Commercial finance is term referring to several different financial products, each are effectively a form of borrowing. Although not a loan in the traditional sense, commercial finance can be tailored to suit your business, what your business has at its disposal and what your business needs. It can be used for expanding your business, improving your levels of cash flow, giving you that extra injection of cash, or restructuring the business as a whole.
Key types of commercial finance
There are lots of different forms of commercial finance, each having the ability to be tweaked to match the needs of the borrower. However, there are a several key types which can be altered slightly.
- Hire Purchase
- Bridging Loans
- Asset Finance
It all depends on what your business is trying to achieve. But each type of commercial finance can provide a benefit to your business. Offering a better alternative to traditional bank lending, the lender will look at your circumstances and different forms of security to make deals work. Lenders will class products, raw materials and work in progress as forms of security to back up a loan deal.
Leasing – The process for leasing is very straight forward and is a vital form of lending if you’re wanting better equipment but don’t have the immediate funds to pay. You firstly pay a small deposit, before paying off the remainder of the asset in instalments over an agreed time period. After the payments are finished, you have several options to make a final decision. Physically own the asset, change it or upgrade to a new asset on new terms.
Hire Purchase – Hire purchase is a very particular form of asset finance. It is similar to leasing, but with a few subtle differences. Just like leasing there will be an initial payment, with an agreed time period in which to finish paying off the asset. The key difference is that at the end of a hire purchase agreement the owner would always retain the asset.
Bridging Loan – Bridging loans have a very particular purpose. The finance package is designed to bridge the gap between one payment of an asset or property whilst the sale of different asset goes through. It is effectively a short term, interest-only loan. Once the sale of your asset goes through, you are able to repay the whole of the bridging loan.
Refinancing – If you’re asset rich but cash poor and an injection of cash is just what you need, refinancing is the right option. Lenders will allow you to take out a loan based upon the value of your asset and will then use your asset as security. Your assets are never sold and are there or you to use whilst you repay the loan.
Asset Finance – Asset finance gives you the option of spreading the cost of any new asset over an agreed time period. It can help settle your cash flow, but most importantly it can get your business new top of the line equipment in your industry, which importantly will be key for productivity.
As with all loans, inevitably there are drawbacks. Paying back interest will always be difficult and at times it can be incredibly costly. As the majority of assets that are purchase on commercial finance are so expensive, lenders will typically look to put a debenture on the deal in one way or another which is a form of security.
Not being able to keep up with repayments could see you not only loosing the asset in questions, but if there are assets being used as security, they could also be taken. If you fail to keep up with your commercial finance commitments, for both unregistered business and limited companies, you could see yourself with a winding-up petition.
Commercial finance can be a very helpful financial solution, especially for new businesses, those looking to grow or those in dire need of financial assistance. But as with any form of lending, there are always drawbacks