What Is a Commercial Loan Texas?
The definition of a commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank. It is typically used to fund major capital expenditures and/or cover operational costs that the company may otherwise be unable to afford. Expensive upfront costs and regulatory hurdles often prevent small businesses from having direct access to bond and equity markets for financing. This means that, not unlike individual consumers, smaller businesses must rely on other lending products, such as lines of credit, unsecured loans or term loans.
How Commercial Loans Work in Texas?
Commercial loans are granted to a variety of business entities, usually to assist with short-term funding needs for operational costs or for the purchase of equipment to facilitate the operating process. In some instances, the loan may be extended to help the business meet more basic operational needs, such as funding for payroll or to purchase supplies used in the production and manufacturing process.
These loans often require that a business posts collateral, usually in the form of property, plant or equipment that the bank can confiscate from the borrower in the event of default or bankruptcy. Sometimes cash flows generated from future accounts receivable are used as a loan’s collateral. Mortgages issued to commercial real estate are one form of commercial loan.
Types of Commercial Loans
Commercial Real Estate Loan
Business Line of Credit
Commercial Construction Loans
Commercial Auto Loan
Commercial Loan or Line of Credit
A business line of credit is a type of commercial loan that shares many characteristics of a credit card. Instead of getting your funds in one upfront lump sum, you’ll qualify for a maximum amount. You can then draw funds from your line of credit as you need them. The best part about this is that you pay interest only on what you use— not for the maximum amount.This makes a line of credit great for businesses who may occasionally need funds to cover operating expenses or to purchase equipment as you go.
Your line of business may require that you own large pieces of equipment to produce your products or conduct your service. Equipment can come with a hefty price tag that you can’t cover with cash on hand.Instead of buying your equipment outright, you can finance it through a loan. This means that you can pay for it over time— with interest payments included, of course. Many times, the equipment itself will serve as collateral for the loan, which makes this type of loan easier to qualify for than others. However, if you default, the bank can seize your equipment.
A business term loan is a flexible loan with a consistent repayment schedule. Some general characteristics of this type of loan include:
A set loan term in which you must repay what you borrowed, which is usually one to five years but can be longer or shorter
A fixed or variable interest rate
Few restrictions on what the money can be used for
Because you can use the money however you see fit in your business, a term loan is great if you have different areas of expenses to cover.
Commercial Construction Loan
A commercial construction loan is similar to a real estate mortgage. The difference is that a construction loan is designed to cover designing and building a structure that doesn’t exist yet. So whether you have a vision for a brand new owner-occupied office space, a business center, or a towering multi-family real estate investment, a commercial construction loan would be the product to make it happen from scratch.
Commercial Auto Loan
Some businesses need vehicles for business-related operations. These can be purchased with a commercial auto loan, which is similar to a consumer auto loan. Because vehicles depreciate so quickly, many financial institutions will only offer financing on newer vehicles, which is important to remember when building your fleet.Also keep in mind that this type of loan is best for average vehicles like cars, vans, or pick-up trucks. If you need financing for a larger vehicle, such as a semi-truck, equipment financing may be the better option.
The U.S. Small Business Administration (SBA) has several loan programs that small business owners can apply for. Each SBA program comes with its own set of intended uses and eligibility requirements.
SBA loans aren’t actually funded by the SBA themselves. They guarantee the loan; the funds are provided through other parties. For example, you would apply for a 7(a) loan through your local lender who participates in the program, and the SBA would back the loan. A certified development company would provide a SBA-backed 504 loan, and SBA microloans are funded through intermediary lenders that partner with the SBA.
Bridge loans are designed to fill the gap between what a business needs at the moment and a longer-term financing solution. These shorter-term loans have higher interest rates than permanent loans, but allow businesses to meet immediate obligations by providing a temporary cash flow.This type of loan is most often used in commercial real estate.
Sometimes, businesses need to purchase products upfront that will not be sold until later. For example, if you have a clothing line, you may purchase materials upfront in bulk, even if your designs won’t hit the shelves all at once. Inventory financing is designed to help cover these costs. The loan is backed by the inventory as collateral.Invoice financing can be a risky endeavor for financial institutions, which is why these are usually approved on a case-by-case basis.
Commercial loan requirements
If you’re a business entity or an investor who is looking to purchase a commercial property, the one option for financing is a commercial loan. These mortgages work in exactly the same way as residential mortgages save that lenders have more stringent eligibility criteria. That’s because the economy and other external factors affect a business’s income, profits and ability to pay the loan, which results in higher perceived risk for the lender. A commercial borrower must meet all the requirements set by the lender to receive a loan.
Small business lenders will generally look at the following criteria when evaluating loan applications:
The personal and/or business credit scores of the owners.
Time in business
Business income (usually based on business bank statements). Other factors such as loan amounts, collateral, and even the industry of the business may have some impact on the rate that will be charged.
It’s not possible to control every factor that goes into your eligibility and your interest rate for a small business loan. But there are some things that you can do to reduce your overall credit risk to lenders.
Commercial Loan Interest Rates 2022
The average business loan interest rate for a small business loan in 2022 will range from as low as 2% or 3% to as high as 100% or more. With so many different types of business loans available for borrowers across a broad credit spectrum, the answer isn’t entirely clear.
Understanding the type of loan you need for your business and your credit situation can give you a better idea of what kind of interest rate to expect.
The average interest rate for a business loan can vary depending on the type of lender you borrow from and the type of loan products your business needs. However, the interest rate you get can end up above or below that average, based on your creditworthiness and how your business is doing.
As you compare business loan products, look at both the interest rate and fees to understand the total cost of credit. Also, look for opportunities to improve your credit so that you pose less of a risk to potential lenders.
While there’s no guarantee you’ll get approved with the lowest rate a lender offers, these actions can help you qualify for more favorable terms.
How to Applying for a Commercial Loan in Texas
Applying for a commercial mortgage can be slow and often requires a lot of documentation. At the other extreme, you might be able to secure a hard-money loan in days without producing copious financial information.
In general, banks and lenders will require you to provide this common information:
Business tax returns
- Your books, records and financial reports
- Last three months or more of bank statements
- Details regarding collateral
- Third-party appraisal of the property
On the other hand, a hard-money lender will concentrate on the current and projected value of the property, with fewer requirements for other financial disclosures.
How to improve your chances of getting approved?
Business owners with poor credit or new businesses may face more obstacles when applying for a commercial real estate loan. Some things you can do to help boost your chances of getting improved include:
- Paying off existing debt and taking other steps to improve your credit scores.
- Pledging additional collateral if you have it.
- Adding an investor or cosigner
Agreeing to pay a larger down payment and/or higher interest rate.
- Selecting a less expensive property.
Texas Commercial Loan Application
Process for Securing a Commercial Loan. Depending on the lender, the process to secure a commercial loan may be different. The general process for securing such a loan is as follows:
1. Pre-approval (Qualifying process)
The lender (bank) will begin a pre-approval process for the business by evaluating the financial history and income of the business. In addition, the lender will investigate the existing debt of the business and the purpose of the loan. Through a pre-qualifying process, the lender can gain a rough idea of how much the business would be able to borrow and the relative riskiness of the borrower.
2. Loan application
After the pre-qualifying process, the business must complete and submit a loan application. In the application, financial statements or similar documents dating back at least three years are generally required. This is to help ensure that the business can repay the loan.
3. Review of the loan application package
Once the application is submitted, a loan officer will review these due diligence documents. They will investigate things such as credit history, available collateral of the business, the current and projected income of the business, etc. A big part of the diligence process is the financial analysis.
4. Loan underwriter/Loan committee
If the loan request is deemed appropriate by the loan officer, a complete and formal credit application is submitted to a credit adjudicator or loan committee. The adjudicator reviews all relevant information and decides whether to approve or decline the loan. The process can take up to a week, and the business may be required to provide additional documentation during the review.
5. Term sheet
If approved, the processor will present the company with a term sheet. A term sheet is a formal document that outlines the parties involved, amount of financing, available collateral, fees, use of the loan, and the interest rate on the loan. After reviewing the term sheet and signing a letter of intent, payment may be required for third-party reports, e.g., appraisal reports.
6. Loan package and closing documents
Upon completing third-party reports, the complete loan application package is resubmitted to the loan underwriter for final approval. If approved, the business is required to sign finalized loan documents. Generally, businesses employ a closing agent (e.g., an authorized representative, an attorney, etc.) who handles all closing documents and completes any remaining paperwork.
Commercial lenders include commercial banks, mutual companies, private lending institutions, hard money lenders and other financial groups. These lenders typically have widely varying standards on which they base their loan criteria and evaluate potential borrowers—but are often focused exclusively on the private market and have more lenient financial qualifications than banks.
Commercial lenders specialize in hard money and bridge loans, often those that close quickly, in as little as two weeks. The commercial loan industry is most often accessed through commercial brokers, who provide an evaluation of a borrower and then recommend the loan to a number of different commercial lenders whom they feel will be most likely to fund the borrower’s request. Going through a broker rather than directly through a lender may cause longer wait times for loan financing and more up-front fees. However, they can greatly facilitate the process and come up with innovative and unique ways to overcome obstacles that the borrower may not be able to access on their own.
Thanks to freedom from regulation, the commercial lending industry operates with particular speed and responsiveness, making it an attractive option for those seeking quick funding. However, this has also created a highly predatory lending environment where many companies refer loans to one another (brokering), increasing the price and loan points with each referral.
There is also great concern about the practices of some lending companies in the industry who require upfront payments to investigate loans and refuse to lend on virtually all properties while keeping this fee. Borrowers are advised not to work with hard money lenders who require exorbitant upfront fees prior to funding in order to reduce this risk.