Banks and bankers have a tendency to overcomplicate commercial lending (maybe this article should be called “The Simplest Guide to Commercial Finance”). The right commercial business loans solution comes down to three factors – the right loan type, at the best lender, in the timeframe you need.
But even if you know you need a commercial property loan, or an equipment finance loan or an unsecured overdraft, do you know how to identify the best lender?
And if all lenders tend to tell business owners they can help (until they can’t), how do you work out if they can support the small business loan you need in a timeline that works for you?
As a Commercial Finance Company specialising in business loans let’s strip all the over complicated and unnecessary jargon back and look at what counts – loan type, lender selection and time to settlement.
Part 1. How do you choose the right loan type?
One of the main drivers for business owners seeking commercial finance from us is to consolidate debts or refinance out of commercial lending products that weren’t well suited to them in the first place. A good example of this is using an expensive unsecured loan to purchase assets when equipment finance would have provided a longer term and a much cheaper rate, both of which are features that would have resulted in much lower monthly repayments. Getting the right loan type from the beginning saves you money and the hassle of having to fix it later.
The following are some of the common kinds of commercial lending solutions and when to use them:
An overdraft allows you to overdraw your business account up to a certain limit. An overdraft is ideal for businesses that experience fluctuations in their cash flow and need quick access to funds to cover expenses.
There are two types of overdrafts: secured and unsecured. Standard overdrafts often require property security, while unsecured overdrafts do not.
Unsecured Term Loans
An unsecured loan is a type of term loan that provides you with a lump sum of money that you can repay over a fixed term. This type of loan is ideal for businesses that need to invest in longer-term plans and opportunities, such as expanding their operations or executing a business strategy.
The application process for unsecured loans is usually done by analysing bank statements and doesn’t require financials. Because of this they’re approved fast – usually within hours.
Unsecured term loans do not require property security. Because of this they usually have higher interest rates than secured loans.
Equipment finance, also known as asset finance, is a type of loan that allows you to purchase vehicles, equipment, and machinery assets to generate income or improve efficiency in your business. It’s a form of finance that’s available to startups and mature businesses alike.
The equipment you purchase is usually the security for the loan and because equipment finance is a secured form of finance rates are generally less than unsecured loans.
Depending on the amount of the finance and which lender you’re applying to, the application process for equipment finance could be a low doc application or a full doc application process requiring financials.
Commercial Property Loans
Commercial property loans are a type of loan that enables you to purchase commercial property for your business or as an investment. Banks, second tier lenders and private lenders all provide funding for property. This provides a broad range of finance solutions and even allows for bad credit loans, as well as business owners with tax debt.
Development finance is a type of loan that provides funding for property development and construction costs. Banks are conservative lenders for property development. Specialist funders have filled the niche and offer competitive rates without the drawn out process and uncertainty of bank applications. Lenders will seek to understand if your project has a suitable margin, a strong feasibility study has been carried out and will rely on a commercial valuation and QS report as part of their assessment process.
Invoice finance, also known as debtor finance and factoring, is a type of loan that enables you to bring your revenue recognition forward and get paid on your invoices the day you write them. This type of loan is ideal for businesses that have long payment cycles and need to improve their cash flow making it a valuable lending solution.
Trade Finance and Import Finance
Trade finance and import finance is a line of credit that enables you to pay for material supplies, extend supplier terms, and support you through your sales cycle. This type of loan is ideal for businesses that import goods from overseas or need to purchase raw materials to manufacture products.
Trade and import finance can be secured or unsecured depending on your time in business and profitability. There is a substantial variation in the process and rates between lenders and both are important factors to take into account.
Private loans provide a flexible commercial finance solution that mainstream lenders cannot offer. This might be because of the speed required or the loan could service as bridging finance or there may be a history of bad credit. Secured by property, private loans typically take the form of a first mortgage, second mortgage or a caveat loan.
Private lenders often specialize in niche areas, such as a short-term property loan used to take out tax debt so a business owner can comply with major bank lending policy.
As with any loan, it’s important to consider the terms of this lending solution and conditions carefully before committing and this is especially true for private loans as they are unregulated. There is significant variation in the quality and business practices of private lenders for commercial finance – we strongly recommend getting expert advice before entering into a contract for any private loan.
Part 2. Lender Selection
Lender selection, and its importance to a successful commercial lending experience, isn’t talked about enough.
Some lenders are specialists in providing working capital or equipment finance but they might not fund property. Or they might provide all forms of lending solutions but may favour certain kinds of finance solutions over others.
Different lenders also have different appetites for different kinds of borrowers and security property. This could relate to a client’s credit score or even an industry. Some lenders might not be interested in providing commercial property loans for retail premises but they might be very supportive of providing loans for factories.
To get the best possible outcome, you want a commercial finance company that matches up with you and your needs in the best way possible. This is done by matching up your commercial loan type with a lender who is interested in your industry, security type and has competitive rates. If you do this effectively, your decision about which lender to choose for your commercial lending becomes all the more easy.
Part 3. Can your lender deliver in a timeframe that works for your business loan needs?
Every lender has slightly different processes and sign offs within their business – these processes take time. There are lenders who can provide same day funding and sometimes the banks take months. This is important; if you need equipment finance to purchase machinery for your business you can’t wait weeks for an approval as the asset could be sold to someone else.
You should ask lenders about their process and how long that’s likely to take. Most fintech lenders are very fast and speak openly around their turnaround times because it’s one of their strengths. Very large institutions tend to take longer but as a general rule of thumb, low doc loans are assessed faster and banks are the slowest.
If your commercial finance relates to a time sensitive need you must prioritise lenders’ service levels into choosing the right commercial business loans solution.
Need help? We’re experts at matching the right business loan to the best lender for you who can deliver on the timeline you need so you can get the commercial lending outcome that’s right for you. Contact us here.
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