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  • Writer's pictureColin Green

How Do Business Loans Work: A Simple Guide To Commercial Lending

Updated: Mar 18

One of the most common forms of finance we help to secure for our clients are business loans. As a business owner, you may find yourself in a position where you need extra funding to expand your operations, buy another business, or even kick-start a new venture. The big question we always get is: how do business loans work? Understanding commercial lending and the role it plays can be pivotal to the growth and expansion of your business. This post aims to break down what you need to know about business loans, ensuring you’re adequately equipped to navigate this essential part of growing your business.


Understanding Business Loans

Let’s start with the absolute basics: a business loan is a type of financing that is specifically designed for business purposes. It involves borrowing a sum of money from a financial institution, lender, or another financial entity with the agreement to repay the principal amount along with interest over a predetermined period. Business loans are used for various purposes, such as expanding operations, purchasing assets or equipment, funding inventory, managing cash flow, increasing working capital, or investing in new projects.


mobile phone showing message that a business loa has been approved

Types of Business Loans

There are quite a variety of business finance options available, each with its own pros and cons and commercial lending should be tailored to your specific business needs. This is why it pays to get the support and advice of a business loan expert to help you find the right solution with the best terms and rates for your business. Among the types of business loans available are:


Term Loans

These are traditional loans with a set repayment schedule over a fixed period. They can be secured (requiring collateral) or unsecured (no collateral required).


Lines of Credit

This is a flexible financing option where a lender provides a maximum loan balance that the business can draw upon as needed, perfect for managing cash flow and unexpected expenses.


Equipment Financing

Specifically designed for purchasing equipment, where the equipment itself often serves as collateral.


Commercial Mortgages

For purchasing commercial real estate, with the property typically serving as collateral.


Invoice Financing

Allows businesses to borrow money against invoices from their customers that are due but not yet paid.


Overdrafts

Allows businesses to withdraw funds from their business bank account beyond the available balance.


The terms, interest rates, and eligibility criteria for these loans can vary widely based on the lender, the type of loan, and the business's creditworthiness.


How To Get A Business Loan: The Application Process

When it comes to how to get a business loan, the application process will vary depending on the type of commercial loan you’re looking for. For example, lenders may not require security for a working capital loan depending on the loan's total value and the business's assessed health. And if you're looking at a Low Doc Business Loan the application process can be surprisingly straightforward.


For more complex arrangements or larger loans typically lenders scrutinise aspects such as your business credit score, annual turnover, profitability, and the duration your business has been active. Certain lenders might also demand collateral, a well-drafted business plan, or comprehensive financial forecasts. Security can take several forms: mortgage over land or property, the business' property including equipment, tools and vehicles, and generally personal guarantees. Expectations vary between lenders.


As for the application procedure, it generally encompasses completing a loan application form, supplying the necessary business documents, and undergoing a credit check.


Securing a business loan involves several key steps:

  1. Assess Your Needs: Clearly define why you need the loan, how much you need, and how you plan to repay it. This clarity will help you choose the right type of loan.

  2. Check Your Eligibility: Lenders evaluate your creditworthiness based on your credit score, business history, revenue, and sometimes collateral. Knowing where you stand can help you target the right lenders.

  3. Prepare Your Documents: Gather financial statements, business plans, tax returns, and any other documents required by the lender. These documents will be scrutinised during the application process.

  4. Choose a Lender: Beyond traditional banks, you can consider credit unions, online lenders, and government programs. Each has its own pros and cons, depending on your specific needs and qualifications.

  5. Apply: Submit your application along with all required documentation. Be prepared for further inquiries and possibly a face-to-face meeting.


Business lending can be complicated and time consuming so it makes sense to get help from an expert so that you can get on with running your business.


How Do Business Loans Work: Commercial Lending Tips for Success


  • Boost Your Credit Score: A higher credit score can improve your chances of approval and secure better terms.


  • Have a Solid Business Plan: Demonstrating a clear path to profitability can sway lenders in your favour.


  • Shop Around: Compare offers from multiple lenders to find the best rates and terms.


  • Understand the Fine Print: Be fully aware of interest rates, fees, penalties, and repayment terms before signing any agreement.


Securing a business loan is a strategic step toward growth, but it requires careful planning and consideration. By understanding the types of loans available, preparing thoroughly for the application process, and choosing the right lender, you can navigate the world of commercial lending with confidence. Remember, the right loan can be the catalyst that propels your business to new heights. As you embark on this journey, keep these insights in mind to make informed decisions that align with your business goals.


At CJG Finance, we believe in empowering business owners with the knowledge and tools needed to succeed. With so many lenders and products on the market, it can be difficult to work out just what you need and make sure you're getting the best deal and a solution that fits your needs. Let our expert business loan broker help you do the legwork and know you've got someone in your corner. Whether you're expanding your existing business, acquiring a new one, or starting from scratch, understanding how business loans work is the first step towards realising your entrepreneurial dreams.


To find out more, contact us or call Colin at CJG Finance on: 0402 413 917 or email him: cgreen@cjgfinance.com.au

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