Commercial Finance Companies

Commercial Finance Companies

Commercial finance companies exclusively offer business loans rather than consumer loans. The main reason a small business would use a commercial finance company is to borrow funds to purchase inventory or equipment. Commercial finance companies are a useful source if you have sufficient collateral to back a loan. They typically also offer accounts receivable and inventory financing. This type of loan best fits small businesses involved in manufacturing or wholesaling. Manufacturing and wholesaling businesses tend to have high amounts of collateral.

Commercial finance companies by and large only offer loans secured by assets. That means commercial finance companies are predominantly used by businesses with a proven track record, and not startups. Consumer and Commercial finance companies are very similar, in that the higher cost of borrowing causes these types of lenders to be the last resort to be used only after loan applications have been denied at other types of lending institutions.

Some of the advantages of a commercial finance company are:

They are less conservative than a typical bank for small business loans;
They are more willing, on average, to accept riskier loans (This is because commercial finance companies have less regulations and can take on more risk.)
Their lending terms are more flexible.
They typically offer both short-term (one year or less) and long term loans.
They are a useful resource to explore the possibility of an asset-backed loan.

Disadvantages of commercial finance companies:

They will habitually make only loans to borrowers with a high amount of collateral. The assets must be readily accessible, liquid, hold their value, and marketable. Collateral can include items such as equipment or accounts receivable.
The loans are usually riskier. This means that commercial finance companies need to charge higher rates of interest than a conventional lender. Make sure you check and see if they have any prepayment penalties to discourage refinancing with a different lender if you build up your businesses creditworthiness.
Not having standard loan terms permit a degree of flexibility, but also requires a thorough evaluation of the terms of the loan. The evaluation needs to include the interest computation method, payment terms, prepayment rights, and default provisions.

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