Ever caught yourself wondering how to fund your great business ideas? Do not worry, you are not alone. The world of commercial finance can seem a little like learning a foreign language. But fear not, we are here to make it less mysterious.
Commercial finance is basically the lifeblood that sustains businesses. It is money flowing into your company in the form of loans to grow, cover cash flow, or capitalize on new opportunities. Historically, banks and other special-purpose lending institutions are where you go to access these funds.
Now, when we are discussing commercial loans, we have two big flavors: Secured and Unsecured. Let us discuss them in detail.
Secured vs. Unsecured: What is the Difference?
Suppose you are taking a friend’s favorite thing on loan. If they insist you leave something valuable with them to ensure you return it, that is similar to a secured loan. In commercial life, that translates into posting something of value – some kind of property, equipment, or even accounts receivable – as collateral.
Should you, for one reason or another, not be able to repay the loan, the lender can come in and take control of that collateral to recoup their investment. It provides them with a feeling of security, which usually manifests itself in more favorable terms on your part.
On the other hand, an unsecured loan is similar to borrowing from a really friendly person who does not require anything in return. You do not have to pledge any tangible assets as collateral.
It is! However, because the lender is assuming more risk, they will usually be much more critical of your company’s financial stability. They will want to get a very clear idea of healthy, solid cash flow, demonstrating you can most certainly repay them without the comfort of collateral.
Your Funding Options
There are numerous government-supported schemes and programs aimed at assisting small businesses in obtaining access to finance. These can include:
- British Business Bank (BBB): It is a state-owned business finance bank that aims to grow the supply of finance to SMEs. They do not lend themselves, but they collaborate with partners such as banks and other lenders to provide access to finance through programs like the Start Up Loans program and other guarantee schemes.These guarantees lower lenders’ risk, making them more likely to lend to small businesses.
- Regional Growth Funds and Local Enterprise Partnerships (LEPs): These usually provide grants or loans, especially for businesses operating in specific regions with a view to stimulating local economies.
- Innovate UK: If your business is innovation-related, Innovate UK provides grants and assistance for research and development initiatives.
- It is definitely worth trying out these options since they are specifically intended to fill the gap in funding for small businesses.
- Beyond government initiatives, here is another smart move for smaller businesses: hire a financial coach or expert. Think of them as your personal financial trainer. An experienced financial advisor, well-versed in the intricacies of finance and investment, can be an absolute game-changer. They can help you:
- Create a persuasive business plan: Lenders prefer a well-defined, well-reasoned plan that shows the viability of your business and your capacity to repay the loan. A good business advisor will be able to assist you in developing this plan to address lenders’ concerns directly.
- Find the right finance options: With their extensive knowledge of the market, they can direct you toward the ideal loan plans and lenders best suited to your individual financial condition and needs. There are just so many options available nowadays, ranging from bank loans to alternative finance providers, and a professional will be able to guide you through the field.
- Tighten up your financial projections: Lenders are single-minded in their focus on your capacity to repay the loan by the due date. A professional can assist you in making realistic and resilient financial projections that will instill confidence in prospective lenders.
- Keep in mind that lenders care most about one thing: Your capacity to repay the loan within the set period. This holds particularly true for unsecured loans, where the lender has more to lose, and they will take a more stringent approach to screening applicants.
Key Things to Consider Before You Get Started
So you are looking into commercial financing? Excellent! Just before you get started, here are the key things to consider:
1. What Security Can You Offer?
This is likely to be the largest question you are asked, particularly if you are considering a secured loan. In order to receive that commercial finance, you will have to provide something of value as security. Here are some of the most popular items that can be used:
- Property: This is usually the biggie. If you have commercial premises, a residential property, or even some land, these can be extremely valuable as collateral, particularly if you need a higher amount. Lenders are more confident with a large asset securing the loan, and usually, the more valuable your collateral is, the more you can borrow. It is a simple principle of commercial finance.
- A small tip: In unstable economic weather, lenders may be more conservative and provide no more than 70% (and sometimes even less) of the market value of the property. This is how they build a safety net against possible market fluctuations.
- Supplies or Equipment: If your company is dependent on expensive equipment, vehicles, or even stock, these too can be used as collateral. In the case of minor loan needs, employing vehicles or individual items of equipment as collateral is not uncommon. Some lenders are even very accommodating and will let you “refinance” equipment already in place, which is to say, use it to release additional funds for your company.
- Invoice Finance: It is a great choice for companies with loads of unpaid invoices. Basically, you can take your unpaid invoices as security to borrow cash immediately. The lender will lend you a percentage of the value of the invoice, and once your customers pay, the lender takes their fee, and you take the remainder. It is a great way to supplement your cash flow without having to wait for payments from your customers.
2. Think About Your Credit Record
Your credit record is your report card of finance, and it greatly influences the interest rate you will be given. It is a straightforward formula: a good credit record tends to result in a lower interest rate. Why? Because lenders view you as a less risky proposition.
There are bad credit commercial lenders who specialize in bad credit commercial loans. These loans may have slightly more interest or more stringent terms based on the additional risk to the lender, but they can offer a lifeline when other lenders would not take a chance. It is just a matter of getting the right fit for you.
3. Direct Approach vs. Consulting a Broker
You have two general options when it comes to commercial finance:
- Direct Approach: This involves approaching banks or other lenders yourself. It is a popular option, and if you already have an established relationship with a bank, it can be an easy place to begin. You will go directly through their loan officers and negotiate.
- Talk to a Broker: This is where things can get very interesting. Commercial finance brokers are business matchmakers and lenders. They know the market inside out, have vast experience with different loan schemes, and tend to have personal relationships with an extensive network of lenders, not only the high street banks but also specialist lenders and alternative finance providers.
Whereas brokers will charge a fee for their services (which may be a percent of the loan or a flat rate), it is usually an investment you will be happy you made.
Here is why:
- More Options: They can offer you a far wider array of loan products than you might be able to obtain on your own.
- Best Deals: Brokers make every effort to get you the best deal that matches your financial capabilities and certain business requirements. They are able to secure more favorable terms than you may negotiate yourself because they have insight into the complexities of lending and market conditions.
- Time-Saving: Borrowing and seeking loans takes time. A broker simplifies the process, doing much of the legwork for you.
- Expert Advice: They can assist you in getting your application ready, interpreting the small print, and even foretelling potential roadblocks.
Finally, whether you go direct or brokered is up to your personal comfort level, availability, and funding complexity. For most small and emerging companies, a quality broker can be a goldmine.
Conclusion
Commercial finance is a strong catalyst for business development in the UK. With knowledge about various types of loans, how collateral works, your credit history, and the advantages of seeking professional advice, you can feel confident in navigating the world of lending. Do not hesitate to research, ask questions, and consider all the possibilities open to you. Your business is worth the financial fuel it requires to succeed!
