With limited options to raise adequate funds, many small businesses struggle to stay afloat. For instance, research reveals that more than 25% of small businesses cannot grow and expand because of financial constraints. This is where commercial business loans come into play. Business owners can use these loans to finance various business operations, including opening new locations, hiring new employees, buying equipment, and investing in new inventory. However, commercial business loans may not be the right option for every small business.
Here is a look at some of the pros and cons of commercial loans.
Pros and Cons of Commercial Business Loans
Advantages of commercial real estate loans include:
- Boost your cash flow – A whopping 82% of small businesses in the U.S. fail due to cash flow problems emanating from either mismanagement of funds or seasonal operations. For instance, if you run a highly seasonal business, it is difficult to keep it running and growing all year round. With a commercial business loan, you can still manage to fund your business when your cash flow goes down, and this can help promote growth.
- Access to a large amount of funding – While the equity markets and venture capital allow businesses to raise a large amount of money, most small businesses cannot use these channels to raise funds due to one reason or another. Still, businesses can access significant funding through commercial business loans, which are generally more accessible than the two abovementioned funding options.
- Long-term repayment periods – Long-term commercial loans typically span anywhere from 3 to 10 years. With such loans, it is easier to repay considering the long repayment period.
- Maintain ownership of your business – As mentioned earlier, some businesses sell their shares in equity markets to raise funds. While this is one of the cheapest ways of raising funds, you may end up losing control of your business in the long run. A commercial business loan gives you alternate funding, ensuring that you maintain ownership of your business as you repay it.
- Low-interest rates – Most lenders charge low-interest rates on secured commercial business loans. A low-interest rate shields you from repaying way more than you borrowed, which can help protect business finance
- Accessible without collateral – You don’t necessarily need to have collateral to get a commercial business loan, especially if you’re applying for a short-term loan. Even so, the lender will likely require a personal guarantee before issuing an unsecured loan. Commercial business loans may not be a good option for the following reasons:
- Extensive application process – Before approving your loan application, the lender would typically need to ascertain your business is capable of repaying the loan, especially if no collateral is involved. This means you’ll likely need to go through an extensive loan application process. Typically, you will need to produce key business documents, including tax returns spanning up to 3 years back, accounts receivable, accounts payable, and financial statements. You may also need to provide your credit history and give a presentation detailing your business goals.
- Stringent eligibility requirements – Providing the necessary documents is one thing while meeting the lender’s eligibility criteria is another. Only businesses with excellent business credit have a good chance of getting commercial business loans. The lender may also look into your personal finances, including unpaid debts, credit score, and annual income. Any slight problem in your personal finances can make you ineligible for funding.
- Tough consequences of defaulting – Although the likelihood that you will default on a commercial business loan is low given extended repayment plans and low-interest rates, defaulting can have dire consequences. For instance, if you take a secured loan with your home as collateral, you risk losing your property in case you fail to repay it as agreed. Moreover, defaulting on it will damage your business credit score, making it difficult for you to get a business loan facility in the future.
- Lack of repayment flexibility – While long-term commercial loans have extended repayment plans, repayment terms are somewhat rigid. For example, the lender will require you to make regular monthly payments for the whole loan period. Even if your business cash flow goes down due to business interruption or a lack of customers, the lender will still expect you to make your monthly payments without fail.
Determine the Right Form of Financing for Your Business
A commercial business loan facility can make or break your business. The key to benefiting from these loans is to thoroughly evaluate your business and determine the right kind of financing needed. Experts recommend taking a commercial business loan if you need to grow a business that generates regular income. In case you qualify for the loan, you also need to determine which type of commercial loan will serve you best. For instance, while short-term loans are suitable for improving cash flow, long-term loans can help grow your business revenue for the long term. Take note that seeking a commercial business loan is also a risky venture, and hence, be sure to evaluate how much risk your business can handle.
How Fidelity Mortgage Lenders Can Help
Before you apply for commercial real estate loans in Los Angeles, you first need to analyze their pros and cons and decide if this is the right kind of financing for your business. Additionally, getting the right commercial loan largely depends on the type of lender you choose. Our team of seasoned professionals at Fidelity Mortgage Lenders is always on hand to assist you! To learn more, contact us today.