November 2, 2018 | Last Updated on: June 29, 2023
Updated October 26, 2020
There are all kinds of lending options available to both businesses and individuals, but when you’re seeking out funding, it’s important to know the difference between commercial and consumer loans. Whether you’re looking to finance a vehicle, home improvement, or expand your business operations, you need options. In this guide, we’ll take a closer look at both commercial and consumer loans in order to highlight some important distinctions between the two.
Essentially, a consumer loan is just a loan that’s issued to a consumer; or, in everyday terms, an individual person. Consumer loans come in many forms—from credit cards to auto loans to mortgages and beyond. The main differentiating factor that separates consumer loans from commercial loans is the scope of the loan itself. Most consumer loans aren’t designed for large purchases—you probably wouldn’t buy a yacht with your personal credit card.
Consumer loans require an extensive process to obtain. A lender will want to know that their loan is well-handled, and that they’ll make a profit on it. This means checking a person’s credit score and report. Lenders will look for things like payment history, account mix, and credit age to determine a person’s creditworthiness. Certain factors like collections and derogatory accounts will impact your creditworthiness and could dissuade a lender from approving your funds.
Consumer loans aren’t utilized for the same scope of uses that a commercial loan would encompass. A consumer loan can get you a new house or vehicle, but you’ll be subject to an interest rate based on your credit score, at the lender’s discretion. A lender can say no for any reason it chooses, but there are some common reasons your funding could be denied.
That’s not to say that lenders don’t look closely at businesses to make a determination, but they’re often more wary of individuals. The bank doesn’t know anything about the person it’s lending to until a credit report is acquired, and even that can’t tell them everything.
Commercial loans come in several varieties, and everything from private banks to wealthy investors to the federal government provides commercial loans. These loans can be used for just about anything a small or large business might need to improve operations or stay afloat.
There are too many commercial loan types to cover on one page, so instead, we’ll focus on some of the most popular options available today.
Installment Loans: Installment loans offer a business a lump sum of money all at once, and as soon as funds are approved, the business will start making monthly payments toward the balance. Installment loans are great for expanding business operations or covering sudden expenses in times of need. In addition to the principal balance, the business will be responsible for the interest on the loan as well as fees and other charges.
Of course, even something as simple and straightforward as an installment loan is subject to creditworthiness. A lender may decline an installment loan based on assumed risks of lending to particular businesses.
Lines of Credit: Similar to a consumer credit card, a business line of credit allows a business to have funds always available. This is not usually used for large purchases like property, company vehicles, or equipment. A business line of credit will have limitations depending on the lender.
Lines of credit are usually better for emergency business funds, simply because they’re more flexible.
SBA Loans: The Small Business Administration acts as a guarantor between lenders and small businesses. The SBA will offer small business funding through dedicated lenders with interest rate caps and terms that are more favorable to small businesses. The SBA also guarantees a percentage of every loan should the business fail to pay back the entire balance.
SBA loans have more specific terms and requirements, but they’re also more flexible for new or growing small businesses. Check out sba.gov today to see what options are available to you.
Equipment Loans and Merchant Advances: Equipment loans are specifically used to purchase business equipment that is necessary to run the organization or keep producing. Maybe you have a piece of industrial machinery that you need to produce your products, or a certain tool you need. An equipment loan will only cover the cost of equipment and isn’t used for anything else. A lender may require proof that the funds were used accordingly.
A merchant advance is usually dependent on the relationship between the merchant and business. A business can borrow money, similar to a merchant credit card, and use it to buy products or services directly from that merchant.
There are many commercial loan options available, so if you’re looking for business funding, you’re certainly not limited. However, you still need to remember that a business is just as responsible as an individual for adhering to the terms of the loan and paying back the entire balance—including any fees, interest, or other costs associated with the loan.
Responsible borrowing should be a practice that everyone adheres to, but especially a business owner. Not only are you putting the future of your business at risk by borrowing irresponsibly, but you could also be putting personal assets at risk, too. Not to mention, you don’t want your business to gain a reputation for not keeping its commitments. You won’t find many funding options available to you if you default on a business loan!
Borrowing money from a lender is a huge step to take, whether you’re buying your first home or expanding business operations. It’s a good idea to always research your lending options before you settle on anything, and you should always make sure you read the terms of your loan(s) thoroughly. Make responsible lending a habit, and always pay a little more than the minimum per month.
