In the business world, it’s very common to need a loan from time to time to help take your business to the next level. You might need a cash injection for anything from upgrading your equipment to hiring new staff members, or even investing in commercial property.
The term ‘commercial loan’ applies to any finance advanced by a lender to a business. While they’re usually short-term, some types (such as commercial mortgages) are paid back over a longer period.
What’s the difference between secured and unsecured?
Commercial loans can be ‘secured’ against a company’s property or assets (machinery, for example), providing the lender with a way of recouping their money if the business defaults on the loan. Because commercial property and other assets such as machinery and technical equipment are typically highly valuable, businesses are usually able to borrow more than an individual consumer.
Alternatively, loans can be unsecured, with no business assets required as collateral. Not all businesses will be able to take out this type of loan, however. Lenders will require the borrower to show solid proof of their ability to repay, as well as to demonstrate an excellent credit score. While unsecured loans are less risky for businesses because they won’t lose any assets if they’re unable to repay, on the other side of the coin they are considered a higher-risk option for lenders. This means that interest rates are often significantly higher, and they are normally short-term loans.
Commercial loan options
There are many types of commercial loans, catering for the many reasons why companies might require finance. Below, we’ve summarised just some of these options.
As the name suggests, these loans ‘bridge’ the gap between making a purchase (e.g. if a company wishes to buy a larger premises or update its equipment) and the money becoming available (e.g. if the company is still waiting for the sale of another property to complete). It enables the company to quickly access funding for a time-limited opportunity when it is still waiting for capital to arrive.
As with an ordinary mortgage, a business will take out a commercial mortgage when purchasing a property for commercial use. The loan will be secured against the value of the property, again as with a residential mortgage, and the lender will carry out a detailed assessment to ensure the borrower will be able to make their monthly repayments.
It’s not completely the same, however; while fixed rate deals are the norm for residential mortgages, variable rate is the standard for commercial ones. What’s more, businesses will usually pay higher interest on their mortgage as they are considered a higher risk by most lenders.
Especially for property developments and refurbishment projects, these loans are usually short-term and the sum advanced depends on the estimated gross development value (i.e. what the completed development will eventually be worth). There are two costs that need to be covered by the loan: land cost and build cost. Usually, the loan provider will offer up to 70% of the former and 100% of the latter, although this does vary. One rule of thumb, though, is that the majority of lenders won’t provide more than 70% of the total gross development value.
Peer to peer lending
This is a different type of commercial loan, as it cuts out the middleman of financial institutions altogether. Instead, special websites link up investors with money to lend to businesses looking to borrow. The website will take a fee for facilitating the exchange. Usually, investors will typically enjoy higher rates with this type of loan, and borrowers will pay lower interest. It should be noted that this type of transaction is not without its risks, however. Peer to peer loans are not covered by the Financial Services Compensation Scheme, while lenders should be aware that, as with any investment, they may not get back the full sum invested.
We can help
If you’re a business looking to borrow would like advice on the types of commercial loans and lenders that would best suit you, please get in touch. We can help.
- The Financial Conduct Authority may not regulate some area of commercial financial planning.
- IDC Wealth Management Ltd is not a lender. We can help to find a suitable provider for your borrowing needs.