Commercial Finance Companies Are an Alternative Source of Financing

New or expanding small business may be denied traditional bank loans because of limited track records or high debt. They may also be denied bank financing because of past business difficulties. In these situations, a commercial finance company may be an alternative source of financing for your business.

While commercial finance companies, like banks, are concerned with the borrower’s collateral, they also take the business’ track record or profit forecast into consideration, when approached with a loan request. These firms may even lend more than the net worth of the borrower, a situation which is usually undesirable to a bank. However, there’s usually a penalty to pay for having to do business with a commercial finance company. Because finance companies are willing to take on higher risk loans, they typically charge higher interest rates. The major methods of financing offered by commercial finance companies appear below.

• Accounts receivable and inventory financing. This is the most popular financing tool offered by commercial finance companies. Receivables are the most easily liquidated security a company owns and therefore is a more attractive avenue for a finance firm to support. But if you need to go beyond the value of your outstanding accounts, an inventory loan may be added to extend the line of credit. A line of credit helps keep ready cash available, while you are waiting for accounts receivable payments and while you wait for merchandise to be sold from inventory.

• Equipment and real estate loans. Finance companies will often provide two-year up to five-year loans secured by equipment. Longer term loans, up to 10 years, may be secured by commercial or industrial real estate. Of all finance companies make mortgagees; however, those that do usually provide refinancing and second mortgages. If your firm has an extensive supply of high-value equipment, you have a valuable asset that can be used as collateral against a loan. This collateral provides you with flexibility to take on debt, which frees cash so your business is not under capitalized.

• Partially or totally secured long-term loans. Some commercial loan firms now offer two-year up through ten-year loans based upon the borrower’s potential profitability, rather than on collateral. Typically, lenders will not require the same extensive financial projections demanded for unsecured lending. Instead, the emphasis is on accounts receivable, inventory and other assets, such as equipment or real estate. Lenders will generally require the usual documentation of financial statements, tax returns, credit references and management history.

If you are considering commercial financing for your business, carefully consider the amount of credit you want and the corresponding repayment burden. Evaluate the return you expect the credit to bring your business in terms of cash flow and profitability. To discuss your plans for business capitalization and growth, contact the SCORE Association (Service Corps of Retired Executives). SCORE is a nonprofit association with 12,400 volunteer business counselors, who donate their time to advise entrepreneurs on strategies for business success. Counseling is confidential and offered free-of-charge. Call 1 (800) 634-0245, for a referral to the SCORE chapter nearest you.

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