A commercial loan is a debt arrangement between a business and a lender, used to fund anything from day-to-day operations to multimillion-dollar property purchases. Bank-issued commercial loan rates currently run roughly 6% to 12%, depending on the loan type, borrower strength, and collateral, while online and alternative lenders charge significantly more. These loans differ from consumer lending in almost every way that matters: underwriting is more invasive, closing costs are higher, contracts contain ongoing financial obligations that can trigger a default even when payments are current, and most require the business owner to personally guarantee the debt.
Types of Commercial Loans
The label covers a wide range of products built for different needs. Picking the wrong structure wastes money on unnecessary interest or leaves a company without the flexibility it needs.
Term Loans
A term loan delivers a lump sum that the borrower repays on a fixed schedule, usually with a fixed or variable interest rate. Terms run anywhere from one year to 25 years depending on the purpose. These are the workhorse of commercial lending, used for large capital purchases, expansions, or acquisitions where the business needs the full amount up front and can plan around predictable payments.
Commercial Real Estate Loans
These loans finance the purchase, construction, or refinancing of income-producing property such as office buildings, retail centers, or warehouses. The property itself serves as collateral, which keeps rates lower than unsecured alternatives but means the lender can foreclose if the borrower defaults. Amortization schedules of 20 to 25 years are common, though many carry a balloon payment due after five or ten years.
Business Lines of Credit
A line of credit works like a credit card for a business. The lender approves a maximum, and the company draws only what it needs. Interest accrues only on the outstanding balance. This structure is especially useful for managing seasonal revenue swings or bridging short gaps between paying suppliers and collecting from customers.
Equipment Financing
When a business needs specific machinery, vehicles, or technology, equipment financing ties the loan directly to the asset being purchased. The equipment serves as collateral, simplifying the lender’s risk analysis and often producing better rates than an unsecured loan for the same amount. If the borrower defaults, the lender repossesses the equipment rather than pursuing other business assets.
SBA-Backed Loans
The Small Business Administration does not lend money directly. It guarantees a portion of loans made by private lenders, which reduces the bank’s risk and makes it easier for smaller businesses to qualify.1U.S. Small Business Administration. Loans Two programs dominate:
- 7(a) loans are the SBA’s most flexible program, covering working capital, debt refinancing, equipment, and real estate acquisition. Maximum loan amount is $5 million.2U.S. Small Business Administration. 7(a) Loans
- 504 loans focus on long-term fixed assets such as land, buildings, and heavy equipment, structured as a partnership between a private lender (about 50% of project cost), a Certified Development Company funded by an SBA-backed debenture (up to 40%), and a borrower contribution of at least 10%. Maximum loan amount is $5.5 million.3U.S. Small Business Administration. 504 Loans4eCFR. 13 CFR Part 120 Subpart H – Development Company Loan Program (504)
Bridge Loans
Bridge financing covers a gap between two events, like buying a new property before selling an existing one or stabilizing a building before refinancing into a permanent loan. Terms are short, usually 6 to 36 months, and rates reflect the urgency. Commercial bridge loans currently carry interest rates of roughly 9% to 14%, often as a floating rate tied to SOFR plus a lender spread. These loans almost always require a clear exit strategy within 12 to 24 months.
What a Commercial Loan Actually Costs
Interest is only part of the total. Commercial borrowers pay a stack of fees that can add 3% to 6% of the loan amount on top of principal, and some of them catch first-time borrowers off guard.
Interest Rates
Rates vary enormously by loan type and lender. As of early 2026, bank-issued small business loans carry rates in the 6% to 12% range. SBA 7(a) loans, tied to the prime rate (currently 6.75%), run roughly 10% to 15% depending on loan size and whether the rate is fixed or variable. Online lenders and alternative products charge much more, sometimes exceeding 30% APR. Equipment loans tend to fall on the lower end because the collateral is straightforward to value and repossess.
Origination and Closing Fees
Lenders charge an origination fee, typically 0.5% to 1% of the loan amount, to cover underwriting and processing. SBA loans add a guarantee fee of 0.25% to 3.75%, scaled to loan size. Beyond those, budget for legal fees, title insurance, commercial appraisals (running $2,000 to $10,000 or more depending on property complexity), and recording fees. Commercial real estate transactions add an environmental site assessment on top.
Eligibility Requirements
Getting approved for a commercial loan is harder than qualifying for a personal loan or a home mortgage. Lenders look at the business and the owner separately, and weakness in either can kill the deal.
Credit Scores
Banks and credit unions generally expect personal credit scores of 670 or higher. Some major banks set the floor at 680 or 700. Business credit scores from reporting agencies like Dun & Bradstreet also factor in, giving lenders a picture of how the company has handled trade credit and vendor payments over time.
Time in Business and Revenue
Most conventional lenders want at least two years of operating history. Startups have a much harder time qualifying with banks, which is why SBA loans exist: the government guarantee compensates for the higher risk. Revenue thresholds vary by loan size, but smaller lines of credit often require minimum annual revenue in the low six figures, scaling up sharply for larger term loans.
Debt-Service Coverage Ratio
The debt-service coverage ratio (DSCR) measures whether a business earns enough to cover its loan payments. Lenders calculate it by dividing net operating income by total debt obligations. A DSCR of 1.25 is a common minimum benchmark, meaning the business generates $1.25 in operating income for every $1.00 owed in debt payments. That 25% cushion protects the lender against revenue dips. Fall below the required ratio and most lenders will decline the application, or if you are already funded, they can potentially call the loan in default.
Collateral
Most commercial loans are secured. The lender requires you to pledge assets, such as real estate, equipment, inventory, or accounts receivable, that can be liquidated if the business stops paying.5National Credit Union Administration. Examiners Guide – Commercial and Member Business Loans – Collateral To formalize the claim, the lender files a UCC-1 financing statement, which puts the public on notice of the lender’s security interest in specific business assets. That filing also gives the lender priority over unsecured creditors if the business files for bankruptcy.
SBA-Specific Restrictions
SBA loans add rules on top of what conventional lenders require. The business must operate for profit, be located in the United States, and qualify as “small” under the SBA’s size standards for its industry.2U.S. Small Business Administration. 7(a) Loans Entire categories are excluded, including nonprofits, businesses primarily engaged in lending, passive real estate holding companies, life insurance companies, and businesses deriving more than one-third of revenue from gambling.6eCFR. 13 CFR 120.110 – What Businesses Are Ineligible for SBA Business Loans Businesses with an owner currently incarcerated or under felony indictment are also ineligible, as are companies that previously defaulted on a federal loan.
Personal Guarantees and Borrower Liability
This is the section most first-time commercial borrowers do not read carefully enough. A personal guarantee means the lender can come after your personal assets, including bank accounts, investment accounts, and your home, if the business cannot repay the loan. The business entity’s liability protection does not shield you from a personal guarantee.
Recourse vs. Non-Recourse Loans
A recourse loan gives the lender broad collection rights. If the business defaults and the collateral does not cover the balance, the lender can pursue the borrower personally for the difference. Most commercial loans for small and mid-sized businesses are full recourse.
A non-recourse loan limits the lender’s recovery to the collateral itself. Even if the property sells for less than the outstanding balance, the lender absorbs the loss. Non-recourse terms are generally reserved for larger deals with experienced borrowers and strong collateral, and first-time commercial borrowers rarely have access to non-recourse financing.
Bad Boy Carve-Outs
Even non-recourse loans are not entirely safe. Nearly all contain carve-out provisions, sometimes called “bad boy” guarantees, that convert the loan to full recourse if the borrower commits certain prohibited acts. Fraud, misrepresentation, filing a voluntary bankruptcy petition, failing to maintain insurance, and transferring the property without lender consent are the most common triggers. Violating a carve-out strips away the non-recourse protection entirely, leaving the borrower personally exposed for the full loan balance.
Documentation Lenders Will Ask For
Commercial loan applications require significantly more paperwork than consumer lending. Lenders want to reconstruct the business’s financial history, verify its legal standing, and assess the specific use of funds before committing capital.
Financial and Tax Records
At minimum, expect to provide profit and loss statements, balance sheets, and cash flow projections for the last two to three fiscal years. Personal and business tax returns for the same period are standard, and lenders cross-reference them against the financial statements to flag inconsistencies. If the numbers do not reconcile, the application stalls.
Corporate and Legal Documents
Lenders need proof that the entity is legally organized and authorized to borrow. Articles of incorporation, operating agreements, business licenses, and any partnership agreements establish who owns the company and who can sign loan documents.
SBA-Specific Forms
SBA-backed loans require extra paperwork. SBA Form 1919 collects personal background information on every owner holding 20% or more of the company, plus all officers and directors regardless of ownership percentage.7U.S. Small Business Administration. SBA Form 1919 Borrower Information The form also requires a line-by-line breakdown of how loan proceeds will be used: how much to real estate, how much to equipment, how much to working capital.
Environmental Assessments
For commercial real estate transactions, lenders frequently require a Phase I Environmental Site Assessment before closing. This report investigates whether the property has a history of contamination from prior uses. The requirement is almost universal for properties with environmentally sensitive histories such as gas stations, dry cleaners, auto repair shops, and manufacturing facilities. If Phase I flags problems, a Phase II involving physical sampling follows, adding cost and weeks to the timeline.
How Long the Application and Funding Process Takes
Commercial loan closings are slower and more involved than most borrowers expect. A straightforward deal takes four to eight weeks from application to funding. SBA loans and complex real estate transactions can take considerably longer.
After you submit a complete application, the lender’s underwriting team reviews the financials, orders appraisals, and evaluates risk. If the deal passes initial screening, the lender issues a term sheet or letter of intent outlining the proposed interest rate, repayment schedule, fees, and major conditions. The term sheet is not a binding commitment. It is an offer to negotiate final terms. Scrutinize the covenants, prepayment provisions, and personal guarantee requirements at this stage, before the legal costs of drafting final documents kick in.
At closing, the borrower signs the promissory note, any security agreements granting the lender a claim on collateral, and various compliance certifications.8CDFI Fund. Business Loan Closing Checklist Funds are typically wired directly into the business’s operating account within a few business days, though loans tied to specific purchases may disburse directly to the vendor or into an escrow account.
Loan Covenants: Obligations After Funding
Signing the documents is not the end of the process. Commercial loans contain covenants, ongoing conditions the borrower must satisfy for the life of the loan. Violating a covenant puts the loan in technical default even if every payment has been made on time, and that default gives the lender the right to accelerate the balance and demand immediate repayment in full.
Financial Maintenance Covenants
These require the business to maintain certain financial ratios, measured quarterly or annually. Common examples include:
- Debt-service coverage ratio: maintaining a minimum DSCR, often 1.20 to 1.25, throughout the loan term.
- Debt-to-equity ratio: keeping total debt below a specified multiple of owner equity, such as 3:1.
- Current ratio: maintaining current assets at a certain multiple of current liabilities, such as 2:1.
Lenders review the company’s financial statements regularly to verify compliance. A business that lets its ratios slip, even temporarily due to a bad quarter, can trigger a covenant violation.
Affirmative and Negative Covenants
Beyond financial ratios, affirmative covenants require the borrower to do specific things: maintain insurance, pay taxes on time, submit periodic financial reports, and keep collateral in good condition. Negative covenants prohibit certain actions without lender consent, like taking on additional debt, selling major assets, or changing the ownership structure of the business. These restrictions can feel burdensome, but lenders view them as early warning systems.
Prepayment Penalties
Paying off a commercial loan early sounds like a good thing, but it often comes with a cost. Lenders price loans assuming they will collect interest for the full term, and prepayment penalties compensate for the lost income. These penalties are far more common and more expensive in commercial lending than in consumer lending.
Three structures are typical:
- Yield maintenance. The borrower pays a penalty calculated to make the lender whole for the interest it would have earned over the remaining term, based on the difference between the loan rate and current Treasury yields. On a large loan with years remaining, this can be substantial.
- Defeasance. Instead of paying off the loan, the borrower replaces the real estate collateral with government securities that generate the same cash flow as the remaining payments. The loan technically stays on the books, but the borrower is released from the property. This is complex and expensive to execute.
- Step-down. The most borrower-friendly option. The penalty declines each year on a preset schedule, for example 5% of the balance in year one, 4% in year two, down to 1% in year five.
Some loans also include a lockout period during the first one to three years, during which prepayment is not allowed at all. If you anticipate selling a property or refinancing within a few years, negotiate the prepayment structure before signing.
Is Commercial Loan Interest Tax Deductible
Interest paid on a commercial loan is generally deductible as a business expense, which is one reason debt financing is so common. A federal cap, however, limits how much interest larger businesses can write off in any given year.
Under Section 163(j) of the Internal Revenue Code, deductible business interest expense cannot exceed the sum of the business’s interest income plus 30% of its adjusted taxable income (ATI).9Office of the Law Revision Counsel. 26 USC 163 – Interest Any interest that exceeds this cap carries forward to future tax years. For tax years beginning after December 31, 2024, deductions for depreciation and amortization are no longer added back when calculating ATI, which effectively tightens the cap for capital-intensive businesses.10Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
Small businesses are exempt. If your average annual gross receipts over the prior three years fall at or below the inflation-adjusted threshold (currently $31 million as of 2025, with the 2026 figure pending IRS announcement), you can deduct all business interest without hitting the 30% cap.9Office of the Law Revision Counsel. 26 USC 163 – Interest Most businesses seeking their first commercial loan will fall well below this threshold.
Alternatives If You Do Not Qualify
Not every business can qualify for a traditional commercial loan. Thin credit history, insufficient collateral, or an industry that banks avoid can all shut the door. Two alternative products fill the gap, but both carry tradeoffs worth understanding clearly.
Invoice Factoring
Factoring lets a business sell its unpaid invoices to a factoring company at a discount in exchange for immediate cash, usually within 24 to 48 hours. The factoring company then collects payment directly from the business’s customers. Qualification is based on the creditworthiness of the customers, not the business itself, which makes factoring accessible to newer companies.
The cost is steep. Factoring fees run 1% to 4% per month until the customer pays, which translates to an effective annual rate of 30% to 60% or higher if customers are slow to pay. Factoring companies also typically require a blanket lien on receivables through a UCC-1 filing, which can block the business from obtaining SBA loans or other traditional financing until that lien is released.
Merchant Cash Advances
p>A merchant cash advance (MCA) provides a lump sum in exchange for a fixed percentage of future daily credit and debit card sales. It is technically not a loan. It is a purchase of future receivables. Because repayment scales with daily revenue, a slow sales day means a smaller payment, which provides some cash flow flexibility.
The pricing structure is where most borrowers get burned. MCAs use a “factor rate” instead of an interest rate. A factor rate of 1.4 on a $50,000 advance means the business repays $70,000 regardless of how long repayment takes. Translated to an APR, the effective cost routinely exceeds 40% and can climb well above 100%. MCAs should be a last resort, and borrowers should always calculate the true annualized cost before signing.