What is the Difference Between Commercial Loans and Business Loans?

Growing a business is hard. Most businesses look for capital either to get started or to grow. However, the world of commercial lending can feel intimidating to many small business owners. Knowing what type of funding to look for as a potential borrower is often confusing.

To get on the right track, it’s important to understand the terminology used in commercial lending. Specifically, you’ll want to have a solid grasp of the types of loans available to you as a business owner so that you know what financing options are on the table.

In this article:

• The difference between a commercial loan and a business loan
• Types of small business loans available
• How to compare business loans and find the right one for your business

Are Commercial and Business Loans the Same Thing?

Commercial and business loans are generally the same thing. Commercial lending and business financing are more or less interchangeable terms. In both instances, you’re referring to a financial institution loaning money to a business (rather than an individual) with specific repayment terms.

All that said, while there isn’t a formal difference between the two, they’re often used differently in vernacular. In business financing, commercial loans are more commonly used to refer to loans given to larger businesses, while “small business loan” is used to refer to loans given to smaller companies.

The Basics of Commercial Lending

Many business owners struggle with the fact that there are so many types of loans available for different business needs that it’s hard to make sense of them at first.

Before searching for a general “business loan,” it’s more productive to compare business loans by type and how the money will help your business grow and thrive.

Some of the common types of commercial loans used by small businesses include the following:

• SBA loan: We will discuss this topic in more depth below because it’s such a big factor in small business lending. The SBA is the S. Small Business Administration, a government entity that works with lenders to partially guarantee term loans and other funding options for small businesses. This program stimulates lending to businesses that might not otherwise be able to secure a low interest rate on the funding they need to succeed.
• Equipment financing: One issue that can hold back small businesses is an inability to purchase the equipment they need to scale up operations. Even if the manufacturer offers financing for their equipment, high interest rates may make it too expensive. With equipment loans, you can make a purchase that you might have otherwise put off for years until it was affordable, and you might be able to do it with lower interest rates. That means a quicker timeline to scale up your business and hopefully a bigger boost to profits.
• Business line of credit: Opening a line of credit for your business is similar to taking out a credit card. Unlike a term loan, where you get a lump sum upfront, with a line of credit, you get access to a maximum credit line, but you only pay interest on the amount you debit. Lines of credit are a popular option for businesses with down periods during the year when their cash flow is insufficient to make ends meet. During those times, the line of credit can be used and repaid during the busier time of year. Since a line of credit is not technically a loan, it offers greater flexibility without fixed repayment schedules typical of loans.
• Unsecured business loan: An unsecured business loan is a loan that isn’t secured by any collateral. However, this sometimes means the loans are more challenging to get and have a high interest rate.

What Are the Benefits of a Commercial Loan?

Bootstrapping a business without outside funding is impressive and keeps your business debt-free. You might be tempted to go this route, but doing so may put you at a disadvantage compared to the competition.

When used properly, a commercial loan can go a long way toward improving the prospects of your business. Here are just a few of the things commercial lending can help you do:

• Grow and expand: If your small business is already profitable, you’ve proven that the market is receptive to your ideas and products or services. That said, you might not have the working capital to expand your business into new markets, produce more inventory, or open additional locations. Through commercial lending, you can scale the number of people you can serve and the money you can make.
• Establish credit: Just like building your personal credit score by using a credit card and paying it off, opening a business line of credit or business credit card and making timely monthly payments will build your credit score and open up the opportunity for additional funding options in the future.
• Improve cash flow: It’s one thing to have a business that makes sales and turns a profit, but maintaining a steady cash flow to pay the bills isn’t always guaranteed. Many businesses use lending to deal with cash flow issues so they can cover their obligations and not stress over the timing of customer payments.
• Navigate the unexpected: Should an emergency threaten your business’s ability to operate, a loan could be what keeps you in business. Assuming you have a generally profitable business under normal conditions, you can use a loan to deal with the tough times and repay the loan when revenues are flowing once again.
• Get started: Business financing isn’t just for already established companies—it can also be used to help new businesses launch. The startup phase is often the most difficult to get commercial lending since there are so many expenses to manage, and you don’t yet have customers to supply you with cash. While many lenders require a business to be operating for one to two years before offering a loan, you may still be able to get a business credit card or line of credit to help you launch. You can also pursue a personal loan, although you will have to guarantee the loan personally.

The Benefits of SBA Loans

Now that you have a basic understanding of the business financing solutions available and how they work, let’s circle back to SBA loans. The SBA offers a range of short-term and long-term loan programs. Like any other loan, your application is subject to credit approval and meeting eligibility requirements.

SBA loans often have a somewhat long lending process, and underwriting can take some time. But that’s because they help reduce the risks to both the lender and the borrower and offer competitive interest rates on a variety of lending solutions.

We break down some of the SBA’s most popular commercial lending products here.

Microloans

An SBA microloan is a great option for a small business that only needs a modest loan. The limit for this program goes up to $50,000.

You can use microloans for a wide range of business needs, including buying inventory, managing startup supplies, acquiring equipment, and much more. Finding a microloan with good repayment terms for your business needs can be a turning point for your company.

7(a) loans

The most popular SBA loan is the 7(a) loan program. Unlike the microloan program, which only grants up to $50,000, you can borrow as much as $5 million with a 7(a) loan. Of course, you will have to qualify for whatever amount of money you hope to secure for your business, and your credit history and current business revenues will play a part in that qualifying decision.

Only for-profit businesses operating in the United States are eligible for 7(a) loans. You’ll need substantial documentation to prove your creditworthiness, including income tax returns, business plans, leases, financial statements like balance sheets, and more. The reward is a commercial loan with a competitive interest rate and substantially reduced risk.

504 loans

If you have a project in mind that has the potential to grow your business in the long run, you might be able to secure an SBA 504 loan. As with 7(a) loans, there are requirements such as operating in the U.S. and running a business that already turns a profit. Also, your business can now have an annual net income of more than $5 million.

If you’re looking for working capital or increased cash flow, 504 loans are not for you. This is a commercial loan for major assets like new equipment. Many business owners use 504 loans as commercial real estate loans to purchase or upgrade property.

Final thoughts

Having a great idea and finding the right market are two important keys to business success. But it’s also crucial to get the capital you need to bring your vision to life. That’s where commercial lending comes into play. Matching the right type of loan to the needs of your business will make it possible to grow, expand, and accomplish great things.

FAQs about commercial lending

What is the difference between a commercial loan and a business loan?

Commercial lending and business lending refer to the same thing: Financing a business with a loan. However, in common vernacular, commercial banking and lending are usually marketed to larger enterprises looking to borrow large amounts of money or make large purchases, such as with a commercial real estate loan. Business loans are typically marketed to small business owners.

How can you use a commercial loan?

Depending on the type of financing, you can use business loans for a wide variety of purposes. Term loans typically, do not have many restrictions, allowing you to spend on hiring, purchasing inventory, paying operating expenses, or any other business need.

What types of small business loans are available?

There are many types of commercial lending on the market today. Some of the most popular include SBA loans, traditional term loans, working capital loans, business lines of credit, commercial real estate loans, and equipment loans.

How do you get a commercial loan?

Getting a business loan is a bit like getting a personal loan. You’ll need to determine why you need funding and how much, research and compare business loans to find the right match and apply for a loan to prove your creditworthiness. Some lenders allow you to handle the application process entirely online, but most traditional lenders like banks and credit unions require you to apply in person.

Is it better to use a traditional lender or online lender?

There are benefits to both traditional lenders and online lenders. Traditional lenders tend to offer the most competitive interest rates but also have stricter eligibility requirements. Online lenders, on the other hand, may offer faster funding times and more accessible qualification requirements.

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