Commercial Finance Options for Small Businesses

By: Akhil Shahani

One of your biggest worries as a small business owner is how to secure capital to expand the business. Commercial finance is one of the many options available to people in your situation. This sort of financing is also called asset-based lending, since it involves some form of a secured business loan. The borrower guarantees repayment of the loan by pledging business assets as collateral.

There are several types of commercial finance options available to small businesses:

&bullAccounts receivable factoring
Businesses can "sell" unpaid invoices to banks at a discounted value for cash, which can be used right away for ongoing needs. There are many benefits to this financing option such as not having to give up a share in the business as with equity financing, and doing away with the risk and hassle of collecting payment from clients.

&bullPurchase order financing
This short term commercial finance option is popular because it enables building up of cash flow reserves. A growing business is likely to be strapped for cash while trying to meet its objective of manufacturing and selling products. At the same time, suppliers usually want to be paid upfront or are willing to extend only limited credit to new firms.
If the business has a few purchase orders on hand, it can solve this problem by seeking funds against the same. The financing agency pays suppliers directly for inputs that go into the production of that particular order.

&bullAsset based loans
This form of financing is used to test the robustness of a business and evaluate how it would perform given a long term loan. The business receiving the asset based loan has to prove within a limited period that given adequate financing its business model would be effective, and that a long term loan would sustain business growth over a period of time.
This form of financing is perfect for the business that can't afford to wait to establish creditworthiness. Assets that can be offered as collateral against this type of loan include real estate, accounts receivables and finished goods.
Some other forms of commercial finance besides those described above include:

&bullBankruptcy reorganization
&bullSecured lines of credit
&bullTrade financing
&bullLoans against inventory
Financing a business is a tough ask, but there are ways to do it, especially if your business idea looks sound. At the same time, it is critical that your business establish its creditworthiness in due course. Only with a good business credit rating is it possible to obtain large loans and other forms of capital. Work on building yours up so that your business is not one among the vast majority that has a loan application rejected

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