Commercial Finance is simply getting business owners the capital they need at the time they need it. Therefore, it is not overboard to state that commercial finance is all about helping businesses get into a comfortable financial space. This assistance is not limited to any type or form of business. It could be a loan for business acquisition, startup capital, investment capital, working capital, or expansion capital to increase an existing business.
Unlike in times gone by where the only institutions that gave out any form of commercial finance were banks, in recent years, the landscape of commercial finance has expanded to the point where there are many other sources of financial assistance now available. This has been a great help to businesses, especially small and medium-sized enterprises who typically found it much harder to acquire loans from traditional lenders.
Arguably, at least 25% of applications for loans sent to banks by businesses get rejected, but these new alternative financial providers provide opportunities for business owners to get the loan they need. Of course, these loans require collateral, so before you make any commercial finance application you need to make sure you have qualifying collateral that a lender will accept in the event of you defaulting on your loan.
Factors to Consider Before Applying for a Commercial Loan
There are several factors to consider before filling out a commercial finance application form and submitting it.
- How Much Do You Need?
It may be difficult to work out the exact amount of money you need to borrow in the initial stages of making an application, but it is important to get this right. This is because in some cases, moving ahead to apply for commercial finance without having an exact figure has caused business owners to ask for too little or too much.
- How Much Can You Afford?
In the same vein as the point above, before filling out any commercial finance form, do know what you can afford? Remember, interest payments will need to be made on your loan, so you’ll need to factor that in when working out what your repayment sums are likely to be. Know what you can afford, so you only borrow what you can afford and avoid future issues.
- What is Your Credit History?
Most financial institutions consider your credit score before approving loans. Even those that are not credit driven still have to go through your history to know exactly which products you will qualify for. Therefore, if you realise that this might be the case, endeavour to improve your credit score before applying for commercial financing.
- What Are the Terms Involved?
Know the terms and conditions involved before applying for loans. Be fully informed about the interest rate and prepayment penalties; this is a fee paid by borrowers to their lenders for paying off their loans before the agreed date. If possible, ask your lender to remove the prepayment penalties, but if not review the paperwork critically and understand if it is a hard or soft penalty, how much this penalty costs, when it expires and lastly, if there are any fees for late payment and the amount. You need to be aware of these terms before diving into a commercial financing process.
Commercial Finance Options
- Bank Loans
Although bank loans can be a more affordable source of finance for a business, especially small enterprises, qualifying for such loans can be difficult. Additionally, the process of getting a bank loan is long and tedious, therefore, if the finance you seek is to take care of an immediate need then look for other financing options.
- Credit Card Financing
As the years roll by, more entrepreneurs have turned to credit cards as a solution to their business finance woes. Credit card finance is money borrowed by cardholders to pay for goods and services using credit cards issued to them by a financial company.
Getting this type of finance isn’t difficult and the process is very fast, hence, the reason why the use of credit card finance has skyrocketed over the years. Another reason is the fact that there is little underwriting in this type of finance option unlike the previously mentioned options and this is a major advantage. Despite this, it should be noted that most credit card interest rates are on the high side, making it an expensive form of financing.
- Lines of Credit (LOC)
This is an arrangement between a financial institution and a business owner whereby terms are set for the maximum amount of money the business owner can borrow. This means when you get lines of credit financing you cannot go beyond the stipulated maximum amount of funds. The requirements for line of credit financing differ from one institution to another but typically, you would have been in business for more than six months before you are considered for the financing. The application process is very fast and you can qualify on the same day you applied. It also comes with interest rates, but you only pay for what you use for your line of credit.
- Equipment Financing
This type of financing is basically for business owners who need funding to purchase a piece of equipment for the smooth sailing of their business. The particular equipment that is needed then serves as collateral for the loan taken. Simply put, once the loan is paid in full, you own your equipment free from any charge but if you default on your loan, then the equipment would be taken by the lender.
Conclusively, there are many different options to choose from when it comes to commercial financing which means there are more avenues for you to try to find the funding you need, however this can also lead to uncertainty about which to go for. Go, therefore, for what works for your business and focus on your priorities, whether it be affordability, how fast you need the loan, how low the monthly payments are etc. If you’re considering getting finance for your business or just want to know more about commercial financing then speak to a financial advisor and do your research before making any applications.