Commercial finance companies are good options for entrepreneurs
seeking small business loans. Commercial financing institutions
generally charge higher interest rates than banks and credit
unions, but they are also more likely to approve a loan request.
Most loans obtained through finance companies are secured and the
assets used as collateral can be seized if the entrepreneur
defaults on the loan. Commercial finance companies provide small
businesses with loans for inventory and equipment purchases and are
a good resource of capital for manufacturing enterprises.
Commercial finance companies have also grown because they are
more flexible in arranging loan repayment schedules than are banks.
Whereas banks typically require a seven-year repayment schedule on
term loans and 15-year schedules for loans on commercial property,
finance companies may extend payment schedules up to 10 years for
term loans and up to 25 years for loans on commercial real
estate.
Finance companies have experienced sustained growth throughout
the 1990s. By the end of the decade, finance companies had become
America's second largest source of business credit, behind banking
institutions. Larger commercial finance companies often offer small
business owners a variety of lending options from which to choose.
These include factoring, working capital loans, equipment financing
and leasing, working capital loans, specialized equity investments,
collateral-based financing, and cash-flow financing.
- Commercial loans offer the lowest interest rates of all loan
options, enabling business owners to access critical funding while
maintaining lower overhead costs.
- The loans are long-term, often between 3 and 10 years, allowing
you to pay the money back slowly as you work to increase business
profits.
- Lower interest rates and extended payment plans decrease the
potential for default, which reduces your investment’s risk.
- Commercial loans can be used for very large sums, allowing you
to cover the bulk of startup costs with a single loan.
- Commercial loans are often unsecured, meaning you don’t need to
provide any collateral to obtain the loan.
- You retain complete ownership of your company. Venture capital
investments typically require signing over a fraction of your
company to the investor, whereas commercial bank loans enable you
to retain total ownership of the business.
- Funding can be very challenging to qualify for and require
excellent business credit. First-time business owners are unlikely
to be eligible and will have to build credit prior to
applying.
- The application process is exhaustive, often requiring a
detailed financial report of the business, an accurate assessment
of projected revenues, and detailed information of all associated
business risks. Basically, you need to provide a highly compelling
proposal that will assure bankers there is a relatively low risk of
business failure.
- You must also provide your personal financial history including
your credit score, annual income, and unpaid debts. Even minor
problems with your financial history could render you ineligible
for the loan.
- Commercial loans provide less personal autonomy than with some
loan options. Larger loans often require detailed accounts of how
the money will be spent.
- In the event you fail to qualify for an unsecured loan, you may
have to secure the loan with your home or car as collateral. If you
default on a secured loan, the bank retains the right to seize any
property used as collateral.