Commercial finance is a general term, covering a variety of different financial products, which are available to all manner of businesses. A commercial finance package is often tailored to exactly what the business needs and is designed to suit the circumstances it finds itself in. They are used for a variety of different reasons, whether it be steadying the ship and sorting out cashflow, or if the business has potential to grow even more. Offered by external lenders, commercial finance provides an alternative to your traditional bank loan.
So, what options for commercial finance have you got? How can they benefit your business?
Types of Commercial Finance
When it comes to types of commercial finance, there are almost endless possibilities available. There are some basic versions available, however, each of these can be modified to suit the type of finance you need.
Forms of commercial finance
With most commercial finance arrangements, all manner of variations can be included to make a package work. However, there are a few key types of commercial finance.
- Asset Finance – This gives you the option of spreading the costs of a new asset, over a set period. The assets themselves form the security for the lender, with the cost then spread over the item’s potential lifespan. This gives you a level of cashflow stability, whilst also giving you the option of obtaining the latest equipment in your industry.
- Hire Purchase – Hire purchase is a specific form of asset finance. The agreement involves paying an initial deposit, then the remainder of the debt over monthly instalments. The hire purchase agreement means the owner would always retain control of the asset.
- Leasing – Very similar to hire purchase, but with some key differences. Its process works in almost an identical manner, first paying a deposit, then paying the remainder over instalments. However, the big difference is at the end. From here you will 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 your biggest problem, refinancing is an option for releasing a cash injection to the business. A lender will use your assets as security and advance you a loan, based upon the value of your assets. You can then repay those loans over time, whilst still being able to use the equipment.
These are the standard options most lenders will look at, when it comes to commercial finance. There can be a multitude of variations to each of these options, with different forms of security available against very different kinds of assets. Some lenders will accept anything from livestock to machinery as security.
Invoice finance is a very particular type of commercial finance package and is only available for B2B businesses. It allows you to accept an advance based upon the value of your invoices. A factoring company will typically give you up to 90% of the invoices value. It can help get cashflow under control, if you are not bringing in cash quickly enough. Invoice finance can also give you the opportunity to grow further if you’re in need of extra finances. A factoring company will go out and collect your outstanding invoices, taking what they’re owed, along with their fees before finally returning you with the change.
Invoice finance is a great option. However, factoring companies will first assess the quality of your invoices and look at the reliability of your clients, before deciding where to give you a finance facility.
There are a few different variations when it comes to invoice finance, with invoice discounting and invoice factoring options. Although both are similar, they have slight differences suited to different business needs. Discounting gives the factoring company less credit control, meaning you would collect your own invoices, whereas factoring would have the lender pick up your invoices for you.
When it comes to restructuring, it can be hugely beneficial for your business and allow you to get your cashflow in a better position. Restructuring means looking through your whole business and assessing the quality of your processes and the efficiency of how you operate. Commercial finance can help provide you with that extra finance to improve your processes.
As with the various forms of asset finance, you can have the option to get the very best equipment, which you might not otherwise be able to afford and improve the speed and quality of how you operate as a business. Being aware of how you operate is essential. As a director, or business owner, you could in avertedly be trading whilst insolvent, which could eventually lead to wrongful trading accusations.
The further you delve into the processes of your business, the easier it will be manage. This works in a very similar way with regards to a cash flow forecast. The more detail which goes into that, including everything from sales to seasonal variety, the easier it will be to plan for the future.
With the various forms of commercial finance available, there are plenty of options set to help businesses. It doesn’t matter what type of business you have, there could be a financing option ready to help you.