Commercial Loans in Northeast Ohio

Offering commercial loans is yet another way credit unions like FFCCU can serve their memberships. As member-owned not-for-profit institutions, the mission of all credit unions is to serve their memberships’ financial needs – allowing savers to earn a good return on their deposits, and offering borrowers credit at reasonable rates. And while we typically have individual loans in mind, FFCCU is equipped to aid the entrepreneurs in our membership as well.

Commercial Loans Vs. Consumer Loans

Credit unions, not unlike banks, vary in what products and services they offer. Car loans, motorcycle or boat loans, personal loans, home equity loans and lines of credit, and credit cards are pretty standard. These types of loans are considered “consumer loans” – loans made directly to individual people. If Mr. Joe Smith is looking to purchase a car, a credit union will make a loan to Joe Smith and title the vehicle in Joe Smith’s name. The borrower will likely be required to carry insurance on the vehicle securing the loan, which will also likely have to be in Joe Smith’s name.

Commercial loans are different than consumer loans in quite a few ways.

Commercial Loans – the Who and the What

What is a Commercial Loan For?

First, the purpose of a commercial loan is to finance some kind of business need. That might be the purchase of an investment property. It could be to refinance an investment property to take cash out for repairs or updates. Maybe it’s a line of credit to purchase inventory. Or perhaps an installment loan to purchase heavy equipment for construction or excavating. There are a world of possibilities. While a consumer loan is made to an individual, to finance a purchase for personal consumption, commercial loans are typically used to finance a business pursuit.

Who Can Get a Commercial Loan?

Secondly, the borrowing entity is usually the business itself. So again, where with a consumer loan the borrower is that individual person (or perhaps two joint borrowers like spouses) who is borrowing for a major purchase or refinancing an existing loan, commercial loans are made to business entities. These include limited liability companies (LLC’s), partnerships, S-corporations, and C-corporations. They can also include non-profit or not-for-profit entities.

While the business is typically the borrower, the owners of the business are usually required to serve as guarantors on the loan. That means that they are personally “guaranteeing” the debt and can be held liable if the loan defaults. Their personal income and their personal assets can be pursued by the lender if the loan isn’t paid as agreed.

Since a commercial loan is made to the business itself, the business’ financial health will be the primary focus of the lender as they consider whether or not to approve the request. Multiple years of business tax returns, financial statements, bank statements, etc., are typically requested and analyzed. Lenders are looking for clear indication that the business can afford to repay the debt, and that the economics of the business are stable enough to suggest the enterprise remains capable of making their payments.

Are Personal Finances Considered?

If there are personal guarantors on the loan, which is standard, the credit histories and personal finances of those guarantors will also be analyzed. Credit reports are pulled, personal tax returns are requested, as well as bank statements reflecting assets.

The lender will review all of this information as they weigh the strengths and weaknesses of the commercial loan application, ultimately deciding whether or not to approve the request.

How Do Terms Work for Commercial Loans?

A third difference between consumer and commercial loans is that the terms of the loan are less standardized with commercial loans. Consumer loans have common, predictable terms. For example, car loans are generally installment loans, meaning that there is a fixed payment each month that includes principal and interest. And the terms are usually in 12-month increments ranging from 36 months to 72 months. Home equity loans are also installment loans, and often have 5, 10, or 15-year terms. Personal loans are installment loans with shorter terms, more like car loans. Credit cards have a monthly billing cycle, as do home equity lines of credit (HELOCs).

Commercial loans come with all sorts of unique terms. Most are installment loans for longer terms, especially if they’re financing some sort of real estate or investment property. But they often include provisions where the full balance becomes due after 5 or 10 years and the borrower must refinance at that point at current market interest rates. There may be interest-only periods. There may be draw periods, typically on construction loans, at one interest rate and then repayment periods at another interest rate.

Stay Connected to Your Lender

One final difference between commercial loans and consumer loans is that once a consumer loan is granted and funded, the lender usually doesn’t interact with the borrower beyond the sending of statements or receiving of payments. As long as payments on a consumer loan are made on time, the borrower simply repays the loan as scheduled. With commercial loans, the lender and the borrower interact frequently over the life of the loan. Typically, updated financial statements and tax returns are required by the lender each year. The lender is looking to make sure that the business is still operating as expected and earning sufficient income to support the loan. The loan note will also typically include provisions that can result in penalties or fees, or even increased interest rates, if business performance metrics aren’t met.

Commercial Lending with FFCCU

Many credit unions can offer their members help with business lending needs – including FFCCU! Commercial loans are typically more involved and more complicated than consumer loans. If you’re interested in pursuing a commercial loan with Firefighters Community Credit Union, speak with a representative in branch, or reach out to us digitally through online chat at ffcommunity.com or email communications@ffcommunity.com.

Posted In: Lending