Commercial business loans are the most common approach to funding new business endeavors. But are they best? While they do provide a few advantages over other small business loan options, there are also some disadvantages that must be considered prior to applying for a loan.
Commercial Loans for Small Business: Pros & Cons
In general, commercial loans for business have low interest rates and fairly flexible payment plans. But because they are long term and often for large sums of money, they also have a very rigorous approval process.
We highlighted the main benefits and drawbacks of commercial loans for small business to help you identify if it’s right for you.
The Benefits of Commercial Loans for Business
Commercial bank loans are widely sought after by entrepreneurs due to providing business owners with several key incentives.
- Commercial loans offer the lowest interest rates of all loan options, enabling business owners to access critical funding while maintaining lower overhead costs.
- The loans are long-term, often between 3 and 10 years, allowing you to pay the money back slowly as you work to increase business profits.
- Lower interest rates and extended payment plans decrease the potential for default, which reduces your investment’s risk.
- Commercial loans can be used for very large sums, allowing you to cover the bulk of startup costs with a single loan.
- Commercial loans are often unsecured, meaning you don’t need to provide any collateral to obtain the loan.
- You retain complete ownership of your company. Venture capital investments typically require signing over a fraction of your company to the investor, whereas commercial bank loans enable you to retain total ownership of the business.
- With lower interest rates and flexible long-term payment plans, commercial business loans often provide the most cost-effective loan option for business owners. Though eligibility can be challenging, a commercial bank loan is often the ideal solution for obtaining startup capital.
Commercial Loans for Business – The Drawbacks
While their low interest rates and adaptable payment plans make commercial loans an appealing funding option, they also have their shortcomings.
- Funding can be very challenging to qualify for and require excellent business credit. First-time business owners are unlikely to be eligible and will have to build credit prior to applying.
- The application process is exhaustive, often requiring a detailed financial report of the business, an accurate assessment of projected revenues, and detailed information of all associated business risks. Basically, you need to provide a highly compelling proposal that will assure bankers there is a relatively low risk of business failure.
- You must also provide your personal financial history including your credit score, annual income, and unpaid debts. Even minor problems with your financial history could render you ineligible for the loan.
- Commercial loans provide less personal autonomy than with some loan options. Larger loans often require detailed accounts of how the money will be spent.
- In the event you fail to qualify for an unsecured loan, you may have to secure the loan with your home or car as collateral. If you default on a secured loan, the bank retains the right to seize any property used as collateral.
The Bottom Line on Commercial Loans for Business
Commercial business loans are the most popular form of funding because they offer low interest rates and long-term payment plans. However, in order to obtain an unsecured loan, an immaculate business and financial history is essential. For those ineligible for unsecured loans, secured loans are also available but pose a much greater financial risk in the event of loan default. Invest in the future of your company by applying for business funding now.