Large Business Loans: Know Your Options

4 types of large business loans

Lenders typically pair higher loan amounts with stricter requirements, such as requiring collateral and three years in business. With more money at stake, lenders want to work with seasoned business owners that demonstrate the ability to repay a large loan amount.

Some of the highest business loan amounts are available through the Small Business Administration (SBA) loan programs. Traditional banks and online lenders also offer various loan products in ranging amounts.

SBA loans

The SBA 7(a) program is a popular general-purpose loan of up to $5 million that can be used on real estate, machinery, seasonal expenses and more. The SBA does not issue the loans directly — rather, SBA-approved banks and other financial institutions facilitate the loan application process. SBA loans are guaranteed by the SBA, which will reimburse the lender for a percentage of the loan amount in case you default. Since this reduces lender risk, you can improve your chances of getting approved.

The SBA places a maximum cap on interest rates, which helps keep costs affordable. The maximum is 11.25% for fixed rates or 8% for variable rates. Repayment terms can extend up to 25 years, depending on how the loan proceeds are used.

To qualify for an SBA loan, your company must meet the SBA’s industry-based small business size standards that rely on your average annual receipts or average number of employees. A minimum FICO Small Business Scoring Service (SBSS) of 155 may apply, too. The SBSS is based on multiple factors, including your credit bureau data and financials.

Pros

  Interest rate maximum caps help keep loan costs affordable

  SBA guarantees can boost your chances of approval

  SBA resource centers are available for business assistance and coaching

Cons

  Down payments of up to 20% may apply

  Time to funding may take over two months

  Low-credit applicants may struggle to qualify

Commercial real estate loans

Commercial real estate loans help business owners purchase commercial property, such as an office building, hotel or shopping center. These loans, on average, cover 60% to 90% of the property value in amounts up to $1 million and more. Private lenders, banks and the SBA offer various commercial real estate financing products.

Like a residential mortgage, a commercial mortgage loan can carry long terms and is secured by the property being purchased. Other types include commercial bridge loans and commercial hard money loans —  ideal for business owners that need quick financing. A commercial bridge loan, for example, can be used to compete with potential bidders that may be paying in cash for a physical storefront.

Commercial real estate loans are also available through the SBA CDC/504 loan program. Loan amounts are available up to $5.5 million to be used for constructing or renovating facilities, landscaping, creating parking lots and more. Qualifying for a CDC/504 loan includes meeting net worth and net income requirements. You may also have to create or retain one job for every $75,000 borrowed.

Pros

  Down payments can be as low as 10%

  Commercial bridge loans offer fast funding

  Lower eligibility requirements for commercial bridge and hard money loans

Cons

  Short-term commercial real estate loans typically carry high interest rates

  Traditional commercial mortgage loans may carry stricter eligibility requirements

  Use of proceeds limited to commercial real estate-related expenses

Secured business loans

A secured business loan is a loan that is backed by collateral. If you default on your loan, the lender can seize your collateral to recoup their loss. Examples of collateral include real estate, equipment and inventory.

Secured business loans can be for general purposes, like the SBA 7(a) loan, or specialized ones — equipment loans, for example, are used to finance equipment, like industrial machinery and computers. Loan amounts can extend from $500,000 to over $5 million depending on the loan product.

Business owners might opt for a secured business loan to improve their odds of getting approved. Since collateral reduces the lender’s risk, lenders may extend financing even if you do not meet credit or revenue requirements. Secured business loans also tend to feature higher amounts and lower interest rates than unsecured business loans.

Pros

  Secured loans typically carry lower interest rates than unsecured loans

  Secured business loans tend to carry higher amounts than unsecured loans

  Low-credit applicants are more likely to secure financing

Cons

  If you default on the loan, you risk losing valuable assets

  Lenders may collateralize personal assets, such as your home

  Collateral appraisals can extend the timeline for getting funded

Accounts receivable financing

Accounts receivable financing, or AR financing, allows you to borrow against the value of your unpaid invoices, typically up to $5 million. Since the loan is secured by your invoices — money your business has already made — the risk is lower for both you and the lender.

Example of how AR financing works: A restaurant orders $10,000 in supplies from a wholesaler and has 30 days to issue payment upon receipt of the order. The $10,000 is now part of the wholesaler’s accounts receivable. Using the invoice as collateral, the wholesaler can secure invoice financing to access capital, minus the lender’s fees.

AR financing is ideal for business owners that want to access capital from unpaid invoices without waiting for customers to issue payment. Instead of expending resources on collecting invoices, you can use that capital to invest back into your company.

Pros

  Access capital by leveraging your unpaid invoices

  Lenders typically don’t require additional collateral beyond your unpaid invoices

  The risk is lower since you’re borrowing against money already owed to you

Cons

  Credit history and qualified invoices are strong indicators of getting approved

  You may need to pay the invoice if the customer defaults

  Excessive invoice defaults can compromise your relationship with the lender

How to get a large business loan

Learning how to get a big business loan starts with understanding your qualifications, such as your credit score, time in business and annual revenue. Large business loan requirements tend to be more strict than smaller loans and will likely require collateral. With larger loan amounts, good internal reporting is essential — be sure to keep good financial records, such as profit and loss statements and balance sheets.

Time in business

Lenders for large business loans prefer working with seasoned entrepreneurs — typically those whose businesses have been generating revenue for at least three years. Startups and inexperienced entrepreneurs may struggle with qualifying for larger loans, as lenders may perceive younger businesses as high risk since they may not possess any history of repaying debt.

Annual revenue

Lenders will generally want to see your business generating at least $350,000 in annual revenue. Your annual revenue and cash flow prove to the lender your ability to repay a large loan. When applying for a loan, be prepared to supply the lender with your business’s financial records, including monthly revenue, cash flow and debt-to-income ratios.

Credit score

Business owners with a minimum credit score of 680 are more likely to qualify for a large business loan. However, lenders may approve low-credit business owners if the loan is entirely secured by collateral.

Collateral

Large business loans are often secured business loans, which means that they require some sort of collateral to back the loan. Collateral requirements are more likely to apply for larger loans — SBA 7(a) lenders, for example, require collateral for a $500,000 loan but not for a $25,000 loan. Collateral can be the asset the loan is financing, such as machinery on an equipment loan or the property on a commercial mortgage loan. You can also secure the loan with other types of assets, such as vehicles, equipment, bank accounts, accounts receivable and investments.