The World of Commercial Financing
You may think that you already know a lot about financing because you have dealt with home and car loans in your personal life. Well, the world of commercial loans is an entirely different one. There a many options. Some sound familiar, but they are unique.
Business credit lines are similar to home equity lines in some ways. The primary difference is their use. Business credit lines are used to cover cash flow strains caused by delays between revenues coming in and bills being paid by the company.
Factoring is a financing option designed to deal with cash flow problems. You sell your receivables for a discount to a lender in exchange for immediate payment. While factoring is good for cash flow, it is an expensive option.
If you own it, you have cache in commercial financing. Lenders will loan a business money based on the assets held. Known by the obvious name of the Asset Based loan, the loan is secured by a security interest.
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.
Businesses often need to make capital investments and improvements. As you might guess, there is a loan for this as well. The capital term loan is common and comes with a term associated with the life of the asset being improved.
Even the lenders in the commercial world are different. While there are banks, private money is a big part of the game. Investors pool their money and make loans just like banks. Make sure you consider this option, as they can offer good terms.
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.
Filed under: Business