In today’s competitive business world, finding the right financial resources can make or break a company’s success. That’s where commercial lending comes in. Commercial lending gives businesses the capital to thrive, whether purchasing, constructing, or refinancing real estate, new equipment, expanding facilities, or managing cash flow. But this is no simple task; navigating the ins and outs of commercial lending can feel overwhelming. This blog post will serve as a guide to help you better understand commercial lending, how it works, and the various products and services available.
Understanding Commercial Lending
Commercial lending refers to loans provided by financial institutions such as banks and credit unions, specifically for businesses, as opposed to individuals. These business loans typically carry higher loan amounts and shorter loan terms and often require collateral compared to personal or consumer loans. Let’s explore some important aspects of commercial lending.
Types of Commercial Loans
Depending on a business's funding needs and goals, it can explore various commercial lending products. Common types of commercial loans include:
- Term Loans: These loans are used for specific purchases or projects and involve a fixed interest rate and repayment schedule.
- Lines of Credit: Provide businesses with a flexible borrowing limit, allowing them to access funds up to a predetermined amount as needed. This can be useful for managing cash flow fluctuations or unexpected capital expenditures.
- Commercial Real Estate Loans: Designed to finance commercial property purchase, construction, or renovation. They usually have longer terms and often require a substantial down payment.
- Equipment Financing: A loan dedicated to acquiring equipment needed for business operations. The equipment itself acts as collateral for the loan.
- SBA Loans: The Small Business Administration (SBA) offers loan guarantee programs for small businesses. They make getting a commercial loan easier by providing lenders with a government guarantee, making them more willing to take on the risk of lending to startups or businesses with a limited operating history. These business loans are available through various participating lenders. SBA-guaranteed loans are subject to requirements set forth by the SBA, in addition to underwriting requirements of commercial lenders.
Factors that Impact Commercial Lending
The commercial lending process involves several crucial factors. Both lenders and borrowers should know these key elements before entering into a commercial loan agreement. Here's a closer look at some important factors:
Creditworthiness
Lenders consider a company's financial history, revenue stream, and existing debt. Solid creditworthiness assures the loan can and will be repaid according to its terms. They will also consider the business's credit term, the period granted to repay borrowed money, and how that aligns with their typical credit terms.
Collateral
Commercial lending institutions require collateral, typically property, equipment, or accounts receivables, as a security measure. If the borrower fails to repay the loan as agreed, the lender has the right to seize the collateral to recover their losses.
Interest Rates
When a business applies for a loan, the prime lending rate and treasury indexes directly affect lenders’ interest rates. This, in turn, impacts the total cost of the loan and the borrower’s monthly repayments.
Exploring CBS Solutions for Commercial Lending
Cooperative Business Services (CBS) focuses on simplifying commercial lending for credit unions. With its cooperative model structure, credit unions can tap into CBS’s expertise without building a full commercial lending department. This is a big deal because credit unions can participate in deals and serve their communities without the overhead expense and management of experienced commercial lending underwriters, closers, or portfolio managers.
Another advantage of utilizing CBS services is that credit unions do not have to fully fund commercial loans. In partnership with local Credit Unions, CBS builds cost-shared business development and origination models in various geographic footprints and involves many credit unions to support lending in their local communities better. For instance, a credit union can choose to invest in only a portion of the full loan amount rather than taking on a whole loan. That means funding portions of a $2 or $3 million loan instead of the entire amount. CBS partners with credit unions, offering solutions to help diversify investments and manage concentrations and risk.
Leveraging SaaS Solutions
Creditable, a CBS software-as-a-service product, offers an efficient platform to streamline the small business lending process. Credit unions gain quick support from the CBS team at various points, whether for deal approvals, lender analyses, or closing documents.
In recent years, this online platform has become increasingly valuable for the financial services industry. You can see it with Remote Deposit Capture Access and Remote Deposit Capture Enhanced Access options. This trend emphasizes secure, digitized banking procedures that simplify financial interactions for individuals and businesses.
Creditable comes with a distinct benefit: it helps expedite transactions quicker and more efficiently. It’s especially valuable because it lets credit unions leverage the CBS team’s support throughout. Need assistance approving deals, doing a lender’s analysis, or finding closing documents for their loans? Creditable empowers clients to manage the process from start to finish independently.
Imagine a borrower-friendly website personalized for a particular credit union. This setup allows borrowers to submit their applications and necessary documentation through a dedicated portal. Then, the credit union can quickly review the application, and loans can get approved and closed in days. The credit union can use CBS as much or as little as needed to ensure a smooth and easy process.
Even credit unions that don’t want to get deeply involved in these complex transactions can find value in the program. Think of Creditable as a cost-effective solution to access specialized knowledge. It gives you expert support without committing to a full-scale CBS partnership. Besides, suppose you use CBS for their additional a la carte offerings. In that case, they offer several additional solutions, including underwriting and closing services to portfolio and Current Expected Credit Loss analyses, as well as workout solutions in case a loan defaults.
Navigating Commercial Lending Regulations
Regulations play a crucial role in overseeing commercial lending. Understanding the regulations governing this aspect of finance is vital to mitigate risks and to maintain compliance with various federal oversight rules. Key federal regulations directly relevant to commercial lending for credit unions includes:
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Regulation |
Purpose |
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The federal law to make credit available to Americans and promote thrift through a national system of nonprofit, cooperative credit unions later allowed for the creation of the National Credit Union Administration (NCUA) |
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Part 723 of the Federal Credit Union Act | Member Business Lending |
Policy and program responsibilities that a federally insured credit union must adopt and implement as part of a safe and sound commercial lending program |
FAQs about commercial lending
What is commercial business lending?
Commercial business lending involves a financial agreement where an institution (like a bank or credit union) provides funds to a company for various business purposes. This might include buying new equipment or real estate, covering day-to-day operating costs, or helping with expansion plans.
What are the 4 C's of commercial lending?
The four C’s—capacity, capital, collateral, and conditions—refer to the key elements lenders look at when reviewing commercial loan applications. Capacity evaluates the business's ability to repay the loan through consistent cash flow. Capital measures the business's financial stability through its assets, owner’s investment, and overall financial standing. Collateral relates to any assets the business can pledge to back up the loan in case of default. Lastly, conditions describe the intended purpose of the loan, the existing economic climate, and the current interest rates impacting both borrowers and lenders.
What is an example of a commercial lender?
Commercial lenders encompass a range of institutions including:
- Banks
- Credit Unions
- Online Lenders (like Axos Bank)
- Private Lenders
What are commercial lending products?
The phrase “commercial lending products” covers various business financing solutions. Common products include term loans, lines of credit, commercial real estate loans, equipment financing, and SBA loans. Some institutions also offer SBA lines of credit. Many lenders will also have a dedicated relationship manager who works with certain business entities.
Conclusion
Commercial lending offers various options that can greatly help businesses achieve their financial objectives. However, businesses must understand the types of loans, factors affecting the lending process, and current regulations impacting commercial lending. By being well-informed and strategically planning, companies can make wise financial choices. Seeking more than funding and understanding which lending partner can become a true business partner is key to your long-term success.
Ready to learn more or get started? Visit our Commercial Lending page for a full view of what we could offer to your credit union or small business!
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