What Is a Commercial Loan?

Commercial Loans Explained

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A commercial loan is a type of conditional funding for businesses.

A commercial loan is a type of conditional funding for businesses. These loans allow them to acquire capital for day-to-day operations, expansion, or other business purposes. Businesses can also use them to refinance existing loans.

Learn how commercial loans work, when your business might benefit from one, and how to get one.

Definition and Example of a Commercial Loan

A commercial loan is a type of business loan offered by a bank or financial institution. They are one of the most important assets to which a business can have access.

Alternate name: business loan

Commercial loans are often used to finance the purchase of real estate, equipment, inventory, or other business needs. They can include:

  • Term business loans
  • Working capital advances
  • Agricultural credits
  • Individual loans for business purposes

There are many benefits to getting a commercial loan for both new and existing business owners. Commercial loans often have:

  • Lower interest rates, which can help you stay on budget
  • Fixed repayment periods, giving you more predictability
  • Lower overhead because large banks fund these loans
  • Quick turnaround time for getting approved
  • A wider range of funding options than traditional loans

Commercial loans may be either secured or unsecured. Secured loans or “hard money loans” are backed by a business’s collateral. This is usually some kind of property or inventory that the bank can claim to regain their money if you default on your loan.

For example, one type of secured commercial loan is a mortgage on a building. The borrower pledges the building as collateral to the lender to make the loan payments. The borrower has an option to repay or refinance during the term of the loan. If they default on their payments, the lender has the right to repossess the collateral (the building).

Unsecured loans are not backed by collateral and are solely based on creditworthiness. They are more common than secured commercial loans. If your business applies for an unsecured loan, the amount you’re given and the interest rate you have to pay will be based on:

  • Your creditworthiness
  • How much cash flow you have from operations or other sources not pledged as collateral

How Commercial Loans Work 

Commercial loans are used for businesses. Unlike other types of loans, commercial loans are often unsecured and non-collateralized. This means they do not require any collateral or security as a part of the agreement. Some, though, may use inventory or accounts receivable as collateral. At the end of the life of the loan, these are converted into cash to repay it.


There is no set timeline for how long it will take to be approved for a commercial loan. Your credit score and debt-to-income ratio are factors that will determine how long it takes to be approved.

If you aren’t using collateral to secure your loan, your credit history will be an important part of getting approved. If you have a good credit history and you've paid off your debts in the past, there is a higher chance you will get approval for your loan faster than if you apply with bad credit history.

Commercial loans typically have lower interest rates than other business loans, but may have other requirements. Commercial lenders may want to know what you intend to use the money for, how you expect your business to grow over time, how much money you take in before taxes, and other details about your business.

Every commercial loan is different and has a different set of terms. The interest rate is the loan's borrowing rate that the lender offers. It is usually based on what other rates are available in the market. It will also be affected by factors such as:

  • Interest rates offered by other lenders
  • The amount being borrowed
  • The length of time for repayment
  • Risk factors associated with borrower

Commercial loans can also be bundled with other financial products to provide the borrower with more options. These might include personal lines of credit, receivables factoring, and asset-based lending.


Use a loan calculator to help you understand how different commercial loan terms will impact your business and to find the best option.

Types of Commercial Loans

Commercial loans can be broken down into two main categories. Short-term commercial loans are typically given out for periods of less than 12 months. Long-term commercial loans are typically given out for more extended periods.

Within these categories are different types of commercial loans. Your business’s needs will determine the right loan for your financial situation.

Working Capital Loans

A working capital loan is a type of asset-based lending. This means that these loans are usually unsecured. They are often offered by banks and other financial institutions to small and medium-sized businesses.

Working capital loans are used to finance a business’s short-term capital needs for daily expenses. They are often used seasonally for things such as buying inventory, paying extra staff, purchasing equipment, or other operational costs. They have two main features:

  • They are meant to be repaid in less than one year.
  • They should be used for working capital purposes only.

At the end of the loan’s term, a business will usually convert inventory or accounts receivable to cash in order to pay back the loan.

Real Estate Loans

Real estate loans are used to purchase and invest in property. They can be used for both residential or commercial properties.

Real estate loans can either be:

  • Mortgage loans, which are secured by the property being purchased
  • Non-mortgage loans, which are unsecured and do not require the borrower to use the property they are purchasing as collateral

Real estate loans can be used for purchasing things such as residential properties or cooperatives, undeveloped land, or forests. They can also include construction-project loans. In some states, oil and mineral rights are considered real property and can be bought with real estate loans.

Accounts Receivable Financing

For accounts receivable financing, a business uses its accounts receivable as collateral for borrowing working capital. This type of financing is best for businesses that have high volumes of invoices and can't wait for them to be paid before they can use the funds.


Accounts receivable financing is helpful to growing businesses because their ability to borrow increases as their sales expand. The financing creates a revolving and growing line of credit for a business to draw on.

There are two methods for using this method of borrowing:

  • Blanket assignment: The business keeps the lender up-to-date on the amount of unpaid receivables. Payments are made to the business, which then makes payments to the lender.
  • Ledgering the accounts: The lender maintains control of the accounts by requiring that customers make payments directly to them.

Multipurpose Commercial Loans

This kind of loan is not designed for one specific purpose. Government and private lenders offer multipurpose loans to provide businesses with the capital they need to purchase, make repairs, or invest.

SBA 504 Loans

The Small Business Administration (SBA) is a federal government agency that helps small businesses and entrepreneurs grow and succeed. The SBA offers a variety of lending programs to help you meet your financing needs. Its loans range from $500 to $5.5 million. Businesses applying for SBA loans must meet specific size standards.

The SBA 504 loan program is designed to help small business owners develop their business plans to become successful enough to repay the loan eventually. It also is the only direct lending program that offers long-term, fixed-rate financing for small businesses with minimal collateral.

SBA loans are for up to $5 million. With this type of loan, you make monthly payments to cover both the interest and principal over a period of up to 25 years or until you no longer own or operate your business.

This kind of loan is ideal for purchasing commercial real estate.

SBA 7(a) Loans

The 7(a) Loan Program is for a small business with less than $35 million in revenue. The applicant uses their credit history when applying for a loan from one of many participating lenders to start or expand a business.

SBA Microloans

Microloans are available for businesses requiring $50,000 or less to help them start or expand. These are available through local nonprofit organizations that partner with the SBA.

Keep in mind that in order to qualify for an SBA loan, a business must meet specific requirements, including no delinquent debts or unpaid taxes, not being a not part of a conglomerate or larger organization, and having no pending legal disputes with the government.

Key Takeaways

  • Commercial loans are financing from banks or organizations to businesses that the borrowers must repay within certain time frames.
  • Commercial lenders look at creditworthiness and cash flow for approval decisions.
  • Some commercial loans are secured (require collateral), while others are unsecured.
  • Commercial loans generally have longer repayment periods and lower interest rates than other loans.
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  1. Federal Deposit Insurance Corporation. "Risk Management Manual of Examination Policies: Loans." Pages 9-10. Accessed Jan 19, 2022.

  2. Office of the Comptroller of the Currency. "Commercial Loans." Page 3. Accessed Jan 19, 2022.

  3. Office of the Comptroller of the Currency. "Commercial Real Estate." Accessed Jan. 19, 2022.

  4. Federal Deposit Insurance Corporation. "Risk Management Manual of Examination Policies: Loans." Page 10. Accessed Jan 19, 2022.

  5. U.S. Small Business Administration. "Loans." Accessed Jan. 19, 2022.

  6. U.S. Small Business Administration. "504 Loans." Accessed Jan. 19, 2022.

  7. U.S. Small Business Administration. "7(a) Loans." Accessed Jan. 19, 2022.

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