A company with commercial finance is considered having an asset based loan, since commercial finance is equated to business assets. In general, commercial financing is the process of offering long-term and short-term loans to different types of businesses.
Commercial financing is not just the domain of banks. It can be offered by private entities recognized under law. Commercial finance requires some time to understand and assimilate. Since there are multiple financing options, finance training combined with experiential learning is how to gain knowledge on this subject.
Why commercial financing providers prefer to give secured loans over unsecured?
The question is evident and self-explanatory; and surely does not need finance training to get answered. Secured loans offer greater security and guarantee the relinquishment of lent funds. Secured loans are more prominent due to the high-uncertainty faced by many businesses. Since these are asset-based commercial financing instruments, banks require security in the form of business assets. Approval of the amount of funds is directly proportional to availability of company assets and their valuation.
Banks may require a company to maintain a good credit to obtain commercial finance. Even if a company does not have this, the bank determines the liquidity of business assets and its immediacy.
How to make use of the different types of commercial financing options
This is the most popular type of commercial financing. Working capital has a simplistic definition in essence like any finance training manual will elucidate. But as simplistic as it is, it could get complicated as well.
There are more businesses seeking working capital than any other type of commercial finance. Since the nature of business sales is dynamic, it could hit crests and troughs. When in negative deficit, a business might need working capital to pull through. Banks that have a good relationship with a business grant this loan without a second thought.
Account receivable factoring
A business always has receivables. In other words, receivables are money owed to a business by its customers. They are projected income, and a guaranteed one at that. In the commercial financing business world or like any finance training expert will reassure you, receivables are viewed as income even if they are deferred income.
On account of this fact, receivables are also viewed as collateral. A business places its projected income bills as collateral to secure commercial finance. The age of receivables has a bearing on the amount of commercial finance disbursed. If the receivables are older, the business can expect lesser commercial finance.
Account receivable factoring is a perennial activity in commercial financing. Businesses use this option extensively, even disregarding any finance training protocol that seeks restraint on this part. Since this option helps free-up frozen income, it helps businesses keep their wheels moving.
Inventory loans are commercial finance obtained by expressing inventory or stock as collateral. The value of the stock has a bearing on the amount of inventory loan that is disbursed. There are a lot of benefits of this type of loan for businesses and lenders. One of them is the immediate availability of capital to buy immediate stocks or inventory.
Obtaining inventory loans can be a cyclical activity. So much so that some businesses have an automated inventory loan procedure with their lenders.
The importance of finance training for borrowers and lenders
Commercial finance is an expansive topic of discussion, debate and research. It is also a tricky area. Wrong use of commercial financing products can spiral a business into bankruptcy.
Commercial finance training can be on the job or by way of institutes. But nothing beats experiential learning. If used correctly, commercial finance can provide more than back-up money for businesses. They have the potential to become growth vehicles for future expansion plans.