Commercial Loans: Guide for Long Island Businesses
What is a Commercial Loan?
When it comes to understanding commercial loans Island Federal has to offer, we must first start with a definition. Commercial loans are debt-based loans offered either by local banks or financial institutions to help a business cover capital expenditures or operating costs. These loans are particularly helpful for small businesses and startups that require a significant amount of capital to get their business up and running and fund various aspects of it, such as office space, equipment, payroll and more.
Unlike a small business loan or personal loans, commercial loans are specifically designed to help fund a business. They’re often associated with extra fees and higher interest rates, which often result in comparably higher monthly payments.
How Commercial Loans Work
Loan Structure
Commercial loan programs are typically structured as lines of credit or as term loans. Term loans are repaid over time with interest, while lines of credit allow businesses to draw from funds as needed. Commercial loan interest rates are typically higher than personal loans. Many lenders also require businesses to put forth collateral, which helps protect the lender from loss if there’s a default on the loan.
Eligibility
Commercial loans aren’t just simply handed out—businesses have to meet certain eligibility requirements. Some of the key factors that tie back to eligibility include creditworthiness, the overall business plan and strategy, annual revenue, established years in business, among others.
Repayment
All loans come with repayment schedules, and commercial loans are no exception in that their principal and interest are repaid over a set period. Some commercial loans may also come with balloon payments, which are large, final payments made at the very end of the loan term. Balloon payments are in addition to any regular monthly or weekly payments defined by the loan.
Types of Commercial Loans
Contrary to what you may think, there’s more than one type of commercial loan. Here are the various types of commercial loans so you can determine which one is most applicable to your business:
Term Loans
Term loans are best used to fund one-time expenses such as equipment or other fixed assets. They provide businesses with a lump sum of money, which is typically repaid with interest over five years.
Lines of Credit
Unlike term loans, lines of credit allow businesses to draw from a sum of money as they need it. Ideal for funding day-to-day operations, lines of credit offer more flexibility than term loans. Benefits often include lower comparative interest rates and some tax advantages.
Commercial Real Estate Loans
Commercial real estate loans are loans specific for purchasing or refinancing properties. They can also be used to renovate an existing property or refinance debt on an existing property.
Equipment Financing
SBA 504 loans are a type of commercial loan designed for purchasing equipment.
Types of Collateral for Commercial Loans
Because commercial loans tend to lend a high sum of money to borrowers, commercial lenders often require collateral as insurance if the borrower defaults on the loan. Here’s a look at the types of collateral offered:
Real Estate
Because they’re often worth a significant amount of money, personal and industrial properties themselves are often used as collateral.
Equipment
Equipment – like machinery, vehicles, or specialty tools – may be used as collateral.
Accounts Receivable
Projected future cash flow can also be used as collateral. This is most common with businesses that have stable revenue streams.
Unique Considerations for Long Island Businesses
Higher real estate costs and local economic conditions offer unique opportunities for Long Island businesses. At Island Federal, we pride ourselves on understanding the local market conditions and offering tailored solutions to our business partners to best support and meet their unique needs.
The Commercial Loan Process
Here’s a step-by-step overview of how the commercial loan process works:
- Origination: The process begins with a business contacting a lender and discussing their specific loan needs.
- Underwriting: Once a business opts to move forward, the underwriting process begins. This typically involves assessing creditworthiness and determining whether to approve or deny the loan.
- Approval and documentation: Businesses are required to provide substantial documentation to the lender to ensure approval. This often includes profit and loss statements, balance sheets, current debt schedules and more.
- Disbursement: Following approval, loan disbursement occurs.
How to Apply for a Commercial Loan at Island Federal
Interested in applying for a commercial loan? Contact Island Federal today to kick-start the process.
We’ll carefully assess your standing, including your credit score and business history, and collect all the necessary documentation to analyze your eligibility and move things forward. We aim to make the process as streamlined and as convenient as possible for all of our clients so they can access the funds they need to grow their businesses faster.
Additionally, Island Federal offers many competitive advantages that you won’t receive from other lending institutions. This includes competitive rates, more personalized service and local expertise.
Common Pitfalls to Avoid When Seeking a Commercial Loan
Another value-added benefit of working with Island Federal for your next commercial loan is that we’ll help you avoid some of the most common mistakes that are made when seeking and applying for a commercial loan. These include:
Over-Borrowing
Nobody should ever borrow more than what they can reasonably repay. However, it’s common to get into bad loans that require repayments that can’t adequately be made. This has the potential to lead to default.
Lack of Preparation
People shouldn’t apply for a loan unless they’re fully prepared to. One of the most important things you can do to prepare is to ensure that you have all the necessary documentation.
Ignoring Terms
It’s easy to get caught up in securing loan approval and funding, causing some to gloss over the terms and conditions. However, it’s important to know all of these details, including whether you might face prepayment penalties or balloon payments.
Choosing the Right Commercial Loan for Your Long Island Business
The type of commercial loan that’s best for you will largely depend on your business, how much money you’re looking to borrow, and your worthiness as a borrower. At Island Federal, we can help you sort through all of this to ensure that you receive the loan that works best for you and your situation.
Take the Next Step: Partner with Island Federal for Your Commercial Loan Needs
Whether you’re looking for a commercial real estate loan or an accounts receivable loan for small business lending, for more information on commercial loans and to start the loan process, contact Island Federal today. With our local expertise, competitive interest rates and personalized service, it’s our personal guarantee that we offer value that you can’t get from other lending institutions. Schedule a free consultation and start the loan process today.
Frequently Asked Questions
What types of businesses are eligible for a commercial loan?
Just about any type of business is eligible for a commercial loan, both for-profit and nonprofit, but key factors include being the business needs to be actively in operation, qualifying as a borrower, and having a means of repayment.
How long does it take to get approved for a commercial loan?
Loan approval can take anywhere from several weeks to a month or longer. Factors include the complexity of the loan, the type of lender, and how much the loan is for. Island Federal can typically complete most loans within two weeks.
Can I apply for a commercial loan if my business is less than two years old?
Most lenders require at least three years in business. Contact Island Federal to learn more about the qualifications.
What collateral is required for a commercial loan?
Collateral is often required to secure a commercial loan. It may be real estate, equipment, or accounts receivable.
How does Island Federal determine the loan amount I can qualify for?
Island Federal works closely with your business to put you in the best loan possible for your situation and ensure that it’s not more loan than what you can afford.