Commercial Loan: Types, Features & How to Apply

A commercial loan can fund growth, buy property, replace equipment or smooth cash flow — but with many loan types, fees and security rules, choosing the right product is complex. This guide explains what a commercial loan is, the main commercial lending options, how interest and repayments work, what lenders assess, and a clear documentation checklist so you can prepare an application with confidence.

What is a commercial loan?

A commercial loan is credit provided to a company, trust or other business structure to fund business activities rather than personal needs. Typical borrowers include small-to-medium enterprises, property investors, retailers, manufacturers and professional practices. Common uses include:

• Purchasing or refinancing commercial property
• Buying plant, vehicles or specialised equipment
• Funding construction or fit-out projects
• Managing seasonality and working capital
• Financing acquisitions or business growth

Commercial loans vary in size, term and structure. Some are short-term working capital facilities (e.g., overdrafts or invoice finance), while others are long-term loans secured by property or chattels. When researching options, compare product features, security requirements and repayment flexibility.

For related finance structures see relevant leasing guides.

Common types of commercial loans

Below are the principal commercial lending products you'll encounter and the typical use-cases for each.

Commercial term loans

A fixed-limit loan repaid over an agreed term with principal and interest (P&I) or interest-only options. Use-cases: plant purchase, business expansion, refinance.

Commercial property loans

Finance to buy, refinance or develop income-producing property. Often secured by a mortgage over the property. Use-cases: owner-occupied offices, retail, warehouses. See Commercial property loan for deeper detail.

Equipment and asset finance

Loans or leases specifically for equipment, vehicles or machinery. Can be structured as chattel mortgage, hire purchase or finance lease. Use-cases: forklifts, trucks, medical devices. See equipment finance guides and invoice discounting resources.

Construction and development finance

Progress-draw loans that release funds as construction milestones are met. Use-cases: property development, fit-outs.

Business overdraft / line of credit

Revolving facility for short-term working capital and cashflow smoothing. Interest charged on the drawn balance.

Invoice financing / debtor finance

Advance against unpaid invoices to improve cash flow. Use-cases: businesses with long payment terms. See invoice discounting guides.

Merchant cash advance

A lump sum repaid by taking a percentage of daily card receipts — higher cost, short-term solution.

For more on asset-specific financing options, see equipment finance and leasing guides.

Compare commercial loan types

How interest, fees and repayments work

Interest and fees determine total borrowing cost. Key concepts:

• Fixed vs variable rates: Fixed rates lock repayments for a set period, reducing rate volatility. Variable rates move with the market — the Reserve Bank of Australia (RBA) movements and wholesale rates influence variable pricing.
• Margin: Lenders add a margin to a base rate (e.g., BBSW or bank bill swap rate). Your margin reflects credit risk, loan size and security.
• Amortisation (P&I) vs interest-only: P&I repayments reduce principal each period. Interest-only lowers short-term cash payments but leaves principal unchanged until the interest-only period ends.
• Fees: establishment fees, valuation, legal, PPSR searches, ongoing account-keeping and early break costs for fixed-rate loans.
• Repayment frequency: monthly, fortnightly or weekly affects cash flow and interest accrual.

For regulator guidance on credit contracts and obligations see ASIC's credit information.

Repayment examples & calculator guidance

Rather than heavy formulas, use an online loan repayment calculator to test scenarios. Examples below illustrate typical outcomes.

Example A — Principal & interest (indicative)

• Loan: $100,000
• Term: 5 years (60 months)
• Nominal annual rate: 6% p.a. (compounded monthly)

Indicative monthly repayment: ≈ $1,660 per month. This is illustrative — small changes to rate or term materially change the payment.

Example B — Interest-only then amortise

• Loan: $1,000,000
• Interest-only period: 2 years at 5% p.a.
  • Interest-only payment ≈ $1,167 per month (1,000,000 × 0.05 / 12).
• After 2 years, if you move to an 8-year P&I term, monthly repayments will increase once principal amortisation begins.

Use a dynamic loan repayment tool to model different rates, terms and repayment frequencies. If you plan fixed-rate borrowings, ask lenders about potential break costs.

Security, guarantees and registration

Security choices materially affect pricing and risk allocation:

• Mortgages over real property: Registered on land title; lender typically takes a first-ranking mortgage.
• PPSR registration: For chattels, equipment and intangible assets, lenders register security interests on the Personal Property Securities Register (PPSR). Check the PPSR for existing encumbrances.
• Debentures: Common for corporate borrowers; a general security agreement over company assets.
• Personal guarantees: Directors commonly provide unlimited or limited guarantees; these expose personal assets and often trigger cross-default provisions.
• Unsecured loans: Higher interest and stricter covenants due to lender risk.

Learn more about guarantees in Personal guarantee and secured vs unsecured options at Secured loan and Unsecured loan.

Eligibility & what lenders assess

Lenders evaluate ability to repay and the loan's purpose. Common criteria:

• Trading history and turnover: Many lenders prefer at least 1–2 years trading, though specialised products can support startups.
• Serviceability and cash flow: Lenders stress-test forecasts against higher rates and lower revenue.
• Profitability and margins: Historical profit and projected EBITDA.
• Security and LVR: Loan-to-value ratios differ by asset type (property vs equipment).
• Credit history: Business and director credit scores, defaults, insolvency history.
• Business structure and ownership: Trusts, companies and sole traders face different documentation needs.
• Industry risk: Seasonal or high-volatility sectors may need additional security or higher margins.

Documents commonly requested: financial statements, BAS, tax returns, bank statements, contracts, business plan and ID for directors.

For startups and small business borrowing options, see unsecured loan and invoice discounting guides.

Fees, costs and what to watch for

Anticipate these costs:

• Establishment/application fee
• Valuation and property inspection costs
• Legal fees for mortgage documentation
• PPSR registration and search fees
• Ongoing account keeping fees and facility fees
• Break costs for fixed-rate loans (can be material)
• Mortgage discharge fees and early repayment penalties
• Default interest and enforcement costs

Hidden traps: low headline rates with high ongoing fees, balloon payments at term end, restrictive covenants that limit business activity. Always request a full fee schedule and a written fee breakdown.

Tax and accounting considerations

High-level tax points (reference ATO for specific guidance):

• Interest deductibility: Interest on commercial borrowings is generally deductible when incurred in producing assessable income. See ATO business finance guidance.
• GST: GST treatment varies — for equipment purchases you may claim GST credits if registered.
• Depreciation: Assets purchased via equipment finance are depreciated over their effective life; finance method affects who claims depreciation.
• Capital works and building allowances: Construction costs may attract capital allowances.

This is general information — consult your accountant or the ATO for specific tax advice.

How to apply & documentation checklist

Typical application steps and timeline:

1. Preparation (1–2 weeks): gather documents and run a cashflow forecast.
2. Pre-application enquiry (1–7 days): discuss loan purpose and indicative terms with lender or broker.
3. Formal application (1–3 days): submit documentation.
4. Assessment & valuation (1–4 weeks): lender conducts credit checks and asset valuations.
5. Approval & documentation (1–2 weeks): sign offer, provide any outstanding items.
6. Settlement / drawdown: funds released after conditions satisfied.

Documentation checklist:

• Up-to-date financial statements (last 2–3 years)
• Business Activity Statements (BAS)
• Tax returns (business and personal for directors)
• Bank statements (6–12 months)
• Asset quotes, contracts of sale or invoices
• Business plan and cashflow forecast
• Company extracts and ASIC information
• ID and proof of address for directors

Pros and cons of commercial loans

Pros:

• Access to capital for growth and asset acquisition
• Potentially lower cost when secured by property
• Flexible structures (term loans, overdrafts, equipment finance)

Cons:

• Security and personal guarantees may be required
• Fees and covenants can restrict flexibility
• Variable rates expose you to market movements

Tips for choosing the right lender or product

• Match the product to the purpose (use equipment finance for plant; construction loans for building projects).
• Consider total cost: compare margin + fees, not rate alone.
• Check flexibility: redraw, extra repayments, interest-only periods and repayment frequency.
• Review security: negotiate scope and release conditions for charged assets.
• Specialist lenders or brokers may offer niche expertise for sectors (transport, medical, agriculture).
• Use a broker or ask multiple lenders for indicative terms to compare margins and covenants.

For role-specific guidance see Equipment finance and Commercial property loan.

FAQ

Key takeaways

Commercial loans are essential for business growth and asset acquisition, but selecting the right product depends on your purpose, cash flow and security position. Compare loan types, understand total costs (rates plus fees), and prepare a strong documentation package to improve approval chances. Use a calculator to test repayment scenarios and consult a broker if you're uncertain about which option suits your situation best.

This article is general information only and is not legal, tax or financial advice.