MoneyThumb provides PDF financial file converters to people from all walks of life for a myriad of uses. One of our largest group of users is private lenders. Smart private lenders use our products to help them make quicker and better-informed lending decisions, for both commercial and consumer loans.
But what are the differences between these types of loans? In this Rules of Thumb blog post, we’ll take a closer look at both commercial and consumer loans and highlight some important distinctions between the two.
A consumer loan is made to an individual person. The main differentiating factor that separates consumer loans from commercial loans is the scope of the loan itself. Most consumer loans aren’t designed for large purchases.
To approve a consumer loan, a private lender will want to know that their loan is well-handled and that they’ll make a profit on it. This means checking a person’s credit score. Private lenders will look for things like payment history, account mix, and credit age to determine a person’s creditworthiness. Certain factors, like collections and derogatory accounts, will impact your creditworthiness and could dissuade a private lender from approving your funds, or charging a much bigger percentage rate if they approve your consumer loan.
There are some common reasons a consumer loan could be denied:
- Poor credit score/history
- Derogatory marks or accounts on your credit report
- You co-signed a bad loan
- The lender calculates your income is insufficient to repay the loan
- You have filed for bankruptcy in the past
Private lenders are actually more prone to making commercial loans and they’re often wary of individuals. The private lender doesn’t know anything about the person it’s lending to until a credit report is acquired, and even that can’t tell them everything.
Commercial loans come in several varieties, and everything from private lenders to wealthy investors to the federal government provides commercial loans. These loans can be used for just about anything a small or large business might need to improve operations or stay afloat.
Types Of Commercial Loans
There are too many commercial loan types to cover on one page, so instead, we’ll focus on some of the most popular options available today.
Installment Loans: Installment loans offer a business a lump sum of money all at once, and as soon as funds are approved, the business will start making monthly payments toward the balance. Installment loans are great for expanding business operations or covering sudden expenses in times of need. In addition to the principal balance, the business will be responsible for the interest on the loan as well as fees and other charges.
Of course, even something as simple and straightforward as an installment loan is subject to creditworthiness. A private lender may decline an installment loan based on assumed risks of lending to particular businesses.
Lines of Credit: Similar to a consumer credit card, a business line of credit allows a business to have funds always available. This is not usually used for large purchases like property, company vehicles, or equipment. A business line of credit will have limitations depending on the private lender.
Lines of credit are usually better for emergency business funds, simply because they’re more flexible.
SBA Loans: The Small Business Administration acts as a guarantor between lenders and small businesses. The SBA will offer small business funding through dedicated lenders with interest rate caps and terms that are more favorable to small businesses. The SBA also guarantees a percentage of every loan should the business fail to pay back the entire balance.
Equipment Loans and Merchant Advances: Equipment loans are specifically used to purchase business equipment that is necessary to run the organization or keep producing. Maybe you have a piece of industrial machinery that you need to produce your products or a certain tool you need. An equipment loan will only cover the cost of equipment and isn’t used for anything else. A private lender may require proof that the funds were used accordingly.
A merchant advance is usually dependent on the relationship between the merchant and business. A business can borrow money, similar to a merchant credit card, and use it to buy products or services directly from that merchant.