What Can You Use A Commercial Loan For?

Author: Woodsboro Bank

Categories: Blog

A commercial loan is a type of funding that qualified businesses can obtain from a lending institution to provide capital for their day-to-day operations, an expansion, or another business purpose. Here is a look at how commercial loans work and what they can be used for.

How Does a Commercial Loan Work?

commercial loansA lending institution may extend a commercial loan to a business after assessing its financial situation and its ability to repay the money in installments.

Commercial loans can be either secured or unsecured. A secured loan, which is also sometimes referred to as a hard money loan, is backed by the company’s collateral. For example, a mortgage on a building is a type of secured commercial loan. The borrower, which is the business, will pledge the building as the collateral to their lender; if they default on their payments, the lender would be entitled to repossess the building. In other types of commercial loans, different types of property or inventory may be offered by the business for the bank to claim in the event that the business defaults on the loan.

An unsecured loan is a type of commercial loan that is not backed by collateral. Instead, it is extended based on the company’s creditworthiness. This type of loan is more common than a secured commercial loan. The amount of money that a business can borrow with an unsecured loan and their interest rate will depend not only on their creditworthiness but their cash flow from operations and other sources. To determine eligibility, commercial lenders may ask what the money will be used for, how the business owner expects their company to grow over time, and other details about the business and its cash flow.

What Can a Commercial Loan Be Used for?

Here is a look at some of the potential uses of a commercial loan.

Working Capital Loans

A working capital loan is a type of commercial asset-based lending that is typically unsecured. Small and medium-sized businesses often seek these types of loans from banks and other financial institutions to finance their daily expenses. They may be used for seasonal purposes, such as purchasing inventory or equipment or paying the wages of extra staff. A working capital loan typically must be repaid in one year or less, at which point inventory or accounts receivable are typically converted to cash to pay it back.

Real Estate

Commercial real estate loans are used to purchase property for the company to conduct its operations or invest. A mortgage loan is secured by the property that the loan is being used to purchase, while a non-mortgage loan is unsecured and does not require property to be used as collateral. This type of loan may be used by a business to purchase residential properties, undeveloped land, or other types of property. Construction project loans also fall under the category of real estate loans. In certain states, mineral and oil rates are legally considered real property and may also be purchased using a commercial real estate loan.

Accounts Receivable

With accounts receivable financing, businesses can use their accounts receivable as collateral to borrow a set amount of working capital. Businesses that have a high volume of invoices and wish to use the funds owed before they receive payments for them may seek accounts receivable financing.

Purchasing Inventory in Bulk

Some businesses may be presented with an opportunity to enjoy a substantial discount by purchasing inventory in bulk. With a strategic purchase, they could set themselves up for a generous profit in the near future. If it is necessary to place a large order and pay for it right away to take advantage of such a discount, some businesses find that short-term commercial loans are a good answer. If the amount they will have to pay in interest is less than their anticipated profit, this can be a smart business move.

Purchasing New Equipment

Many businesses use commercial loans to upgrade their machinery and equipment so they can grow their business. Investing in the right equipment can help an organization boost productivity and expand its capacity, revenues, and profits. The extra cash generated can be used to repay the loan.

Expanding Marketing Efforts

Professional marketing services are one of the best ways for a business to attract new customers and boost sales. Both digital and traditional marketing require an investment, and a loan that is taken out for this purpose can often pay for itself several times over thanks to the additional sales it generates.

Investing in New Technology

Some businesses use commercial loans to invest in new technology systems that can help their business grow. Whether it is a point-of-sale system, customer relationship management system, or another type, businesses can find efficiencies that enable them to increase profits thanks to technology.

Talk to the Commercial Bankers at Woodsboro Bank

The commercial banking team at Woodsboro Bank can help you to grow your business and finance major purchases with tailored financing solutions. Contact us today to discuss your business’s goals and learn more about our lending offerings.