7 Most Common Types of Commercial Loans

A commercial loan simply refers to a sum of money borrowed from a financial institution or bank by a business. It is a debt-based arrangement that medium-sized businesses defer to as it can help the businesses stay afloat and can also maximize business profitability. Out of the various types of commercial loans out there, below is a list of the 7 most common types you may come across:

1. Investment Loan

What Is It?

In simple terms, investment loans can be explained as a type of loan that is taken to invest in something else. It is an amount of money that a financial institution or a bank to finance a specific project. Secured by a mortgage on the investment property, the investment loan requires that the applicant repays both the principal loaned and the interests.

Why Get an Investment Loan?

With investment loans you’ll have enough money to spread it across a variety of investment projects, hence diversifying your investments. Borrowing to invest can also grow your wealth at a faster rate as the size of your investment portfolio can be drastically increased. The bigger the portfolio, the higher the chances of increasing your wealth.

2.Development Loan

What Is It?

Development loan, or property development finance, is a commercial loan that offers businesses funding for either major new building projects or comprehensive renovations. These projects are not limited to new housing estates or luxury homes, but also include office blocks and old blocks converted to flats. Think residential, commercial and mixed-use property.

Why Get a Development Loan?

This is the perfect loan to get if you want shorter repayment terms when undertaking a conversion project of land into a property. Unlike mortgages that can last years, the repayment period for property development loans can be anywhere from 3 months (for simple projects) to 18 months (for larger ones).

3.Equipment Loan

What Is It?

Equipment loans cover all purchases and borrowing of a business. Whether it’s for the acquisition of hard assets or to borrow a physical assert, this type of financing caters to specific types of businesses and equipment. Unlike with working capital loans, the asset you’re purchasing will serve as a kind of collateral.

Why Get an Equipment Loan?

The purpose of equipment loans is to help businesses acquire expensive equipment that they can’t afford to buy upfront. It is also helpful when you want the latest technology, or have to replace equipment that has a relatively short lifespan.

4.Debtor Finance

What Is It?

This umbrella term refers to products that finance invoices, the most common of which are invoice factoring and invoice discounting. If a company is not receiving payment from their clients soon enough, the bank can fund slow-paying invoices.

Why Get Debtor Finance?

If your company offers 30- or 60-days terms to is customers but you cannot afford to wait 60 days to receive payment, debtor finance is the way to go. It’s the perfect solution for companies that are experiencing cash flow problems as it will enable the manager to better manage payments and new investments.

5.Car and Truck Loan

What Is It?

This type of loan is typically offered to self-employed individuals, trusts, partnership firms, organizations who are involved in the transportation business and are considering purchasing vehicles for commercial or business purposes. This will cover the purchase of trucks, cars, buses, and light and small commercial vehicles.

Why Get a Car and Truck Loan?

Since vehicles are depreciating assets, it is common for businesses to opt for leasing. But if you are looking to use the vehicle for a long time and want to write off the depreciation on your tax return, it might be better to get a loan and purchase the vehicle.

6.SMSF Loan

What Is It?

SMSF, short for self-managed super fund, is a type of loan by a self-managed super fund (SMSF) to buy investment property. Regardless of whether the returns on the are via rental income or capital gains, these will have to be funneled back into the super fund.

Why Get a Self-Managed Super Fund Loan?

Thanks to gearing, the SMSF loan allows you to purchase property worth beyond its own available funds. Even if a loan defaults, the other SMSF assets will be protected since the lender may not have recourse to the other assets in the SMSF. To top it all off, SMSF enjoys all capital growth and income even while the property has not been fully paid for.

7.Short-Term Finance

What Is It?

Short-term finance, also referred to as working capital financing, is usually availed by companies that are experiencing an uneven flow of cash. Businesses generally use this type of commercial loan to finance inventory, accounts receivables, etc.

Why Get Short-Term Finance?

The repayment period typically last a year and is, therefore, appropriate for businesses that are cyclical in nature.