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What is Commercial Finance? Everything You Need to Know

Estimated Read Time: 6 Minutes

JESSICA LAMBERT , 27 January, 2023

If you are in the world of business, then it is likely that you have heard the words “commercial finance” uttered once or twice. But despite it being common jargon within the industry, it can still conjure up uncertainty for some business owners, unaware of the options available to them.

So firstly, a simple definition.

Commercial finance is the term given to a huge range of business finance products that include both short and long-term solutions, offered by a provider external to the business.

What is Commercial Finance used for?

A business might seek commercial finance if they have reached a point where growth is imminent. Sometimes there is an obstacle in the way of attaining necessary growth – and that obstacle is  often funding.

Commercial finance ensures that businesses, regardless of size, can thrive and hit their targets, rather than miss out purely because they have to wait to generate enough cash to re-invest in themselves. Commercial finance is essentially a way of providing working capital for businesses.

Better access to commercial finance has paved the way for small and medium-sized enterprises (SMEs) to flourish.

Recently, the commercial finance landscape has expanded. Whereas once there were just banks, alternative finance providers have given businesses more options than ever before. 25% of small-scale businesses have their loan applications rejected by banks, but these new alternatives give fast access to businesses that would otherwise have to go without.

It means there are better options for everyone out there, whether that means you are a business owner wanting to achieve growth or a customer looking to shop around within a specific market.

Who Can Access Commercial Finance?

The answer to this is pretty straightforward… Anyone who owns a business can make an application for business finance.

Criteria varies from provider to provider, but ordinarily, you will need to show business bank statements, management accounts and director information. With some alternative finance providers, there is less rigidity in their criteria, but a lot of online lenders use algorithms that can mean their assessment criteria are almost as black and white as the banks. There are also solutions available for businesses with adverse credit or start-ups who traditionally have struggled the most to find finance.

What Commercial Finance Options Are There?

There are numerous commercial finance options available to businesses, but what exactly are they?

Short-term commercial finance:
– Trade credit
– Business credit cards

Medium-term commercial finance:

– Crowdfunding
– Cash flow loans, such as our popular Nucleus Business Loan
– Bridging finance
– Business Cash Advance/ Revenue Based Loans

Long-term commercial finance:
– Asset based lending
– Invoice finance, which is split into invoice discounting and invoice factoring
– Overdrafts
– Commercial mortgages

Which Commercial Finance Option Should You Choose?

There is never a one shoe fits all option in life and that is certainly the case when it comes to commercial finance for businesses.

Taking out external finance for your business is not something you should decide on a whim. It is important to put the time and effort into ensuring you get funding that suits you and your business best. Finding finance should be treated like any other business partnership, do the appropriate due diligence, look around and make comparisons on all the options available to you.

Once you have done your research, and got to know the market, if you are still unsure, talk to an alternative business finance provider to learn more.

There are various factors that you will need to consider before moving ahead with a commercial finance application. You will need to think about the following:

– Why do you need finance to begin with?
– What industry do you operate in?
– The term: how long do you want the loan to last?
– How big is your business?
– How much money will you need to achieve what you have in mind?
– What is your risk profile?
– How much can you realistically afford to repay each month?

Once you have seriously contemplated all of these things, you will then understand where your business stands and the type of finance you require should become evident. But again, if you still are not completely sure, get in touch with the experts as this is exactly what they are there for.

Next, you will need to decide whether you want to take either the debt financing route, or whether equity financing is the better option for you.

Equity finance involves surrendering a share of your business to an individual or institution in exchange they get a share of your business in return for their investment.

Debt finance comes from a bank or commercial finance company. You will have to pay the loan back, usually with added interest. The majority of commercial finance that is available these days will come in the form of debt financing and means adding a liability to your balance sheet.

So now that you know what is what in the commercial finance world, all that is left to do is weigh up the pros and cons.

The Pros And Cons Of Commercial Finance

Starting with the negatives, some business owners prefer to avoid external commercial finance because they do not want to take on extra debt. Similarly with equity finance, businesses are reluctant to surrender any control or ownership of their business, particularly as if the business is successful the equity will most likely be worth much more than the original loan amount.

However, if you can get past the stigma attached to borrowing for your business, commercial finance can fund growth opportunities and help you to achieve your goals. You can use either the sales ledger or tangible assets as security or to leverage your loan against. When you consider the fact that approximately 60% of SMEs are uncertain about their potential to finance lasting growth, commercial finance is a pretty attractive option for SMEs.

Borrowing money can also help businesses tackle late payments and help to even out cash flow and balance the books. Almost all businesses have times in the month or year where they experience cash flow peaks and troughs, navigating these can be much easier with a funding partner in place. For example, invoice finance is a fantastic way for businesses to access cash that is tied up in unpaid invoices. For many businesses, this is a great and viable option. They often have to provide their customers with credit terms that extend beyond those they are given by their suppliers and invoice finance helps to smooth this gap in cash flow.

In industries with costly equipment set-up costs or where lots of machinery or technology upgrades are required, commercial finance can allow businesses to spread the cost of purchasing over many months. Replacing equipment or getting urgently needed repairs done is often not a choice but a necessity for businesses and commercial finance can help to ease the burden.

Ultimately, you need to ensure that you find finance that fits your business. Different products suit different business life cycle stages and the most important thing to remember is that being proactive, rather than reactive is always best, especially when it comes to finances.

Finding finance before you need it means you can look at the whole picture objectively and select a finance strategy that works for you and your business in its entirety.

For more SME advice and tips, read our related posts below. If you are experiencing cash flow challenges or want to realise your business growth plans, get in touch with our team of Funding Specialists today on 020 7839 9451 or email [email protected].





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