Commercial loans and lines of credit are essential sources of capital that help businesses invest in growth and keep operations running smoothly. Using credit effectively requires understanding the wide variety of financing options and how they align with your business goals. 

Paul Beinstein, managing director of product at J.P. Morgan, explains how commercial lending works, what types of financing are common and ways to find the ideal approach for your business.

Understanding commercial lending

There are many types of commercial financing, but they fall into two broad categories: 

1. Commercial loans provide companies immediate funds for a specific purpose, to be repaid over a fixed term with regular payments. 
2. Commercial lines of credit are revolving credit facilities that allow businesses to borrow up to a set limit, repay funds and borrow again as needed. 

The amount of financing a business can qualify for depends on the business and type of loan or line of credit sought, from commercial credit cards designed to handle everyday purchases to multibillion-dollar syndicated loans. In general, lenders want to understand the business’s purpose in seeking credit as well as its financial profile, growth prospects and ability to repay the loan after covering business expenses. 

“Lenders need a full picture of the borrower’s situation—including its market positioning, operations and financials—as well as specifics on the requested loan or line to ensure the business gets the product it needs,” Beinstein said. 

Term loans

Term loans provide access to funds for a specific purpose, such as buying an asset, funding an acquisition or refinancing existing debt. Three common types of term loans are: 

1. Commercial mortgages to finance owner-occupied real estate, including mixed-use, industrial, office and  retail properties, as well as investment in commercial properties. 
2. Equipment financing that helps companies purchase tools and machinery needed to operate efficiently while preserving working capital.   
3. Cash flow term loans that can support acquisition financing, capital expenditures and shareholder distributions. 

Term loans are designed to be repaid through amortization or regular payments over a time period linked to the purpose of the loan. Equipment loan terms, for example, are generally based on the equipment’s expected lifespan. 

Term loans are generally fully funded at close but sometimes are structured as delayed-draw term loans if funds aren’t needed immediately. For example, a construction loan may release funds for each phase of a project as it reaches designated milestones. This is a common structure for companies making a series of acquisitions and capital expenditures.

Term loans may have fixed or variable interest rates, or they may incorporate both at different periods within the term. 

Syndicated finance

Syndication loans are critical tools for meeting companies’ largest financing needs. A syndicated loan brings multiple banks together to finance and share risk in a single transaction. One lender arranges the deal and identifies other lenders, with each contributing a portion of the total loan amount. 

Syndicated loans can include line of credit or revolvers and term loans. Delayed-draw term loans are also commonly used to support growth.

Using commercial financing strategically

When assessing financing options, businesses may want to: 

• Focus on purpose: Financing decisions should be driven by how your business plans to use the funds. “If you have a business that’s renting space and now want to buy, that’s a distinct purpose from buying the materials you need to run the business day to day,” Beinstein said. One is likely best served by a mortgage, while the other could benefit from short-term, more flexible credit options. 
• Monitor interest rates: When considering borrowing, weigh the opportunity cost of paying with cash against interest rates. “A line of credit has a variable rate, so the business can decide whether or not to draw funds based on what the rate is at the time,” Beinstein said. “With a term loan with a fixed rate, a business might choose how much of a purchase to finance based on the rate.”
• Proactively manage credit capacity: A working-capital line of credit isn’t designed to remain maxed out indefinitely. “If we see a line that’s fully funded, we’ll start trying to understand why, and work to help the business choose a facility that meets its specific needs,” Beinstein said. 
• Explore opportunities to enhance financing structure: Consider options such as personally guaranteeing a loan, which can help businesses get better pricing. 
• Build a strong balance sheet: Maintaining healthy finances and efficient operations helps ensure your business can access financing when needed.  

Evaluating commercial lenders

Interest rates matter, but they aren’t the only factor. When choosing a lender, you may want to consider: 

• Relationship and breadth of options: Businesses need financial services beyond just financing. “Building a relationship with an institution that can provide the full array of required products and services, and support the business as its needs evolve, is important for almost all entities,” Beinstein said. 
• Customized approach: The better your lender knows your business and industry, the better it can provide solutions tailored to your needs. Understanding your growth plans, exit strategy, seasonality and other factors helps your lending team find your ideal financing strategy. 
• Consistent market presence: Look for a lender that can support your business throughout economic cycles.