Commercial Finance Companies
Commercial finance companies provide business loans rather than consumer
loans. A small business's primary use of a commercial finance company is to
borrow money for the purchase of inventory and equipment. These financiers can
be a useful resource, particularly if your business has adequate collateral
available to support a loan. Commercial finance companies usually do a great
deal of accounts receivable and inventory
financing. Small businesses involved in manufacturing or wholesaling may be most
interested because they tend to need to be highly collateralized.
Because commercial finance companies typically offer only loans secured
by commercial assets, these institutions are used primarily by established
businesses, not startups. As with consumer finance companies, the higher cost of
borrowing from a commercial finance company may make this type of lender
appealing only after a loan application has been denied by a bank.
Advantages of a commercial finance company are:
- less conservative than a traditional bank in making small business loans;
willing to make riskier loans (Commercial finance companies are subject to
less regulation and can assume more risk.)
- flexible lending terms
- short-term loans (less than one-year) are offered as well as longer-term
- a good source to investigate for asset-backed loans,
especially if you cannot obtain additional debt from a traditional bank
because your business is already highly leveraged
Disadvantages of commercial finance companies:
- Typically they will make only highly collateralized
loans. Moreover, the security for the loan is closely scrutinized for
value and liquidity. Assets must be readily
accessible and marketable. Typical collateral includes equipment, inventory,
or accounts receivable.
- Because the loan may be riskier, commercial finance companies usually
charge higher rates of interest than banks. Commercial finance companies may
also have significant prepayment
penalties to deter a borrower from refinancing with a conventional bank
if the borrower improves his or her creditworthiness.
- Less-standard loan terms allow for flexibility, but also require careful
review of the terms of the loan, including interest computation and payment
method, prepayment rights, and default terms.