Menu
Commercial loans have long been a go-to funding source—but they’re not always the best fit. In this guide, we walk you through five essential things to consider before applying for a commercial loan. From strict qualification requirements and hidden costs to the long-term impact on your cash flow and credit, we break down the realities many business owners overlook. Plus, if you’re not approved—or decide a bank loan isn’t the right move—we explore faster, more flexible alternatives like invoice factoring that can help you access capital without the red tape.
1. Debt financing is a versatile tool
Only 47% of U.S. businesses who applied for a line of credit in 2024 got fully approved. The rest either got less funding than they asked for or got rejected outright. And the issue isn’t limited to the States: bank lending is declining globally. According to the OECD SME Finance Scoreboard, traditional bank lending to small and mid-sized businesses is shrinking, while demand for alternative finance—like online lending and factoring—is increasing due to more flexible approval criteria and transparent pricing (OECD, 2023).
In short, getting approved for commercial lending is possible for a small business–but it isn’t easy.
Why Commercial Loans Are so Challenging for SMBs to Obtain
Traditional financing, like commercial loans, can be tough to access—especially for startups and small businesses. Most lenders require:
- At least a 2 year-long financial track record showing success
- Accountant or CPA-prepared financials for that time period
- Strong credit history and scores
Many newer businesses haven’t been around long enough to have these things. And many small businesses don’t have the credit history to qualify.
In both Canada and the U.S., the primary lenders for business loans are banks and government programs. In Canada, domestic banks provide more than 50% of all business loans (Statistics Canada). However, only about half of Canadian startups are able to secure credit from financial institutions, and over 80% rely on personal funds, such as savings or loans taken out by the founders themselves (BDC).
In the U.S., commercial banks issued nearly $12.2 trillion in business loans as of late 2023 (Federal Reserve). Yet, according to the Federal Reserve’s 2023 Small Business Credit Survey, 59% of small businesses reported using personal savings, home equity, or retirement funds to finance operations.
Bootstrapping may work in the early stages—but it becomes unsustainable as your business grows and requires more capital to scale.
2. The pros and cons: Should you get a commercial loan?
A commercial loan is a financing agreement where a business borrows money from a lender and repays it over a defined term with interest. These loans are typically used for large expenses such as equipment, renovations, real estate, or other capital investments.
While commercial loans can theoretically be used for short-term needs—like covering payroll or supplier invoices—most lenders won’t approve them for those purposes due to the higher risk involved.
Key Characteristics of Commercial Loans:
- Fixed loan term: Repayment periods often range from 1 to 10 years, depending on the lender and loan type.
- Scheduled repayments: Businesses usually make monthly payments that include both principal and interest.
- Interest rates: Vary based on the borrower’s credit history, collateral offered, and the loan’s structure. Rates typically fall between 4% and 13% (NerdWallet, 2024).
Collateral requirements: Many lenders require some form of security—such as real estate, equipment, or receivables—that they can seize if the borrower defaults.
Commercial Loans Pros:
Fund Large Investments and Operational Costs
Commercial loans are often used to finance big-ticket items like machinery, renovations, or expansion projects. They can also be used for working capital—such as payroll, marketing, or inventory—depending on the agreement.
Lower Interest Rates and APR Compared to Other Credit Types
Compared to credit cards (typically 18%–25% APR) and merchant cash advances (often 20%–70% effective APR), commercial loans are relatively affordable. Bank loans may offer rates as low as 5%–8% for qualified borrowers (Federal Reserve).
Long Repayment Terms
Loan terms can stretch from 3 to 10 years (or more), making it easier to manage cash flow with smaller monthly payments.
Maintain Full Ownership
Unlike equity financing or venture capital, commercial loans don’t dilute your ownership or control. You remain in charge of your business decisions.
Commercial Loans Cons:
Hard to Qualify Without Excellent Credit
Most traditional lenders require a credit score of 680+, stable revenue history, and detailed financials. New or growing businesses often don’t meet these requirements.
Time-Consuming Application Process
Securing a commercial loan can take weeks or even months, especially through banks. You’ll need to prepare financial statements and possibly a business plan.
Collateral Is Often Required
Banks typically require business or personal assets to secure the loan. If you default, they may seize property, inventory, or accounts receivable.
Limited Flexibility in How Funds Are Used
Many loan agreements come with spending restrictions. Lenders may ask how you plan to use the funds—and require that you stick to the plan. Short-term cash flow needs might be seen as a high risk way to use the funding.
3. How much do commercial loans cost?
Commercial loan costs typically range from 4% to 12% annually, depending on loan type, lender, credit score, and collateral. Fees may include origination (0.5%–5%), underwriting, legal, and appraisal charges. Total costs can exceed 15% annually if fees and interest accumulate under riskier terms.
According to Federal Reserve data, the average small business loan interest rate at a commercial bank in 2023 was approximately 6.5% for fixed-rate loans and 8.2% for variable-rate loans (source).
The cost of a commercial loan can vary significantly based on several risk factors. While some borrowers may receive interest rates close to the prime rate, others may face double-digit APRs depending on their business profile and loan structure.
Key Factors That Influence Commercial Loan Rates:
- Personal and business credit history: Lenders use your credit score and payment track record to assess risk.
- Lender relationship: If the lender already works with the business, the business may qualify for better terms.
- Lender type: Banks often offer lower rates but stricter terms. Private lenders or fintech platforms may be more flexible but charge higher rates.
- Loan term: Shorter terms often mean higher monthly payments but lower total interest; longer terms can accumulate more interest over time.
- Collateral: Secured loans typically have lower rates since lenders face less risk.
- Hidden fees: Each lender has their own fees that they add onto the rate.
You can estimate your monthly payments using tools like the Shopify Business Loan Calculator, which allows you to plug in loan amounts, terms, and estimated interest rates. But remember—calculators often don’t include hidden costs like origination fees or late payment penalties.
FAQs: Commercial Loan Pricing
What is the average APR for a small business loan in Canada or the U.S.?
The average APR for a small business loan in the U.S. ranges from 6% to 30%, depending on loan type, lender, and borrower credit. In Canada, the average APR typically falls between 5% and 15% for traditional loans. SBA loans in the U.S. often offer lower rates between 6% and 10%.
Can I negotiate the interest rate on a commercial loan?
You can negotiate the interest rate on a commercial loan by presenting strong financials, comparing lender offers, and leveraging your credit score and business history. Banks and alternative lenders often allow rate adjustments, especially for borrowers with low risk or high collateral.
What are the potential hidden fees?
Even if you secure a rate close to prime (currently 7.25% in Canada as of mid-2025), missing a payment could trigger:
- Penalty interest rates
- Often 3–5% above your original rate
- Late payment fees
- Credit cards: $32–$41 per missed payment
- Loans/lines of credit: 3–5% of the overdue amount
- Origination fees
- Origination fees: 0.5%–1% on traditional bank loans
- 1%–9% for online or non-traditional small‑business loans
- Default clauses, including collateral seizure or personal guarantees
These are particularly dangerous if you’re already facing cash flow issues. Late penalties or compounding interest can deepen your financial strain quickly.
Comparison of True Costs
Funding Type | Typical Interest Rate | Flexibility | Common Fees |
Commercial Loan | 5%-7% | Low | Late penalties, origination fees |
Line of Credit | 6.5%-9% | High | Monthly maintenance, overdraw penalties |
Merchant Cash Advance | Factor rates 1.1–1.5× (≈35%–350% APR) | Medium | Prepayment penalties, origination fee |
Invoice Factoring | Flat fee of 0.5% to 3% per 30 days | High | Origination fee, early termination fee, adjudication fee (FundThrough offers one flat rate with no hidden fees!) |
4. Keep alternatives in mind, especially invoice factoring
Alternative funding refers to non-bank financing options available to small businesses that don’t qualify—or don’t want to rely—on traditional loans. These include:
- Invoice factoring and advances
- Crowdfunding
- Peer-to-peer (P2P) lending
- Angel investors and venture capital
- Credit Cards
These tools are often more flexible, faster to access, and less reliant on credit scores—making them ideal for startups and growing businesses.
Invoice Factoring
Invoice factoring is a financing solution that allows B2B businesses to convert unpaid customer invoices into immediate working capital. Instead of waiting 30, 60, or even 90 days for customers to pay, you sell those invoices to a factoring company—like FundThrough—and receive most of the invoice value upfront, often within 24 hours.
Unlike loans, factoring is not debt since it’s the sale of an asset (i.e., your A/R). There’s no impact on your balance sheet or repayment schedule as long as your customer pays their invoices. Approval is based on your customers’ creditworthiness, not yours, making it an ideal option for startups and businesses with limited credit history. It’s often used by growing businesses who need capital quickly for large contracts.
Pros:
- Immediate Access to Working Capital: Receive funds in as little as 24 hours after invoice verification, speeding up cash flow without waiting for slow-paying customers.
- No Debt Added: Because factoring is not a loan, it won’t show up as a liability on your balance sheet or hurt your debt ratios.
- Approval Based on Customer Credit, Not Yours: Ideal for newer businesses or those with thin credit files.
- Keep Ownership: No need to give up equity or take on investors—maintain full control over your business.
- Predictable Cash Flow: Great for budgeting, forecasting, and taking on new clients without worrying about when you’ll get paid.
- Easy Integration with Accounting Software: FundThrough connects seamlessly with QuickBooks and OpenInvoice for fast setup and ongoing automation.
- Flexible and On-Demand: Many factoring companies require you to factor all your accounts receivable. FundThrough lets you factor only the invoices you choose—no volume commitments, no long-term contracts.
- Transparent Pricing: With FundThrough, there are no hidden fees or surprise costs—just a simple discount rate you see before you fund.
- Great for Scaling: Use your own revenue to fuel projects that will grow your business.
- Outsourced A/R management: For example, FundThrough applies $230K in payments a month for the average client
- Outsourced collections: Rely on a professional, friendly team to collect your overdue receivables.
- Trusted by Thousands: As global factoring volumes reached €3.5 trillion in 2022 (World Factoring Yearbook), it’s a trusted and growing funding method among SMEs.
Ready to get paid early?
Cons:
- Customer Contact: Contacting your customers is required to redirect payment. Hundreds of large buyers work with FundThrough, and we always treat your customers like our own.
- Higher Fees: Compared to traditional financing, factoring is more expensive. However, the rates are similar to credit card fees. You also get more value for your fee in the form of accounts receivable management, collections support, and proactive cash flow support from your account manager.
- Old-School Models: Many factoring services involve heavy paperwork and manual systems. The FundThrough platform enables you to apply and request funding online.
Crowdfunding
Crowdfunding allows entrepreneurs to raise small amounts of money from a large number of people—typically through platforms like Kickstarter, Indiegogo, or GoFundMe. Campaigns are promoted online and often include videos, incentives, and early access to products. These campaigns make the most sense for businesses that have strong brand awareness and/or a loyal community.
Pros:
- No or Low Risk: Funds raised through donation-based platforms must be used for their intended purpose, but you don’t owe contributors a return.
- Built-in Marketing: A successful campaign can double as a visibility boost and community-builder for your brand.
- Creative Funding Models: You can offer rewards, pre-orders, or equity depending on the platform and structure.
- Speed: Campaigns can raise thousands (or millions) of dollars in a matter of weeks if timed and promoted well.
Fast Fact: The crowdfunding market is projected to reach $42.9 billion USD globally by 2028, with equity-based crowdfunding seeing the highest growth (Statista, 2024).
Cons:
- Low Success Rates: Just 22.4% of Kickstarter campaigns successfully met their goal in 2023 (Kickstarter Stats).
- No Strategic Guidance: Unlike angel investors or VCs, most contributors offer money—not mentorship or connections.
- Intellectual Property Risks: Sharing your product publicly too early can invite copycats and result in lost competitive advantage.
- Labor intensive: You’ll need to plan and execute the promotion of the campaign to have the best chance of success.
Peer-to-Peer (P2P) Lending
P2P lending connects borrowers directly to individual or institutional investors through online platforms—cutting out traditional banks. Platforms like LendingClub, Funding Circle, and goPeer (Canada) have made it easier than ever for small businesses to access capital.
Pros:
- Lower Interest Rates: P2P platforms can sometimes offer more competitive APRs than banks, especially for qualified borrowers. Remember to watch out for fees.
- Fast Funding: Approval and disbursement can happen in as little as 2–5 business days.
- Investor Diversity: Borrowers gain access to a broad investor pool with varied lending appetites.
Fast Fact: The global P2P lending market is projected to reach $804 billion by 2030, growing at a CAGR of 29.1% (Allied Market Research, 2023).
Cons:
- Credit Checks Still Apply: Borrowers typically must have a minimum credit score of 600–640.
- Complex Regulations: In both the U.S. and Canada, securities laws apply. All Canadian platforms regulate P2P lending; Alberta and Quebec are particularly strict.
- Platform Variability: Terms, fees, and risk assessment models vary widely across platforms.
Common Question:
Q: Is P2P lending available to startups?
A: Startups can access P2P lending through platforms that connect them directly with investors. These platforms typically evaluate the startup’s creditworthiness and growth potential. P2P lending offers an alternative to traditional bank loans, especially for early-stage businesses lacking collateral or credit history. However, common requirements include at least 6–12 months of operational history and positive cash flow.
Business Credit Card
A business credit card provides a revolving line of credit that businesses can use for daily expenses, travel, inventory, or unexpected costs. It’s a flexible tool for managing cash flow, building business credit, and earning rewards.
Pros:
- Earn cashback, points, or travel rewards
- Builds business credit when used responsibly
- Easier to obtain than a loan or line of credit
- Great for recurring purchases or online payments
Cons:
- High interest if not paid in full monthly
- Can be personally guaranteed (owner is liable)
- Not ideal for large, long-term financing needs
Merchant Cash Advance (MCA)
An MCA provides a lump sum in exchange for a percentage of your future credit card or debit sales. It’s not technically a loan, but rather a sale of future receivables.
Pros:
- Fast Approval: Funds are often available within 24–72 hours.
- No Fixed Payment Schedule: Payments flex with your daily or weekly sales.
- Tax Deductible Interest: MCA costs are generally considered business expenses.
Cons:
- Very High Cost: Effective APRs can exceed 70% or more due to the weekly or daily repayments.
- Aggressive Repayment: Daily withdrawals by your payment processor can severely restrict cash flow.
- No Regulation Under Usury Laws: In most jurisdictions, MCAs are not governed by lending regulations.
- Can get out of control quickly: Businesses have had to shut down due to not being able to keep up with MCA payments. Find out what you need to know about merchant cash advances before getting one.
- Harder to get other funding: Many lenders will require you to pay off the merchant cash advance before you borrow.
Fast fact: According to the Federal Reserve, nearly 1 in 5 businesses that used MCAs regretted the cost of borrowing (2020 Small Business Credit Survey).
Venture Capital (VC) & Angel Investing
These equity-based financing options involve trading a percentage of your company ownership for capital—often ideal for startups with high-growth potential.
Pros:
- Mentorship and Connections: Investors bring strategic insights and networks.
- No Repayment Obligation: If your business fails, you’re not personally liable for repayment.
- Large Amounts of Scalable Funding: VCs and angels can fund rounds from $25K to $10M+ depending on the stage.
Cons:
- Loss of Ownership: Giving up equity means giving up partial control.
- Slow process: It can take 3–6 months to raise a round successfully.
- Misalignment Risk: Investor goals (exit-focused) may not match your long-term vision.
“Make sure your investor isn’t just a checkbook—they should add value.”-Mark Cuban, entrepreneur and angel investor.
5. How to make the most of your application
Once you’ve narrowed down your preferred funding options, optimizing your application increases your chances of approval and better terms. Here’s how to strengthen your position with commercial lenders and alternative funders:
1. Prepare Financial Documentation in Advance
Be ready with key documents, such as:
- Profit and loss statement
- Balance sheet
- Cash flow projection
- Tax returns
- Bank statements
For most lenders—especially banks and institutional investors like the Small Business Administration—organized and up-to-date financials help them make the most informed credit approval decision. It’s also a sign that your business is sophisticated and well-run. NOTE: If you’re applying for invoice factoring, you’ll need invoices for completed work and customer contracts.
2. Know Your Numbers
Lenders want to see that you understand your business metrics. Know your gross margins, burn rate, customer acquisition cost, and lifetime value. Bankers are people swayed by first impressions just like anyone else, so make sure yours shows you’re financially literate and in control of your operations.
3. Improve Your Business Credit Profile
If you don’t have a strong business credit score, take a step back to build it before applying. Pay down existing debts, correct errors on credit reports, and maintain good relationships with vendors and lenders. If you’re starting out with nothing, open a business credit card at a bank that you’d like to grow a relationship with and pay it off monthly. This will help you get a strong score while planting the seed for a loan or line of credit down the road.
4. Tailor Your Pitch to the Fund Type
Each funding method comes with different expectations. Bank underwriters want to see repayment ability; VC firms care about growth potential and your team’s track record; invoice factoring companies focus on the quality of your accounts receivable. Speak their language.
5. Highlight Strengths Beyond Credit
Startups and young businesses may not have years of financial history. In these cases, emphasize contracts in hand, signed purchase orders, recurring revenue models, strong customer pipelines, or intellectual property assets. These intangibles won’t convince traditional lenders, but alternative lenders might take notice.
6. Include a Compelling Use-of-Funds Breakdown
Clearly explain how you’ll use the money. Break it down into specific areas—working capital, hiring, marketing, equipment, etc. This builds trust with lenders and investors, who want to see thoughtful financial stewardship. Lenders often have rules about how funds should be used, so ensure that your plans align.
7. Get Several Offers for Leverage
Don’t accept the first offer you receive. Shop several loan options and compare fees, terms, flexibility, and reviews. You can then use other offers to get the best terms on the one you want the most.
8. Consider your long-term funding needs
While you might need funds in the near future, think about what type of funding and institution will serve you best as your business grows. Are you looking for working capital today but anticipate needing a commercial real estate loan later? That can determine the type of lender you choose.
9. Look for a true partnership
Your lender shouldn’t treat you like a number: they should understand your business, your goals, and want to see you be successful. This looks like maintaining the relationship from a human perspective, quick and thorough responses, and finding creative solutions to problems.
Pro Tip: Applying for small business financing isn’t just about being approved—it’s about getting the right kind of capital that fits your growth stage and goals. Take the time to prepare and choose wisely.
FAQs: Commercial Loans and Lending
Can you get a commercial loan with bad credit?
You can get a commercial loan with bad credit by applying through alternative lenders, offering collateral, or showing strong business revenue. While traditional banks may deny you, private lenders and online financing platforms often approve loans for borrowers with low credit scores by evaluating other risk factors. This is also true for commercial real estate loans as well, but they might require a large downpayment or other strict terms.
Are there unsecured commercial loans?
Yes, there are unsecured commercial loans that do not require collateral. These loans rely on the business’s creditworthiness, cash flow, and financial history. Unsecured options often come with higher interest rates and shorter terms due to increased lender risk, but they provide faster access to capital.
How fast can you get a commercial loan?
You can get a commercial loan in as little as 24 to 72 hours through online lenders, while traditional banks may take 2 to 6 weeks. The speed depends on the lender, loan type, and how quickly you provide financial documents and business information.
What’s the difference between a term loan and a commercial loan?
The main difference between a term loan and a commercial loan is that a term loan refers to a specific repayment period, while a commercial loan is a broad category that includes various financing types used by businesses. All term loans can be commercial, but not all commercial loans are term loans.