June 21st 2023.
What are Commercial Lenders?
Commercial lenders refer to institutions, typically credit facilities, that issue loans to businesses. It is different from consumer lending that provides loans to individuals. There are two types of commercial lenders, traditional and alternative. Traditional lenders are usually commercial banks or credit unions and business owners can apply to them in person. Examples of traditional lenders include Wells Fargo, PNC, and Bank of America.
Alternative lenders, on the other hand, are non-bank financing companies that offer loans online. These lenders use fintech capabilities to speed up the lending process and usually offer loans within a few business days. Examples of alternative lenders include OnDeck, Bluevine, and Fundbox.
How do Commercial Loans work?
Commercial loans refer to any type of business loans, whether small business loans or loans to large corporations. Enterprise-level loans usually come from traditional commercial banks and are negotiated between the bank and the company. Small business loans, on the other hand, tend to be more accessible with defined features. Let's look at the various types of commercial loans available to small businesses.
Business Term Loans
Business term loans are the most common type of business financing and are offered by both traditional and alternative lenders. With a term loan, a small business receives a lump sum upfront, which it then repays, plus interest and fees, in fixed payments over the loan term. Businesses can use term loan proceeds for various purposes such as working capital, purchasing commercial real estate or equipment, expanding locations, acquiring another company, or refinancing business debt.
Business Line of Credit
A business line of credit activates your funds as an available credit limit. You can draw from the credit limit as needed and only pay interest on the money you draw. Most lines of credit are revolving, meaning the credit limit replenishes as you pay it back, like a credit card. This flexible funding arrangement provides money on demand when you need it.
SBA Loans
The U.S. Small Business Administration oversees the SBA loan program. Businesses cannot apply directly to the SBA. Instead, small business owners must apply to one of three types of financial institutions: commercial banks, credit unions, or alternative business financing facilitators like UCS. With backing from the federal government, lenders have the security to offer higher borrowing amounts at lower rates and extended repayment terms.
Equipment Financing
Equipment loans are like term loans, except they are specifically for purchasing business equipment. You can use the loan to buy most equipment, from commercial kitchen appliances to construction equipment to computers and office furniture. The equipment you're financing becomes the collateral for the loan.
Merchant Cash Advance
With a merchant cash advance, borrowers receive a large sum of cash upfront, which is then repaid from a percentage of daily debit and credit card sales. Some lenders use a fixed percentage, while others use flexible terms so borrowers only repay what they can afford. MCAs are among the most accessible but costly business funding options.
Invoice Factoring
Invoice factoring, also called invoice financing, allows you to turn unpaid invoices into immediate working capital. The process requires working with a third-party financial institution called a factoring company. When you factor your invoices, you essentially sell ownership to the factoring company, which issues an advance based on the invoice value, called an advance rate.
Who are the Best Commercial Lenders?
The best commercial lender for your business depends on your needs and business qualifications. Small businesses must find lenders that offer small business loans. Examples of best traditional commercial lenders for small businesses include Wells Fargo Bank, CIT Group, and Truist Bank. Best alternative commercial lenders for small businesses include OnDeck and SmartBiz.
What are Commercial Lenders?
Commercial lenders are financial institutions that provide loans to businesses. This is different from consumer lending, which refers to loans to individuals. There are two main types of commercial lenders: traditional and alternative.
Traditional lenders are commercial banks and credit unions. Business owners usually go to these lenders in person, and the lending process can take several weeks. Examples of traditional lenders include Wells Fargo, PNC, and Bank of America.
Alternative lenders are non-bank financing companies. They typically offer loans online and use fintech capabilities to speed up the lending process. With these lenders, you can receive funding within a few business days. Examples of alternative lenders include OnDeck, Bluevine, and Fundbox.
How do Commercial Loans Work?
Commercial loans are any form of business lending, whether it's a small business loan or an enterprise-level loan to a large corporation. Enterprise-level loans usually come from traditional commercial banks and must be negotiated between the bank and the company.
Small business loans, on the other hand, tend to have more defined features. Let's look at some of the available commercial loans for small businesses.
Business Term Loans
Business term loans are the most common form of business financing. Both traditional and alternative lenders offer them. With a term loan, the small business receives a large sum upfront, which it then repays, plus interest and fees, in fixed payments for the loan term.
Businesses can use term loan proceeds for various business purposes, from working capital to purchasing commercial real estate or equipment. However, some lenders may restrict the use of the loan. Many online lenders only offer short-term loans, which must be repaid within 18 months. Some alternative lenders also provide medium- and long-term loans.
Business Line of Credit
A business line of credit activates your funds as an available credit limit. You can draw from the credit limit as needed and only pay interest on the money you draw. Most lines of credit are revolving, meaning the credit limit replenishes as you pay it back, like a credit card.
The drawback to a line of credit is that it's best to activate it before you need the funds. This type of funding is excellent for covering unexpected costs or emergencies, ongoing projects, and helping smooth out cash flow gaps.
SBA Loans
The U.S. Small Business Administration oversees the SBA loan program. Businesses cannot apply directly to the SBA. Instead, small business owners must apply to one of three types of financial institutions: commercial banks, credit unions, or alternative business financing facilitators.
SBA loans are considered the gold standard of business financing. With backing from the federal government, lenders have the security to offer higher borrowing amounts at lower rates and extended repayment terms. SBA loans are fully amortized with fixed monthly payments.
Equipment Financing
Equipment loans are like term loans, except they're specifically for purchasing business equipment. The equipment you're financing becomes the collateral for the loan. If you default, the lender claims the equipment to cover its loss.
Merchant Cash Advance
With a merchant cash advance, borrowers receive a large sum of cash upfront, which is then repaid from a percentage of daily debit and credit card sales. Some lenders use a fixed percentage, while others use flexible terms so borrowers only repay what they can afford.
MCAs are among the most accessible but costly business funding options. Since repayment comes from your revenue, MCA funders care more about your sales than traditional lending criteria like credit scores and time in business.
Invoice Factoring
Invoice factoring, also called invoice financing, allows you to turn unpaid invoices into immediate working capital. The process requires working with a third-party financial institution called a factoring company. When you factor your invoices, you essentially sell ownership to the factoring company, which issues an advance based on the invoice value.
Who are the Best Commercial Lenders?
The best commercial lender for your business depends on your needs and business qualifications. Small businesses must find lenders that offer small business loans.
Best Traditional Commercial Lenders for Small Business
Wells Fargo Bank is one of the largest banks in the nation. It offers enterprise-level funding but also provides some small business financing. Existing customers can apply for a line of credit. If your business doesn't have an account with the bank, you must visit a branch location to discuss your financing options.
CIT Group is a division of First Citizens Bank, one of the largest commercial banks in the country. CIT's history dates back to 1908. The bank offers an online application for equipment financing and some small business finance options. You must visit a branch location to apply for other business loans.
Truist Bank was formed from the 2019 merger of SunTrust and BB&T Bank. It offers a hybrid model where business owners can apply online for some loans but must apply in person for others. It has limited SBA loan offerings, as you must apply at an approved branch location.
Best Alternative Commercial Lenders for Small Business
OnDeck is one of the most reputable online lenders for business loans. It has lower qualifications and faster funding times than commercial banks. The alternative lender has outstanding reviews from customers.
SmartBiz is a great option for small business owners looking for an SBA loan. It offers SBA 7 loans, term loans, and custom financing. You can apply online for up to $5 million in SBA loans and up to $50k for custom financing.
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