Commercial Lending FAQs

In simplest terms, a commercial loan is a type of loan made to a business. Commercial loans are structured based upon their purpose and collateral. Depending on need and purpose, commercial loans can be a short period of time (1 year) or a longer period of time (10-25 years).

Consumer loans are made to an individual. Commercial loans are made to a business. When applying for a consumer loan, the majority of the credit decision will be based on your personal financial history. When applying for a commercial loan, both your personal and business financial history will be evaluated.

Lending institutions are looking at three main things: cash flow, character, and collateral. A good cash flow tells the bank you’ll be able to repay the loan. Both your business credit and your personal credit score are considered when applying for a commercial loan. Collateral is needed to secure repayment of the loan to the lender.

Real estate is a common go-to for collateral. Other collateral can include assets such as vehicles, equipment, machinery, accounts receivable, and more. Some companies with few physical assets can use contracts or assignment of future cash flow as collateral. Talk with your loan officer to determine what options are available.

Your credit rating impacts your ability to qualify for a loan. A business with excellent credit might not qualify if the guarantor’s personal credit history is bad. Both the guarantor’s personal credit history and business credit history may impact the lending decision.

Every circumstance and every lending institution is different. It likely wasn’t one single reason, but a combination of factors. A common reason is lack of cash flow to repay the debt. For instance, Altabank requires that your cash flow is 1.25 times the debt payments.

Some commercial loans are declined because there is insufficient business history. A business needs to be operating long enough to show that its business plan works. Altabank requires at least two years of business history, but each bank has its own set standard. An SBA loan is an alternative option for those businesses who are just starting out or who haven’t been in business longer than two years.

Lack of cash flow and insufficient business history are only two possible reasons your loan was declined. Other factors such as insufficient collateral, weakness of financial statements, negative equity in the company, and more can impact the final loan decision. With that in mind, remember that each loan application is unique and will be thoroughly reviewed by the lender.

If your loan is declined, it typically is not recommend to immediately apply for another loan at the same institution. You can apply at another institution, but keep in mind many lenders have similar processes and standards. For example, your credit will be pulled for a second time within a short period of time. This could negatively affect your credit, consequently affecting your overall application. It’s best to make some significant improvements to your business before applying for a loan the second time.

Start-up business loans are similar to commercial loans in that it’s difficult to obtain a loan with poor credit. If your personal credit score is low, consider trying to improve your score before beginning your loan application.