Commercial loans and commercial finance

What is commercial finance?

Commercial finance is another term for business finance or business funding — it’s lending designed for commercial enterprises rather than individuals. Commercial finance is often talked about in contrast to personal finance.

There are many types of commercial finance. Originally, commercial finance would have come from mainstream lenders like banks, but nowadays there is a variety of alternative finance available too.

Types of commercial finance

Commercial loans

The simplest form of commercial finance is a commercial loan. You agree on an amount, a repayment period and the cost of finance (for example, the interest rate and fees).

Commercial loans can be secured or unsecured. Secured loans are usually cheaper, because the lender is taking a lower risk, but you need to have assets to use as security. Unsecured loans are useful for companies that don’t have enough assets to get a secured loan.

Commercial loans can come from a variety of sources. They are offered by the mainstream banks, and specialist independent lenders, as well as peer-to-peer lending platforms.

Because a commercial loan is designed for larger businesses, they’re largely unregulated. This means you should take care navigating the market, because you won’t get the sort of projections we’re used to as consumers.

Smaller businesses, particularly sole traders and partnerships, will often choose small business loans as their favoured option.

How do commercial loans work?

Loan sizes for commercial finance are larger than standard business loans, which means there are fewer lenders willing to take on this risk. The good news is, this means lenders are far more likely to take a custom view of your business.

It’s common in commercial finance to combine two or more finance products. For example, you could use a term loan for patient capital to grow, alongside another kind of commercial lending to help with working capital finance. In this way you can equip your business with two types of commercial loans, one for cash-flow stability and the other for long-term growth.

When are commercial loans useful?

Commercial loans are popular for a whole range of business scenarios:

  • Funding a new contract
  • Management buy-outs (MBOs)
  • International expansion
  • Turnarounds and pre-packs

Who can offer a commercial loan?

Unlike smaller business loans, major banks are more likely to compete directly with each other to lend to you.

Although the big banks are involved, the core of the commercial lending market is an increasingly broad range of challenger banks and independent lenders who compete on speed, service, and flexibility.

Other types of commercial finance

Commercial finance types are extremely varied. The first way to compare commercial finance products is by seeing whether or not they require security (or ‘collateral’).

Secured commercial finance is backed by property or assets, which could range from commercial property and business equipment through to the personal home of the business owner.

Alternatively, unsecured commercial finance doesn’t require security, but because the risk is higher for the lender they will look closely at your credit rating and may require a personal guarantee.

Asset finance

Speaking of assets, another major type of commercial finance is known as asset finance. This refers to both funding to acquire assets, and funding backed by existing assets.

Asset finance is a wide area — it might mean equipment finance and plant machinery finance, but it could also refer to asset refinance.

Invoice finance and other receivables finance

Invoice finance is a popular form of commercial finance, used by businesses that trade on credit. It’s a simple idea — the lender advances you cash based on your receivables (i.e. unpaid invoices) — but there are lots of variations that suit different business situations.

Discounting is arguably the simplest form, where you deal directly with the lender and carry on with your customers as normal. Factoring, on the other hand, also includes credit control, so your customers deal with the lender and the lender ensures prompt payment of invoices.

Selective invoice finance is similar to either of the above, but you specify individual invoices rather than financing the whole sales ledger.

Meanwhile, supply chain finance and trade finance are in the same vein, but designed for wholesalers and businesses that trade internationally.

Commercial property finance

In another area of commercial finance, there is a range of property finance. This includes commercial bonds — the commercial form of perhaps the best-known type of lending — and property development finance, which is designed for developers looking to expand their property portfolio.

You could also consider auction finance to be a type of commercial finance — although it can be available to individuals, it’s also suitable for property developers and buy-to-let limited companies.

Specialist commercial finance

One of the best things about the rise of alternative finance is the huge breadth of specialist lenders and products on the market now.

For example, some companies cater for specific sectors using niche products like finance for ecommerce (ideal for companies that sell online), merchant cash advances, a type of unsecured commercial finance that’s very popular with the retail and hospitality sectors.

With a range of options on the market, many businesses choose to use commercial finance brokers to help them find the right option.