Commercial Finance Companies

April 13, 2006

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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 loans
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.