The World of Commercial Financing

By: Thomashammond
The world of personal finance is very simple compared to commercial finance. Basically, we are talking apples and oranges. Commercial loans are not only more complex, they come in different packages.

Let us start with something somewhat familiar to most homeowners. The business credit line is an account you can draw off of just like an equity account. With companies, it is usually used to cover cash flow issues.

Factoring is an area that is very unique. It is a form of financing whereby a lender essentially buys the accounts receivables of a company at a discounted rate. Instead of being required to wait 30, 60 or 90 days to get paid, a company can get money now.

Asset based loans are another common form of financing that is found in business. These loans are made as a percentage of the assets owned by a business as the name suggests. The lender also takes a security interest in those assets in case of default.

Hard money loans are often used by businesses to buy time. They are expensive with most of the cost coming in points paid on the borrowed amount. Still, a hard money loan can give a business an extra month or two to make ends meet and resolve cash flow issues.

Equipment for your business has value and lenders will finance based on it. While they will give you a loan to buy it, they will also give you a loan based on the value of the equipment. This is an example of the creativity in commercial financing.

Getting a loan for your home and an office building might seam similar, but they are not. Commercial property loans are much more complex. The issues are many including the amount of revenue the property will produce.

Capital term loans are interesting financing options. These loans are made for capital improvements and have a term that lasts as long as or a percentage of the life of the item being financed. The exact measurement is the useful life of the asset.

It should also be noted that the lenders are different in commercial financing. While there are plenty of commercial banks, private investments are also big lending resources. Wealthy groups pool money and lend it.

In general, commercial financing is much more involved than getting a personal loan. You can expect the lending source to ask for a lot of paperwork including everything from balance sheets to cash flow statements to personal credit reports. Prepare yourself accordingly.
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