Commercial finance is an effective means by which businesses can get ahead. Markets can be restless, fiercely competitive proving grounds for businesses, with decisive action being a requirement for success. Swift decision-making is only half of the key, however. Flexible planning is only so useful without the financial backing required to act on your ideas. This hurdle is one faced by many small businesses, alongside plenty of big ones, though it isn’t impossible to surpass.
Enter commercial finance. For businesses struggling to source the capital required to expand their operations, commercial finance can be the perfect tool to help realise their potential. However, finding the right fit for you and your business can be easier said than done. Particularly so given the competition within the commercial finance sector. In this article, we will be breaking down commercial finance. Discussing exactly what you need to know in order to make an informed decision.
What is commercial finance?
Commercial finance is a blanket term that refers to a form of finance that exists to serve the financial needs of businesses. They are usually secured loans, meaning the borrower must place physical assets of equal value to the loan up as security. In the event a business cannot repay the loan, assets will be sold to cover the outstanding value of the loan. While this does present a risk for businesses with a rocky financial situation, it allows commercial finance to be much more flexible, able to source capital on a large scale and in a very short space of time.
Commercial finance prerequisites
Thankfully, there are few obstacles in your path to securing commercial finance. As it is asset-based lending, the usual need for a long and positive credit history is mitigated, though still a notable factor. Instead, the focus is on the value of whatever assets you intend to secure the loan against. For example, you might consider putting up business equipment as security, or perhaps the property out of which your business operates. Any asset will do, provided it can meet the value of the loan in total.
Just as important as the proof of collateral is the proof of your business’ revenue. This essentially amounts to proving that you have the means to repay the loan in the first place. Without having to resort to other means, like selling off property. Exactly what information is required will vary from lender to lender. Though usually, it will amount to the total profit and loss over a period of three years prior to applying for the loan.
Documentation
Depending on the lender, you may be required to submit documents that detail the intended use for the loan. For example, taking a particular type of loan, such as a commercial mortgage, will likely require you to purchase property for your business. Alternatively, some lenders will only lend to particular projects or purchases, the most common example being government loans. You will need to prove that you intend to use the capital on something in line with the lender’s criteria.
Lastly, though easily the most important point, you will need to have a detailed business plan. Occasionally, a lender will ask for more information regarding your business. Something a business plan can provide, though this isn’t the main reason. Though it may seem obvious, having a clear plan in mind before taking a loan can not only help pave the path to repayment, but help the overall health of your business too. Plenty of businesses take out loans with plans only half-formed at best, leading to problems down the line. Make sure you aren’t one of them.
Commercial finance applications
Now you know what you need to obtain commercial finance, next up is knowing when it can be useful. As we’ve mentioned, businesses with room for expansion and the plans to enact it are the ones that stand to gain the most. Good opportunities for expansion can be fleeting, so it’s important to seize the opportunity to grow when one arises. As businesses in their growth stage are usually short on capital, with any profits being reinvested into the business, taking advantage of an opportunity can be difficult. Let’s look at an example.
Let’s take a business that is in a stable financial situation, though lacks a reserve of capital to draw from. Perhaps there is a property for sale. One which would increase the storage capacity for the business. Thereby increasing its ability to meet bulk orders, or simply increase its ability to meet general demand. However, without on-hand capital, making the purchase is an impossibility. In this situation, and many others like it, commercial finance can be the perfect short-term measure. As the necessary capital can easily be sourced quickly, allowing for this example business to seize its chance to expand.
The use of bridging loans in commercial finance
Though there are plenty of different types of commercial finance, bridging loans are certainly one of the most effective. Bridging loans are short-term loans aimed at sourcing large sums of capital, secured against physical assets. These points make bridging loans a viable form of commercial finance. They equip borrowers with the tools necessary to act decisively, a core requirement for success in today’s markets.
As bridging loans are a form of secured finance, they follow the same requirements and largely the same applications as commercial finance as a whole. One notable feature of bridging loans, however, is that they are not just intended for commercial use. They can be obtained by individuals for a range of purposes. In a commercial context, bridging loans can benefit a business by offering a flexible method of sourcing capital with a view to funding expansion.
Is commercial finance right for you?
On to the most important question, though the most difficult to answer. You know your situation best, after all. That said, if you are a business with a good, clear plan for expansion, but lack the available capital to do so, then commercial finance could be the cure. If, however, you lack a clear path forward. Or, find yourself struggling to make ends meet. The risks posed by securing commercial finance against your assets may be too much. Especially given the short-term nature of commercial finance. As always, regardless of your situation, you should consult a financial advisor to be apprised of your options and risks. Whether you are considering commercial finance, or other options.