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Navigating Commercial Lending Options For Small Business
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A small business that begins in the family garage and eventually reaches profitability represents a true achievement for any entrepreneur and the time may come when expansion requires outside funding. Unlike the type of loan offered to an individual looking to purchase a vehicle, buy a house, or finance an education, a lender offering a business loan will consider different factors before granting approval.
For example, some types of commercial funding will base approval upon the value of a piece of real estate a business owner wants to buy. Conversely, a personal real estate loan (like a mortgage) often would be approved based upon the creditworthiness of the borrower.
Although the credit score of a borrower seeking a business loan might come under discussion, commercial loans that are meant for real estate or expansion often focus much more upon the property and the future value of that purchase. If the borrower defaults on the loan, the lender will want to make sure that the property purchased will provide suitable collateral.
Factors that will come under discussion during the valuation of the property will include basic characteristics such as size and amenities as well as the inherent risk of the property. Issues such as location, condition of the structure, and whether there are additional tenants who may rent from the owner will create a full picture of the risks involved with a particular property.
In addition to gauging the value of and risk associated with the property, one of the primary differences a borrower will experience when applying for a commercial loan is that this type of lending is meant to increase income or create profit. A personal loan meant for a vehicle, or a mortgage to buy a home isn't necessarily meant to create a profit. Although there are families who might want to invest in a house and make a profit on it later, the primary function of a mortgage isn't usually based upon whether there will be profits that result from the act of lending.
A commercial loan, on the other hand, is meant to help a business expand or improve in some way which would lead directly to potential profits. And this potential income boost is a facet of the application process which will come under discussion. A business owner will need to create an updated business plan with the income expected from the loan. Although increased profits aren't needed immediately, a business must be able to show the lender that a commercial investment (real estate based or otherwise) would represent a good risk for the bank or lender.
Another aspect of commercial lending, which may come as a surprise to individuals who have only thus far dealt with personal loans is the overall loan term of a commercial loan. Some commercial loans (particularly real estate based) might have an amortization period of just 5 or 10 years. A residential mortgage will rarely have an amortization period of less than 20 years (although there are exceptions).
When preparing to apply for a commercial loan, it is essential for the borrower to approach the process from the point of view of a business, and not an individual. Not only is the commercial loan process one where the lender uses a magnifying glass to look at absolutely everything, but sometimes the application timeline is longer than a personal loan. Occasionally there are options for swifter approval times; however, a borrower should apply well in advance of when the funds may be required just in case there are issues that delay approval.
Although it may seem rather tough to apply and be approved for a business loan, the process may be incredibly rewarding upon approval. Expanding a small business is an exciting and gratifying venture.
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