California Financial Law: Commercial Loan Requirements

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A business in California may want a commercial loan for a range of reasons, such as a one-time, business-related emergency, an expansion opportunity or to address a cash-flow problem. Various types of loans are available, and they all come with pros and cons. The right type of loan depends on the reason for the loan and the current financial state of the business, as well as the ability of the business to meet future repayments in accordance with the commercial loan terms.

Types of Commercial Loans

Term loans

The types of commercial loans offered to borrowers in California are the same as those offered throughout the rest of the country. The most common is a term loan offered by a bank or other lender. A term loan may be a traditional-term loan, a medium-term loan or a short-term loan. Basically, it is a lump sum loan paid back by the borrower over a fixed time period.

A traditional-term loan typically offers a large amount, over a long term and with the lowest rates of interest. However, it is the hardest type of term loan to qualify for. A medium-term loan tends to be offered by less traditional types of lenders, like Funding Circle or LendingClub. This offers smaller loan amounts and shorter terms, and is therefore slightly more accessible, with higher rates of interest.

A short-term loan is the most accessible type of term loan – it's possible to get one even if you have bad credit. However, interest rates are very high, up to 110 percent.

Business line of credit

A business line of credit is a flexible financing option. Once approved, it gives a business access to a fixed amount of money whenever it needs a cash injection. As soon as the amount that is drawn is paid back (plus interest), the line of credit goes back to the original amount. One of the advantages of a line of credit is that interest is paid only on the amount that is drawn.

Invoice financing

Invoice financing is a specific type of commercial loan, aimed at B2B (business-to-business) borrowers, that lets the borrower free up cash held back in her unpaid invoices. An invoice factoring company advances the borrower a large percentage of the value of her outstanding invoice, often up to 95 percent. A factor fee (a very small percentage of the value of the invoice) is charged on a weekly basis until the customer pays the invoice. As soon as the invoice is paid, the lender collects the payment and returns the reserve amount to the borrower, minus the factor fee.

In California, companies like Factor Finders can help business owners find local invoice factoring companies.

Commercial real estate loans

If someone wants to buy or renovate real estate for commercial purposes, he might consider a commercial real estate loan. This is a type of business mortgage loan that is normally a large, long-term loan with a low rate of interest. The Small Business Administration offers commercial real estate loans through the Certified Development Company (CDC)/504 loan program and the 7(a) loan program.

Small Business Administration Loans

Small Business Administration (SBA) loans are basically bank term loans that are guaranteed by the SBA. The federal government backs up to 85 percent of the loan issued by the bank, which takes a great deal of the risk away from the lender. Generally, this type of loan offers a large amount at a low interest rate, which makes it a very attractive option. If someone is applying for an SBA loan in California, the first step is to ask the SBA district office for the names of a few approved lenders.

The application process for an SBA loan is different than other types of loans. A great deal of paperwork is required, and the approval and funding process can take several weeks. Companies like Fundera can help small business owners get through the SBA application process, in California and all other U.S. states.

Commercial Loan Requirements

Anybody applying for a commercial loan in California or any other state should be prepared with all the necessary paperwork required by the lender. Requirements vary, but generally include basic personal information like name, address and Social Security number, as well as business information like operating address, entity type and employer identification number (EIN). The lender also needs to see copies of valid ID, tax returns (both personal and business), business bank statements, profit and loss statements, cash flow forecasts and business debt schedules. The applicant's personal credit score and business credit score will also be taken into account.