Commercial Loan: What It Is, Types & How It Works

What Is a Commercial Loan?

A commercial loan is usually a strategy businesses use to fund major expenditures, such as new properties or new equipment, through a bank or financial service provider. Essentially, a business leverages the financial power of a bank to fund capital purchases, operating costs and expenditures. Depending on the business need and type of loan, commercial loans can range from short-term to 30 years.

What Would This Look Like For Your Business?

Let’s say that you are the owner of a rapidly growing business and you are expanding to a second office. You may need to take out a short-term 5 year commercial loan, which provides the funds to establish the office and assist with operating expenses. Alternatively, you may be in a position to purchase the second office through a commercial property loan which can have a term of 15-30 years and is secured by the new property.

To put this into the context of more common types of loans that you may be familiar with, think about a growing family leveraging residential mortgages to move into a larger home. Buying the home outright is unlikely to be an option, but a home loan would be considered a wise decision in this situation.

Types of Commercial Loan

There are many different loan types, with each option offering different benefits depending on your business’s needs and the purpose of the loan. The more commercial loan options you’re aware of, and the better you understand each one, the easier it will be for you to make the best decision about the type of loan for your business.

Commercial Property Loan

A commercial property loan is- a loan used to purchase commercial property. This can be utilised when looking to buy real estate as an owner occupied business site (i.e. an office space for your staff to operate from) or as an investment. There are some significant differences between commercial property loans and residential mortgages including:

• How much the bank will lend against the value of the property
• Commercial property loans usually require a General Security Agreement against the trading entity supporting the repayment of the loan which grants the lender a security interest in the borrower’s assets
• Commercial property loans also require personal guarantees from company directors who are then liable for the debt should the company be unable to meet repayments
• Traditionally commercial loan terms were limited to 15 years, however, in more recent times most loans under $3,000,000 can be taken over 30 years which helps minimise monthly repayments.

A commercial property loan is secured by the commercial property. How much you can borrow against the property depends on the type of commercial security, but as a general rule you can borrow 60% of the property's value. You will have to contribute the rest of the funds or have other security, such as a residential property or unencumbered commercial property, to complete the purchase.

Equipment Financing

If your business relies on expensive equipment, this can often severely stunt growth and expansion. Leveraging an equipment financing solution allows you to pay off the cost of the equipment over time, providing a more realistic and affordable business growth plan.

The loan is generally secured by the asset and a personal guarantee from the company’s directors. Loan terms can vary but are commonly 5 years and may include a balloon payment at the end of the term to help reduce monthly repayments.

Business Line of Credit

Any commercial loan comes with a degree of risk, but one major benefit of a business line of credit is reducing risk by not gaining one large lump sum. Instead, you can qualify for a maximum amount and only pay interest on the funds you drawdown. This is ideal for businesses that may sometimes need to access funds for operational costs (such as wages for new staff or upkeep of equipment) or receive income seasonally to help smooth out cash flow..

How a Commercial Loan Works

Generally, a commercial loan application is more complex than a personal or home loan. You need both a strong, valid purpose and evidence of financial performance through accountant prepared financial statements and tax returns to demonstrate you can meet repayments. Other considerations can include credit scores (both business and personal), whether the business has tax debt, evidence of future contracts, cash flow forecasts, available security and the level of existing debt.

How Big is the Risk For Your Business?

With or without a loan, any business investment is a risk. A common myth is that a business needs a perfect credit score and an extremely detailed, flawless business plan in order to be successful. In reality, the commercial lending market has a product for all businesses, whether you are a startup or a mature business looking to expand. Of course, the cost of lending will be more for riskier propositions such as a start up. Generally speaking, prime lending options will become available to a business once they have 2 years of trading under their belt and demonstrated profits.

Whilst commercial lending is generally not covered by the National Consumer Credit Protection Act which protects regulated lending for consumers, you can be confident that your broker and lender must still ensure that you can meet the loan repayments without undue hardship and the bank must comply with the Banking Code of Practice. When considering to offer credit, the four principles of credit will always be applied:

• Character - credit history, business experience, legal issues etc…
• Capacity - can you repay the debt?
• Collateral - what security is available to secure the loan?
• Capital - what is your overall financial position?

Benefits for Your Business

Investing in Growth Opportunities

It’s all too common for businesses to find themselves with fantastic growth opportunities that they simply don’t have the financial freedom to take advantage of without a commercial loan. Missing out on potential growth opportunities due to a lack of capital isn’t just frustrating - it can also be seriously costly if the business can’t sustain growth without that investment.

Increased Market Share

Leading on from capitalising on those growth opportunities, a commercial loan gives a business the ability to drastically increase its market share and profitability. This can help bridge the gap between growing businesses and the businesses that already dominate the market. Increased market share ultimately unlocks more financial flexibility and power in the future.

What You Can Do For Your Business

We can’t over-emphasise the importance of research before applying for a commercial loan. This can be a daunting decision for business owners and directors, especially when you don’t know where to start. That’s why turning to expert advice is the best next move for you. Expert advice helps you make a commercial loan decision that is: 

• A safer investment
• Better for business growth
• Tailored to your specific business needs



Fortunately, we have a team of experts that can help you with exactly that. You can speak to one of our experts for advice about your commercial loan needs and decisions.