Commercial finance is the term used to define a huge range of financial products available to businesses. It’s used for a variety of different reasons, with short-term and long-term deals available. Offered by an external lender, commercial finance can give businesses that extra bit of cash injection to help with growth, or if cash flow has become a bit tight, it can be used as an option to ease those worries. If you have been bypassed for a bank loan, commercial finance gives that extra option to find additional funding.

So what different commercial finance options are out there? How can they be utilized and why are they beneficial?

Why is commercial finance beneficial?

If you have been turned away by a traditional lender, commercial finance could be your only option. If you have reached a point where growth is imminent, or you are in trouble with cash flow, commercial finance can provide you with that additional funding.

Commercial finance is also often cheaper than traditional financing methods. With so many different varieties, you are not always stuck paying the same high-interest rates a bank would have to offer. Because of the options available, you can have a package tailored to your business needs and circumstances. For example, some commercial finance lenders will class products, work in progress and raw materials as assets for security.

Essentially commercial finance is beneficial because it gives you the option to be flexible when you’re in need of additional funding.

Types of commercial finance

There are few key types of assets finance; however, each of those will have variations available as they do not stick to a strict method.

  • Asset Finance – Asset finance gives you the option of spreading the costs of gaining a new asset, gradually over time. The assets themselves form the security for the lender, with the cost then spread over the potential lifespan of the item. This gives you a level of stability, while also giving you the option of obtaining the latest equipment in your industry.
  • Hire Purchase – Hire purchase falls under the bracket of asset finance. The agreement involves paying an initial deposit, then repaying the remainder of the debt over installments, yet always retaining control of the asset.
  • Leasing – This is very similar to hire purchase, but it has some key differences. Its process works in almost an identical manner, first paying a deposit, then paying in instalments. However, the big difference is at the end where you have a few different options available. Return the asset to the leasing company, upgrade the item, renegotiate a new lease, or make a one-off payment and permanently own the asset.
  • Refinancing – If cash flow is holding you back, refinancing is an option for releasing a cash injection to the business. A lender will use your assets as security to give you a loan, based upon the value of your assets. You are then able to repay those loans over time, while still being able to use the equipment.

These are the very basic commercial finance option which you have available, but there can be alterations to each of these, with security against all kinds of assets from livestock to machinery.

Invoice finance

Invoice finance is a very particular type of commercial finance and is only available for B2B businesses. This is effectively using your unpaid invoices as security. A factoring company will give you an advance on your outstanding invoices, typically up to 90%. The lender would then go out and collect your invoices, taking what they are owed along with their fees, before returning you with the change.

There are several different types of invoice finance, such as invoice discounting, invoice factoring and spot factoring. Although they are all very similar, the costs involved with each type of invoice finance have distinct differences to suit certain scenarios.

Commercial finance can be a very valuable tool for businesses that are struggling, or those looking for further growth. Commercial finance brokers work in pretty much exactly the same way as mortgage brokers and can provide valuable assistance in getting the correct agreement. The most important thing is finding the right deal to suit your business and industry.