Commercial Finance – Is it right for my business?

Commercial finance is a general term used to define a range of different financial products available to all manner of businesses. Used for all manner of reasons, with both short-term and long-term options available, depending on what your business needs. Commercial finance deals are agreed with by external lenders and offer an alternative to traditional methods of lending such as banks, or raising money from friends or family. If you have been bypassed for a bank loan, commercial finance could provide you with that extra option to get you the additional funding you need.

So, what are the options? How can your options be utilised and why could it be so beneficial.

What are the benefits?

Whether you are searching for the extra finance to fund growth, or if things are just starting to turn slightly negative and cash flow is suffering, commercial finance could be your option. It is within the responsibilities of a company director to ensure the best results and outcome for a business and everyone associated with it.

Commercial finance is often a cheaper alternative to traditional lending. With such a variety of products available, you won’t end up paying the same high-interest rates a bank would offer. Lenders will aim to tailor a package towards your business, the sector you’re in and what you’re looking to achieve. Lenders will also look outside of the box at different forms of security and potential in making deals work. For example, some lenders will class products, work in progress, raw materials and good will as assets for security.

Forms of commercial finance

With most commercial finance arrangements, all manner of variations can be included to make a package work. However, there are a few key types of commercial finance.

  • Asset Finance – This gives you the option of spreading the costs of a new asset, over a set period. The assets themselves form the security for the lender, with the cost then spread over the item’s potential lifespan. This gives you a level of cashflow stability, whilst also giving you the option of obtaining the latest equipment in your industry.
  • Hire Purchase – Hire purchase is a specific form of asset finance. The agreement involves paying an initial deposit, then the remainder of the debt over monthly instalments. The hire purchase agreement means the owner would always retain control of the asset.
  • Leasing – Very similar to hire purchase, but with some key differences. Its process works in almost an identical manner, first paying a deposit, then paying the remainder over instalments. However, the big difference is at the end. From here you will have a few different options available. Return the asset to the leasing company, upgrade the item, renegotiate a new lease, or make a one-off payment and permanently own the asset.
  • Refinancing – If cash flow is your biggest problem, refinancing is an option for releasing a cash injection to the business. A lender will use your assets as security and advance you a loan, based upon the value of your assets. You can then repay those loans over time, whilst still being able to use the equipment.

These are the very basic commercial finance options which most lenders will do, but there can be alterations and variations to each one of these, with security against all kinds of assets, from livestock to machinery.

Invoice finance

Invoice finance is a very particular type of commercial finance package and is only available for B2B businesses. Effectively, using your unpaid invoices, you are to obtain an advance based upon their value. A factoring company will advance you on your outstanding, generally up to 90% of their value. The factoring company will then go out and collect your invoices as they take control of your sales ledger. From here they will take what they’re owed along with the fees, before finally returning you with the change.

There are several variations on invoice finance, from invoice discounting, invoice factoring, and spot factoring. Although all are very similar, they each have specific differences to suit what businesses might need. As with most commercial finance products, they all have a cost, but it will be different depending on what you’re looking for. However, the cost of a finance facility, is still likely to be less than a traditional lender.

In summary

Commercial finance can be a very powerful tool for struggling businesses, or for those who are looking to grow what they already have. Commercial finance brokers work in pretty much exactly the same way as mortgage brokers and can provide valuable assistance in getting the correct agreement. The most important thing is finding the right deal to suit your business and industry.