Commercial lending is when a business borrows money from a financial institution like a bank or credit union. Businesses may need to borrow funds to purchase equipment, cover daily operational costs, or expand their facilities.

Loans

Known as either a commercial loan or a business loan, this is a common way to finance an operation of any size. Loans are typically used to help cover the cost of one-time expenses and expansion initiatives, such as:

• Equipment or vehicles

• Expansion or renovation (real estate)

• Lump-sum working capital

• Inventory

Much like personal loans, commercial loans help businesses finance large purchases or access cash that can be repaid over the course of several years at either a fixed or variable interest rate. The repayment term makes big expenses more affordable for business owners, and commercial loans can be secured or unsecured.

Secured loans require that the business offer collateral as part of its agreement with its financial institution. If a business owner is unable to repay their loan, the financial institution will take possession of the collateral to recoup all or part of their cost of financing. Examples of collateral include property, buildings, vehicles, or other assets owned by the business.

Unsecured loans do not require collateral but instead, rely on the borrower’s credit. Your creditworthiness is based on your history of paying off debts. Borrowers with a good credit score are more likely to successfully obtain a loan, although there are other factors a financial institution will consider too when issuing unsecured business loans. Unsecured loans often have higher interest rates, which is a factor to consider when weighing your options.

Secured loans highlight the importance of keeping your personal and business finances separate. Defaulting on a loan for your business could mean losing the assets you pledged for collateral. You can protect your personal assets, such as your home and other property by maintaining separation between your business and personal finances

Line of Credit

A line of credit (LOC) is a flexible method of funding day-to-day operational costs. As the borrower, you can access and use your LOC at any time, which can increase cash flow to your business. Your LOC will have a maximum borrowing limit and interest rate that you and the lender will agree to. If it is an open line of credit, you’ll have a revolving balance, meaning that after making a payment, you immediately have access to additional cash if you need it.

A LOC is commonly used by business owners for expenses such as:

• Rent

• Inventory

• Payroll

• Equipment repairs

Although you will have a maximum borrowing limit, unlike a loan, you will only pay interest on the amount you use. This is helpful for business owners because you can adjust how much you tap into your LOC based on changing cash flow needs.

The 24-hour access and freedom to use your LOC whenever you need to make it a convenient choice for business owners. However, it’s important to budget and manage your line of credit to ensure you’re not relying on it too heavily to finance daily operations.

Commercial Leasing

Commercial leasing options are important for business owners to be familiar with, especially if you require physical space to run your business but don’t own property. You can lease properties or buildings, giving you flexibility and choice in how and where your run your business.

Commercial leasing can be beneficial for business owners who don’t want the full responsibility or costs that come with owning property outright. Leasing allows you to share these responsibilities with a landlord, who will often manage the maintenance and upkeep of the property or building. Commercial leasing is a good option from a financing perspective because it allows you to have predictable business expenses each month for things like rent, allowing you to manage your costs more easily and avoid large and sometimes unexpected expenses that come with owning property.

Commercial leases also cover business necessities beyond builds and property. Some commonly leased items include:

• Heavy equipment

• Semi-tractors and trailers

• Landscaping and excavation equipment

• Computer networks and communications systems

• Medical, laboratory, and diagnostic equipment

Often machinery or equipment is expensive, and your business may need to replace equipment regularly to keep up with changing technology in your industry. It can be difficult for many businesses to cover the up-front costs of equipment purchases. Being able to lease equipment gives you the opportunity to use it today and upgrade or replace it as needed.

Mortgages

Perhaps leasing a property or building doesn’t suit your needs as a business owner. You’ll likely need a mortgage if you want to invest in real estate to run your business. Mortgaging a property for your business can help you:

• Get your business off the ground

• Expand your current operations

• Provide additional income if you plan to rent out extra space

Purchasing real estate to begin or expand your business gives you ownership and control over the property. As long as it follows local laws, you can do what you please with the space without consulting a landlord. This makes renovations and big changes much easier.

A property and its buildings will likely appreciate over time. Owning property provides an asset to your business that you can leverage in the future. Depending on the mortgage agreement that you have with your lender, it is possible to rent out any extra space to generate extra income, which is another benefit of owning property.

Choosing a commercial lending option that is right for your business is a decision best made with an advisor’s help. Whether your goal is big or small, borrowing through a flexible lender who can adapt to your changing business needs is essential to your success.

When preparing to borrow money for your business, it is important to have a clear idea of how you plan to spend the money. This makes it easier to decide how much to ask for, what conditions to discuss with the lender, and ultimately which commercial lending option will work best for you.