Growth requires capital. As a small-business owner, you’ve likely felt that firsthand. Although personal savings can sometimes cover startup costs, significant expansion—like hiring, moving, or launching new products—often demands external funding. Commercial loans give you a way to secure that capital, and understanding how they work can help you evaluate your options and choose the right financing strategy.
This guide explains what commercial loans are, how they work, and the types available to business owners.
What is a commercial loan?
A commercial loan is an agreement in which a business borrows money from a financial institution with a promise to repay it with interest in the future. Unlike personal loan approval, which is based on an individual’s credit and income, a commercial loan application to a lender such as an FDIC-insured bank or credit union is evaluated on the business’s financial health, credit history, and ability to repay.
Because businesses have different financing needs, there are many types of commercial loans, from working capital loans for day-to-day operations to long-term financing for equipment or commercial real estate. Commercial loans provide upfront capital, letting businesses make investments that support future revenue growth. These loans may be secured by collateral or unsecured, depending on the lender and the business’s financial profile.
Let’s say a growing online apparel brand landed a large wholesale order from a national retailer but needed $300,000 to purchase inventory upfront. Although the business had strong sales and healthy margins, it didn’t have enough cash on hand to fulfill the order at scale. It applied for a commercial term loan through its bank, using existing inventory and receivables as collateral. Once approved, the brand purchased the materials it needed, fulfilled the wholesale order, and increased revenue significantly. The commercial loan allowed the company to take on growth it couldn’t have supported with cash flow alone.
How commercial loans work
The process of securing a commercial loan is more complex than applying for a personal loan. Lenders assume greater risk because business income is less predictable, business assets can lose value, and a company can cease operations entirely, leaving lenders with fewer repayment guarantees. As a result, they conduct a thorough review of the business’s financial health and viability.
Preparation
Before approaching lenders, the borrower must collect all necessary financial documents and a detailed business plan outlining exactly what the loan is for and how it will help the business generate the revenue needed to repay it.
Applicants should compare financing options from traditional banks, credit unions, and online lending platforms. Key factors to consider include interest rates, loan terms, and any associated fees.
Once a borrower submits an application, lenders typically ask for a number of documents to verify the company’s financial standing. These may include:
-
Balance sheetsthat show the company’s liabilities, assets, and equity at any specific point in time.
-
Income statementsthat detail the company’s revenue, costs, and profitability during a specific period.
-
Cash flow statements, to show how cash is moving in and out of the business.
-
Business and personal tax returns that provide a complete financial picture.
-
Bank statements, to verify revenue and cash flow.
-
Business plans that include your company’s market analysis, strategy, and financial projections for the future.
-
Proof of business insurance to confirm coverage, which is often required for loans secured by property or equipment.
-
Legal documents. These establish legal structure and authorization via articles of incorporation, business licenses, and franchise agreements, if applicable.
Underwriting
Next is underwriting, which is the lender’s due diligence phase. It evaluates the company’s financial health, credit history, cash flow, and the value of any pledged collateral. For small business owners, many lenders look for strong personal credit scores—often in the mid-600s or higher—and consider business credit scores according to the specific reporting model, which may run on a 0–100, 0–300, or other scale. Lenders often review personal credit in addition to business credit for newer or smaller companies where the owner’s financial history plays a key role in repayment ability. This is the point where the lender determines whether to approve or deny the loan.
Application timelines vary significantly. Loans backed by the US Small Business Administration typically take 60 to 90 days due to additional government review. Traditional banks may approve loans in two to four weeks, while online lenders often move fastest, with some decisions made within days.
If the loan is approved, the lender provides the funding and the repayment schedule begins as outlined in the loan terms.
Collateral requirements
Many commercial loans require collateral. Collateral is a specific asset that the borrower pledges as security for the loan. If the business defaults on its payments, the lender has a legal right to seize that asset to recoup its losses. Loans backed by collateral are considered secured loans. Loans without collateral are unsecured and typically require stronger credit, higher interest rates, or shorter repayment terms to offset the lender’s risk.
Forms of collateral include real estate, inventory, equipment, accounts receivable, and blanket liens, which give the lender a claim on all of the business’s assets. In addition to business collateral, many lenders also require a personal guarantee from the business owner. A personal guarantee means you agree to be personally liable if the business cannot repay the loan, potentially putting your personal assets—such as a home or savings—at risk. Even when a loan is secured by business collateral, lenders may still require a personal guarantee to further reduce their risk, which is common for small or early-stage businesses.
Some lenders offer unsecured loans, but they are difficult to qualify for and usually reserved for businesses with exceptional credit and cash flow.
Types of commercial loans
Lenders offer a wide array of financing products designed for different scenarios. Loans can vary based on how quickly funds are needed, how long repayment will take, and whether collateral is required. These include SBA loans, commercial real estate loans, commercial equipment financing, commercial bridge loans, working capital loans, and business lines of credit.
SBA loans
A common misconception is that the Small Business Administration lends money directly. In reality, an SBA loan is issued by a partner financial institution, such as a bank, and a significant portion of that loan is guaranteed by the SBA. This government backing reduces the lender’s risk, making it easier for a small business to qualify for funding. It often results in more favorable loan terms, such as lower interest rates and longer repayment periods, than conventional loans. The two most common types, both with loan amounts of up to $5 million, include:
-
SBA 7(a) loans. This is the most popular program. Funds can be used for a wide range of purposes, including working capital, purchasing equipment, or refinancing high interest debt.
-
SBA 504 loans. These loans provide long-term, fixed-rate financing for major asset purchases, such as equipment or real estate.
Commercial real estate loans
Commercial real estate loans are used to purchase, develop, or refinance a commercial property, including office buildings, retail centers, apartment complexes, and industrial warehouses. In most cases, the commercial property being purchased serves as the collateral. These are typically long-term loans with repayment schedules spanning 10, 20, or even 25 years.
Commercial bridge loans
Commercial bridge loans are short-term financing solutions designed to bridge a temporary funding gap, typically lasting six months to one year. They are most common in real estate transactions. For example, a company might use a bridge loan to purchase a new commercial property while waiting for the old one to sell. Because they are short-term and fill an immediate need, they often have higher interest rates and shorter repayment periods than long-term financing.
Commercial equipment financing
Commercial equipment financing is designed specifically for the purchase of machinery, vehicles, or technology. The equipment itself typically serves as the collateral, which can make these loans easier to qualify for. The loan terms are often structured to match the expected lifespan of the equipment.
Working capital loans
A working capital loan is a short-term loan designed to cover a business’s everyday operational expenses. These funds are not intended for long-term investments or major asset purchases. Instead, they help businesses cover payroll, rent, utilities, and inventory—especially helpful for seasonal businesses or companies with long billing cycles.
Business line of credit
A business line of credit is one of the most flexible financing options. Instead of receiving a one-time lump sum, a lender approves the business for a maximum credit limit. The borrower can draw funds as needed up to the limit and pays interest only on the amount used. Once the business repays the drawn amount, the full line becomes available again. This makes lines of credit ideal for managing short-term cash flow gaps, buying seasonal inventory, or handling unexpected costs.
Commercial loans FAQ
What is considered a commercial loan?
Any loan or credit product issued to a business rather than an individual for personal use is considered a commercial loan. This includes SBA loans, commercial real estate loans, equipment financing, working capital loans, and a business line of credit. These products are specifically focused on funding business needs.
Are commercial loans difficult to get?
Commercial loans can be more difficult to obtain than personal loans. Lenders conduct a rigorous underwriting process because the risk is often higher. Applicants need to demonstrate their business is a good credit risk, which generally requires strong personal and businesscredit, a history of consistent or rising cash flow, significant collateral to pledge, and comprehensive business plans and accurate, well-maintained financial statements. These factors increase the likelihood of credit approval.
Who qualifies for SBA commercial loans?
To qualify for funding from the Small Business Administration, a business must meet specific criteria. It must be a small business based on industry-specific size standards, operate for profit, and be located in the United States. The borrower must have invested personal time and money into the business, and for some SBA loan programs, applicants must prove they were unable to obtain conventional financing on reasonable loan terms first. These requirements help ensure that SBA-backed loans support viable small businesses that need more flexible access to capital.
*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.
