Understanding Commercial Lending Loans: A Guide for Canadian Businesses

Securing financing is a critical step for businesses looking to grow, whether it’s for expanding their operations, consolidating debt, or buying a commercial property. We’ve had multiple clients over the years who have found the perfect location for their company that would triple their production capacity but they need a huge amount of money to make it happen.

Most of these clients either don’t know much about commercial lending loans or don’t know where to start and they aren’t alone. Many of the successful business owners who have made a name for themselves in specific industries often get overwhelmed too when it comes to commercial property financing. This is because commercial lending loans operate very differently from residential mortgages; they come with unique requirements, processes, and opportunities that can seem intimidating at first.

In this guide, we’ll explore what a commercial lending loan is, how the commercial lending process works in Canada, and the types of commercial loans available in Canada. So, whether you’re looking to purchase your first commercial property or expand your real estate portfolio, you’re in the right place.

What is a Commercial Lending Loan?

A commercial lending loan is a loan specifically made to businesses. It is designed for purchasing, improving, or refinancing commercial real estate properties. These loans can also be used for equipment financing or expansion projects. These loans are significantly different from residential mortgages because they’re evaluated and structured based on the borrower's ability to generate income and repay the debt, rather than just the personal credit of the borrower.

Some of the most common terms you’ll hear when it comes to commercial lending loans are commercial real estate mortgage, equipment financing, or working capital loan. To understand these terms it’s important that you fully understand how a commercial lending loan works. The most important thing to understand about any type of commercial lending loan is that lenders will evaluate both you and your property to make sure that your property can generate enough income to cover loan payments while providing you with reasonable cash flow.

This dual evaluation makes the process of commercial lending more complex but it’s actually a huge advantage for lenders as it creates opportunities for leveraging your business assets effectively. It’s also important to note that commercial lending usually involves a higher amount than residential loans, ranging anywhere from hundreds to tens of millions of dollars.

Commercial Lending Loan in Canada

The commercial lending loan market in Canada offers major relief to business owners and investors but it brings unique challenges of its own. The commercial lenders in Canada include major banks, credit unions, government-backed programs, and private lenders, and each of them targets various property types and different borrower profiles.

Although the commercial lending loan regulations in Canada fall under federal banking laws, the provincial regulations also have an impact. This regulatory framework provides stability and predictability for borrowers but it also means more documentation and longer approval processes compared to some other markets.

Commercial lending generally requires larger down payments than other loans, with most of the lenders requiring 25% to 35% of the amount. However, there are some special programs that offer lower down payments for specific industries. The interest rates for commercial lending loans in Canada usually go with Bank of Canada rates but they include higher spreads than residential loans.  The current rates range from 6% to 10% but it depends on lots of factors like property type, borrower’s profile, and loan-to-value ratios.

Tax considerations play a significant role in commercial lending loan Canada decisions. Commercial property depreciation, interest deductibility, and capital gains treatments can significantly impact the effective cost of borrowing and should be evaluated by qualified tax professionals.

How Does the Commercial Lending Process Works

The commercial lending process in Canada involves several steps that borrowers should understand before they begin. The process can take 45 to 90 days, depending on the complexity and your application. The commercial lending process usually includes the following steps:

Pre-Qualification

This is the first step in the commercial lending process. It includes lenders reviewing your basic financial information, discussing your property requirements, and providing preliminary loan parameters. This helps you understand realistic loan amounts and terms before investing time in specific properties.

Property Analysis

Once you’ve selected a potential property, the lenders will evaluate it based on its location, condition, lease terms, income potential, and tenant quality. They might also consider some other factors such as the current market conditions and comparable properties to assess value and risk.

Application Submission

You will be required to fill out an application and provide extensive documentation including personal and business financial statements, lease agreements, income statements, tax returns, and business plans. It’s important to make sure your application contains all the required documents to speed up the approval process.

Due Diligence and Appraisal

This is the most intensive step of the commercial lending process. Lenders require property appraisals, environmental assessments, risk assessments, property inspection reports, and title reviews to analyze your financial capacity and the property’s cash flow potential.

Final Approval and Funding

Once your application has been approved, you’ll receive final loan terms. Review the closing documents, prepayment conditions, and fees with your lawyers and commercial mortgage professionals to complete the transaction.

Types of Commercial Loans Available in Canada

To choose the right financing for your specific needs and property type, it’s important to understand the various types of commercial loans available in Canada.

• Construction Loans: These are short-term loans that finance new construction or major renovation projects, they typically provide funds in stages as the construction progresses and usually have interest-only payments.
• Equipment Loan: Covers machinery and essential equipment purchases. 
• Leasehold Improvement Loan: Pays for improvements to leased spaces. 
• Line of Credit: A flexible credit facility allowing interest-only payments on used funds.
• SBA loans: Government-backed financing for small businesses with lower down payments for commercial properties, longer amortization periods, and competitive interest rates.
• Commercial real estate mortgage: Along-term financing option for income-producing properties with amortization spanning 15 to 25 years.

Difference between Business Commercial Lending, Business Lending, and Consumer Lending

While these terms are often used interchangeably, they represent distinct lending categories with different requirements and purposes. Commercial lending refers to financing business assets or real estate that generates income. At the same time, business lending includes a wide range of loans encompassing equipment financing, working capital, and other business needs that might not involve real estate specifically.

Consumer lending is a little different on its own, it includes transactions like auto loans, personal credit lines, or home purchases. Consumer loans prioritize personal credit scores and income and commercial loans emphasize property cash flow and business financial gains.

Commercial Lending for Your Business

A commercial lending loan can help you unlock the capital that your business needs to thrive, whether it’s for upgrading equipment, purchasing a new property, or expanding your current property. However, the success of getting your commercial lending application requires great patience, preparation, and professional guidance.

Get in touch with our professionals today to learn more about how commercial lending works, what type of commercial loan fits your needs, and what terms you can expect. Remember, commercial lending is a powerful tool for business growth and wealth building, only if it’s done right with proper preparation and professional guidance.