What is Commercial Finance and how can it Help Grow your Business?

Posted on: September 22nd, 2016

Commercial Finance is the branch of finance related to the funding of the working capital and growth needs of a business. It includes asset based, term loan and cash flow-based loan structures.

Often commercial finance is synonymous with asset based lending or secured lending as the purpose of the finance is to fund the business, as opposed to an acquisition.

The following reasons help explain why commercial financing can help your business grow:

A Quick Way to Working Capital

With commercial financing, a middle market company can gain access to funds in a relatively short time. The approval process is relatively straightforward as it depends on the verification of the asset values.

Most businesses, especially service or distribution companies, have assets such as receivables or inventory its can use to attract commercial finance. Working capital enhancement is one of the primary uses of commercial finance.

Many commercial lenders are specialized in various sectors which makes it easier to attract working capital funding for your company.

A Quick Way to Seize an Opportunity

Because it can be quickly raised, it can help you capitalize on a fast moving opportunity in your business. Because commercial finance is working capital focused, you can bring in a line of credit and use it when you have a need for it.

Often new and unexpected growth can strain working capital unless funded through outside funding. Commercial finance can help you fill this gap.

Flexible Working Capital Management

When sales slow or a customer takes longer to pay, your cash flow can get stretched. With a line of credit, you can manage through this period easily, supported by extra cash that flows into your working capital on a temporary basis.

Added Capacity

Scaling the size of your business take capital and commercial finance can help provide equipment financing or a term loan to help you do this. You should always first look to fund increased capacity through a line of credit if possible.

Longer term loans such as mezzanine loans are best for acquisitions and major expansions where patient capital is required.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.