Last updated: Feb 2026
Key Takeaways
- Commercial loans are common—but hard to secure. Approval rates remain relatively low for small businesses, especially newer or smaller firms that lack long financial track records, strong credit, or collateral.
- Costs go beyond the interest rate. While typical rates range from ~4%–12% (higher depending on risk), total borrowing costs may include origination, underwriting, legal, appraisal, and late fees.
- Alternative funding may offer more flexibility. Options like invoice factoring, peer-to-peer lending, crowdfunding, business credit cards, merchant cash advances, VC, and government-backed loans each serve different stages and risk profiles.
- Invoice factoring is not debt. It converts unpaid invoices into immediate cash, with approval based primarily on your customers’ credit—not yours—making it attractive for growing B2B businesses.
- Preparation improves approval odds. Organized financials, strong credit habits, a clear use-of-funds plan, and multiple competing offers can significantly strengthen your position.
- The right capital depends on your growth stage. The goal isn’t just getting approved—it’s choosing financing aligned with your long-term strategy and cash flow realities.
Commercial loans are a popular source of business funding—but they aren’t always easy to obtain or the right fit for every company. This guide begins by examining how difficult debt financing can be for small and midsize businesses, then outlines when a commercial loan makes sense and the pros and cons to consider. Next, we break down the true cost of borrowing—including interest rates, hidden fees, and risk factors that influence pricing. From there, we explore alternative funding options such as invoice factoring, peer-to-peer lending, crowdfunding, credit cards, merchant cash advances, venture capital, and government-backed loans. Finally, we share practical strategies to strengthen your application and choose financing that supports both your immediate needs and long-term growth.
1. Debt financing is hard to obtain
No doubt debt financing is popular: the global commercial lending market is projected to grow from $11.8 billion dollars in 2026 to $28.3 billion dollars by 2034. However, it’s difficult to get:
- Among U.S. small businesses that applied for financing in 2024, only 41% received full approval. (2025 Report on Employer Firms: Findings from the 2024 Small Business Credit Survey)
- Among Canadian small businesses that applied for financing in 2023, overall approval rate decreased with business size, less about 9% between businesses with at least 100 employees and those with 1 to 4. Amount to authorized rate was also 7.5% less for the smallest of small businesses vs the largest by employee count. (Summary of the Survey on Financing and Growth of Small and Medium Enterprises 2023)
The key takeaway: Getting approved for commercial lending is possible for a small business–but it isn’t easy.
Why Commercial Loans Are Challenging for SMBs to Obtain
Many SMBs, especially new small businesses businesses, have a hard time getting approved for commercial loans because they often can’t meet lender requirements. These requirements include, but are not limited to:
- 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
- Real estate or equipment collateral
Before deciding whether to pursue a commercial loan, think through whether it’s worth the effort.
2. Commercial loan pros and cons
Should you get a commercial loan?
You should get a commercial loan if your business generates stable cash flow, has a clear use for capital, and can service debt within 3–10 years. Commercial loans fund expansion, equipment, or real estate. Avoid a commercial loan if revenue is inconsistent or margins cannot support fixed monthly payments. Many lenders won’t approve commercial loans for short-term needs like payroll due to risk.
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.
Comparison: Commercial Loans Pros & Cons
Commercial Loan Pros | Commercial Loan Cons |
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.
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).
Loan terms can stretch from 3 to 10 years (or more), making it easier to manage cash flow with smaller monthly payments.
Unlike equity financing or venture capital, commercial loans don’t dilute your ownership or control. You remain in charge of your business decisions.
Sometimes banks or credit unions will offer loans that can be rolled into a new loan with simpler underwriting requirements, either on a set schedule or when the loan reaches maturity. This saves time and effort spent securing new financing. |
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.
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.
Banks typically require business or personal assets to secure the loan. If you default, they may seize property, inventory, or accounts receivable.
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. According to Federal Reserve data, the median small business loan interest rate at a commercial bank in 2026 is 7.22% for fixed-rate loans and 7.75% for variable-rate loans.
Key Factors That Influence Commercial Loan Rates
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.
- 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. Bear in mind that estimates like these don’t always 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 common commercial loan 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
- Underwriting fee
- 0.5%-2% of loan amount
- Legal fee for contract redlines
- Simple deals typically start at $2,000; complex deals can go up to $15,000
- Appraisal charges for equipment financing or other collateral
- Depending on asset type (e.g., equipment, real estate, inventory), fees can range from $1,000 to $10,000.
- 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 Commercial Loan 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.
Invoice factoring is not a loan
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.
Invoice factoring pros | Invoice factoring cons |
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Ready to get paid early?
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.
Crowdfunding pros | Crowdfunding cons |
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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).
Peer-to-Peer (P2P) Lending
Peer-to-peer 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.
Peer-to-peer lending pros | Peer-to-peer lending cons |
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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).
FAQ: Is Peer-to-peer lending available to startups?
A: Startups can access peer-to-peer lending through platforms that connect them directly with investors. These platforms typically evaluate the startup’s creditworthiness and growth potential. Peer-to-peer 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.
Business credit card pros | Business credit card cons |
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Merchant Cash Advance (MCA)
A merchant cash advance 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.
Merchant cash advance pros | Merchant cash advance cons |
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Venture Capital (VC)
These equity-based financing options involve trading a percentage of your company ownership for capital—often ideal for startups with high-growth potential. However, it’s important to consider whether it’s worth it for your bottom line (not just your top line). As entrepreneur and angel investor Mark Cuban said, “Raising money is not an accomplishment, it’s an obligation.”
Venture capital pros | Venture capital cons |
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SBA Loans or CSBFP Loans
Government backed small business loans are loans issued by banks and partially guaranteed by a government agency, such as the U.S. Small Business Administration (SBA) or the Canadian Small Business Financing Program (CSBFP).
Government backed loan pros (for SBA and CSBFP) | Government backed loan cons (for SBA and CSBFP) |
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Comparison: Key facts about SBA loans and CSBFP loans
SBA loans | CSBFP loans | |
Maximum loan amount | Up to $5M; $500K for SBA Express or Export Express | Up to $1.15M; $1M for term loans and $150K for a working capital line of credit |
Guaranteed amounts |
| Up to 90% of the loan value |
Interest rates | Prime rate + 3% – 6.5% depending on loan amount | Floating: prime rate + 3% Fixed: single family residential mortgage rate for loan term + 3% |
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
Business figures:
Lenders want to see that you understand your business metrics. Know your:
- Gross margins
- Burn rate
- Customer acquisition cost (CAC)
- Customer lifetime value (LTV)
Technology considerations:
As technology evolves, banks also now factor in:
- AI exposure. Banks are now more likely to approve loans for businesses benefitting from AI and less likely to approve those negatively affected by it. (January 2026 Senior Loan Officer Opinion Survey on Bank Lending Practices)
- Cybersecurity. Especially for industries that handle sensitive information like healthcare or ecommerce, banks want to know that your and your customers’ data is protected as part of their risk assessment during underwriting. A breach could significantly affect cash flow.
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. You can do this by:
- Paying down existing debt
- Correcting errors on credit reports
- Making payments on time to vendors and lenders
Tip: If you’re starting out with no credit score, 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
5. Highlight Strengths Beyond Credit
Startups and young businesses may not have years of financial history. In these cases work with alternative lenders and emphasize:
- Contracts in hand
- Signed purchase orders
- Recurring revenue models
- Strong customer pipelines
- Intellectual property assets
- Alternative data used in advance underwriting, which includes:
- Real-time cash flow
- Utility payments
- Shipping logs
6. Know your borrowing cause: Include a Compelling Use-of-Funds Breakdown
Clearly explain how you’ll use the money. Break it down into specific areas, such as:
- Working capital
- Hiring
- Marketing
- Equipment T
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. You can then use other offers to get the best terms on the one you want the most. Shop several loan options and compare:
- Fees
- Terms
- Flexibility
- Reviews.
Tip: Consider ESG and green project financing if your business qualifies for better rates and terms compared to traditional lenders.
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
- 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
What is a commercial loan?
A commercial loan is a business loan used to fund operations, equipment, expansion, or commercial real estate. Banks and lenders issue commercial loans to businesses with repayment terms of 1–25 years. Approval depends on revenue, credit strength, cash flow, and the business’s ability to service debt.
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.
Conclusion
Commercial loans can be a powerful tool for funding growth—but they’re not a one-size-fits-all solution. Approval can be difficult, costs extend beyond the interest rate, and fixed repayment structures can create pressure if cash flow fluctuates. For businesses with stable revenue and a clear long-term investment plan, traditional loans may offer affordable capital. For others—especially growing or early-stage companies—alternative funding options may provide faster, more flexible access to working capital.
The key is understanding not just how to get approved, but whether the financing structure truly aligns with your cash flow, risk tolerance, and growth strategy. By weighing the full costs, exploring alternatives, and preparing a strong application, you can secure funding that supports sustainable growth—not short-term strain.