What is Commercial Finance?

Malcolm Tatum

Commercial finance is the straightforward process of providing loans to different types of companies that are engaged in money making efforts. As such, commercial financing does not involve the process of making loans for such items as the purchase of a private home or as a means of financing the purchase of a personal vehicle. Commercial finance has to do with lending funds to businesses by either commercial banks or another business entity.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Commercial finance will involve any type of loan that is extended to a business. The business loan is most often structured as a secured loan. With secured loans, the business will pledge some asset in the possession of the company as security or collateral for the total amount of the loan. The asset cannot be sold for the duration of the loan without the expressed consent of the lender. In the event that the business defaults on the loan, the lender has the right to foreclose and seize control of the asset that was used as security.

A secured business loan that is obtained from an entity that engages in commercial finance is generally used to enhance the function of the business in some manner. A common application of a long term business loan would be the acquisition of real estate. The real estate could involve purchasing property adjacent to facilities and land already in the control of the company. This will make it possible for the corporation to expand current operations in locations where the business already operates. At other times, the real estate may be purchased to allow the company to set up operations in an entirely new locale.

Commercial finance may be used in the short term to help obtain receivables from invoices before customers submit payment. Referred to as factoring, this type of commercial finance allows the company to borrow funds based on the Accounts Receivable for a given billing period. Generally, the company is advanced roughly 80% of the face value of the invoices. Payments are submitted by customers to the lender. Once the balance of the loan is repaid, the lender releases the remainder of the face value of the invoices to the company, less a small percentage for the transaction.

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