What is commercial finance?

Small businesses can now leverage from commercial finance which is a loan to manage operational capital needs. Such a financing is offered by lenders or banks. The commercial financing offered by banks are secured by business assets in majority of the cases. On the other hand, they can also be unsecured where the lender depends on the cash flow of the business in order to make repayments.

For commercial financing to be successful for small and medium sized businesses and startups, the concept needs to be innovation driven. Business owners need to come up with holistic and practical solutions if they aspire to grow their businesses. However, this is not it! Businesses require money in all instances to grow and expand significantly. There are multiple financing options available for businesses to choose, and it has become crucial for all business owners in recent times to have a better control of their business growth.

If you have to make a commercial finance decision, the first thing you should be doing is to determine options that are available and you can afford while they meet your financial needs. Therefore, ensure that you have shortlisted realistic funding choices that will help your business financially. The reason why it is a critical decision is that in case you make a wrong decision, the chaotic conditions may have serious consequences.

Read More: Your Quick Start Guide to a Merchant Cash Advance

If we look at the market, the reason why business owners struggle to make a decision is that there are confusions about the availability and rules and regulations of commercial financing. If we talk about commercial bank loans that are classified as traditional loaning options, the lenders have stopped facilitating loan requests from small and medium sized businesses. This is where commercial finance was overtaken by other alternative lending options such as merchant cash advances. In recent years, alternative lenders have been helping small businesses and startups to a great extent, allowing them to get their businesses off the ground. Unless you have a perfect credit score, it is difficult to get business funding from a commercial lender.

Commercial financing was well taken by businesses of all times initially. However, one must also remember the harsh realities that it is associated with when compared to some of the common alternative lending options. It is believed that not many businesses are now willing to go for an unsecured line of credit while considering alternative lending options safer and more reliable options.

As a business owner, whether you are satisfied with your business’ current financial status or not, it is recommended to still look for commercial finance options. Any business would not mind the extra infusion of cash coming in, as there could be an unexpected need to cover finances. For instance, if there is a sudden shift in economic conditions, you should have a backup plan ready to adjust accordingly. To acquire the accurate information of the possibilities is one of the primary challenges, such challenges need to be dealt by commercial borrowers. If you are still not sure the type of financing that is right for your business, it is advised to consult a commercial finance expert that will offer candid advice.

Types of commercial finance loans

There are multiple commercial financing options available for businesses to leverage from – whether they require working capital or equipment financing, lenders are readily available to assist you with everything. Most common types of commercial finance loans are as follows:

  1. Business line of credit – A business line of credit allows businesses to get financing to cover their financial needs. The lender will evaluate your credit score and history in order to grant funding. Your business will be assigned a capped amount that would be free to use whenever needed. In addition, you will not be charged interest rate until you start drawing down funds. The interest rate could be fixed or variable, depending on your profile.
  2. Commercial Construction Loans – You might be looking for funds to build your own commercial building. If so, you can utilize commercial construction loan as your commercial finance option, which is a short-term loan. However, the funding is only allowed to be used for the construction of new building.
  3. Equipment Financing – Businesses also look for the source of funds that help them make purchases of equipment. This type of financing is known as equipment financing and it has to be repaid within two to four years.
  4. SBA Loans – SBA loans are usually offered to businesses by banks or other financial institutions that are guaranteed by the Small Business Administration – thus, known as SBA loans.
  5. Merchant Cash Advance – Commercial finance option that does not require businesses to have a perfect credit score or history is merchant cash advance. The minimum requirements to meet is that your business should be operational for at least six months generating a monthly average of $5,000 or more in sales.

Merchant Cash Advances and Commercial Finance

A lump sum cash payment given to a business in the form of cash advance is known as a Merchant Cash Advance. This type of small business cash advance is provided in return for a fixed percentage of credit card sales or receipts on a predetermined schedule i.e. daily, weekly, or monthly. MCAs are an ideal option for those businesses who are looking for commercial finance at the earliest.

Another good thing about this type of commercial financing is that lenders charge a fixed percentage over the course of repayment. A factor rate is decided by both parties as per business’ credit score and history, which usually varies between 1.2 and 1.5 of the funded amount. This means that if you want $50,000 in funding then you will be required to repay $75,000 in total. Whether you pay it in a year or more, the factor rate will remain the same. Thus, the value will not go up or down in case you are unable to pay at a defined time.

Things to consider before applying for a commercial finance option

  1.    Online application: Majority alternative finance providers accept the online application, by using which they evaluate your profile. The initial screening process helps them to save their and your time. Within a matter of minutes or hours, you will know whether you are eligible for a certain financing option or not. Small businesses or startups usually prefer this, as the form takes a few minutes to complete.
  2.    Documentation: Once your application is approved, you have to provide the necessary documentation to the provider. This includes, but not limited to, credit card statement, bank statement, credit history, and more. Ensure that your finances reflect your business is generating at least $5,000 in monthly sales.

Tip: The best way to get cash quickly and efficiently is to post invoices of well-known, investment-grade account debtors with great credit histories. These tend to get snapped up quickly and receive the best rates of capital.

  1.    Fast approval: Do you remember the number of weeks and months you had to wait just to get approval from the bank? Yes, we all have been there. The long and tedious process might annoy and frustrate you. For some, waiting become very stressful, but this is not the case with Merchant Cash Advances. Whether the lender approves or rejects your application, you will get to know within a day or two. Well, you can breathe a big sigh of relief as your application is 99% likely to be approved if you opt for MCA.
  2.    No collateral required: It is important to understand that when you choose alternative finance providers, you do not have to worry about collateral. In some of the options such as equipment financing, the equipment itself serves as a collateral. However, in cases of a merchant cash advance, your merchant processor is directly linked to the financier, thus payments are made automatically.
  3.    Get it faster and easier: As discussed, it is easier and faster to get commercial financing and once you have made a certain amount of sales, the repayment is transferred to the financier automatically.

Read More: Self Quiz: What Funding is Right for my Small Business?

Merchant cash advances have proved to be a great commercial finance option for small businesses and startups in recent times. In addition to this, it also helps businesses to get quick access to funds so that they can easily cover unexpected finances. Commercial financing using their accounts receivable, allows them to tap into funds that normally take 30-90 days to come in.

It is believed that nearly 60 percent of the working capital of any small business is hidden in form of invoices. With commercial finance, you can easily put assets to work by getting this money now instead of later.