Commercial finance can be aptly described a business loan which is secured and which a borrower must pledge as a collateral any asset that he or she uses in the running of his or her business.
Commercial finance is also loosely referred to as asset-based finance or asset-based lending.
A lending institution that offers this type of loan is therefore referred to as commercial finance limited company. Where the word limited is added implies that the liability of the shareholders of the said company does not extend to the personal assets owned by the shareholders.
Choosing a commercial finance loan can be a tricky affair if not approached prudently. There are some factors that as a manager or the Chief Financial Officer of the company that seeks to borrow money you must take cognizance of:
Interest rates levied on commercial finance loans differ from one lending institution to the other. The large financial companies that are strong base theirs on a predetermined spread of a thirty-day period. When it comes to high-risk commercial finance loans, interest rates charged are typically based on the targeted rate of return to the lender according to the level of the risk undertaken.
Another thing to look out for is the advanced rates. Like interest rates, advanced rates also vary among different lenders and this depends on the financial strength of the lending company in question. The common trend for most financial companies when it comes to commercial finance loans is to advance between 75% and 85% of a borrower’s eligible accounts receivable as well as between the range of 40% and 60% of the company’s eligible inventory.
Many a times, a commercial finance loan will be accompanied by a credit agreement that demands that a company makes certain covenants that relate to what a company may engage in or what it may not engage in during the period of refinancing. For instance, a commercial finance lender may demand that the borrowing company remit to it interim financial statements at stipulated periods. Other agreements could be in terms of other forms of compliance certificates which put the lender in a good position to monitor the financial health of the borrower.
It is good that these agreements are carefully studied to make sure that they are tenable and that the company can cope with them. Some of them are too stringent and a company only needs to agree to them if they are fully aware of the consequences.