An Overview of Commercial Finance

​Commercial finance includes short and long-term options offered by funding institutions. Companies pursue commercial financing for multiple reasons, such as expansions, inventory, and new machinery.

Commercial financing helps companies reach their objectives without delaying growth due to a lack of funding. Therefore, the primary function of commercial finance is to make working capital available for companies.

Traditionally, banks served as the primary lenders of commercial finance. However, the field has expanded, and alternative finance providers have emerged.

Alternative commercial financing lenders may benefit companies of all sizes, particularly small ones with difficulty meeting bank requirements. In addition, alternative lenders may provide financing more quickly than banks.

Trade credit, a type of commercial financing, is an agreement to purchase products and services without immediate payments. Moreover, suppliers and other business entities can extend credit instead of banks. Credit facilitates business expansion by securing agreeable terms with suppliers, which alleviates the strain on cash flow typically caused by immediate payments.

Business credit cards differ from personal credit cards. They help companies establish a credit history, have higher credit limits, and offer varying interest rates. In addition, business credit cards allow professionals and entrepreneurs to separate their business expenditures from personal ones, which aids them when reconciling accountants and filing taxes.

Crowdfunding has become an alternative form of commercial finance. Companies and entrepreneurs can source small funds from numerous individuals rather than substantial funds from a few investors. Crowdfunding leverages social media and other platforms to connect companies with investors.

Companies and entrepreneurs can consult with commercial finance brokers to find suitable financing. Brokers know lenders' preferences, prevailing rates, and offerings across the market, making them authorities on the transactions. Commercial finance brokers possess extensive networks in the lending industry, which significantly benefits their clients by relieving them of the burden of researching available deals.

Further, SBA (Small Business Administration) loans are a type of commercial finance designed for small businesses operating in the United States. These loans are usually given or administered through traditional lenders like banks and credit unions. The SBA7(a) loan is one of the most popular SBA loans. Borrowers can use this loan to consolidate debt, manage operational expenses, and buy land or equipment. SBA 504/CDC is another type of SBA. However, unlike the SBA7(a), the SBA 504/CDC has strict guidelines and is geared toward real estate and development purposes.

Unlike traditional commercial loan facilities that offer a lump sum that is paid at once, a revolving line of credit involves the lender approving the business for a series or line of credit reaching a particular amount. With this system, the borrower is only charged interest over the amount that they have used. Also, during the draw period, they can initiate monthly payments on the balance. The draw period refers to the duration or number of times that the borrower is permitted to take out funds from the line of credit. At the expiration of the draw period, the borrower will be required to close down the line of credit and reapply for another one.

Vendor credit is another type of commercial finance. This type of financing allows businesses to acquire goods and services from a vendor with a stipulated credit limit and terms. For instance, the vendor credit agreement might give a lender a grace period of 90 days to pay for goods that they have collected from the vendor. This is helpful because the business is able to convert goods into revenue before paying the vendor.

Before companies and entrepreneurs choose any form of commercial finance, they must research all their options and avoid rushing into any agreement. They must approach the financing the same way they find new business partners or suppliers.

James W Murphy Tucson AZ

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