What is Meant by Commercial Finance?

In the complex world of business and entrepreneurship, obtaining the right type of financing is frequently critical to success. “What exactly is commercial finance?” is a question that many entrepreneurs and business owners have. In this in-depth blog post, we delve into the world of commercial finance, deciphering its meaning, purpose, and the critical role it plays in driving business growth.

Understanding Commercial Finance:

Defining commercial finance
Commercial finance refers to a range of financial products and services tailored to meet the specific needs of businesses. Unlike personal finance, which addresses individual financial matters, commercial finance is designed to support the financial requirements of companies, both large and small.

Diverse financial products
Commercial finance encompasses a diverse array of financial products, each serving a unique purpose in the business ecosystem. These may include business loans, lines of credit, asset finance, invoice financing, and trade finance, among others.

Business loans
Business loans are a fundamental component of commercial finance, providing a lump sum of capital that businesses can use for various purposes, such as expansion, equipment purchase, or working capital. These loans may be secured or unsecured, depending on the terms and risk profile.

Lines of credit
Lines of credit offer businesses a flexible source of funds that can be drawn upon as needed. This revolving credit facility provides a safety net for operational expenses, helping businesses manage cash flow fluctuations effectively.

Asset finance
Asset finance allows businesses to acquire essential assets, such as machinery or vehicles, without the need for a large upfront payment. The asset itself serves as collateral, making it a popular choice for companies looking to invest in equipment.

Invoice financing
Invoice financing, also known as factoring, enables businesses to access funds by selling their outstanding invoices to a financial institution. This accelerates cash flow and provides immediate liquidity for ongoing operations.

Trade finance
Trade finance facilitates international trade by providing funding and mitigating risks associated with cross-border transactions. It includes services such as letters of credit, export financing, and currency exchange solutions.

Tailored solutions for industries
Commercial finance is not one-size-fits-all; it can be tailored to meet the unique needs of various industries. Whether in manufacturing, retail, healthcare, or technology, businesses can find financing solutions that align with their sector-specific requirements.

Risk management
Commercial finance also involves risk management strategies. Lenders and financial institutions assess the risk associated with a business’s financial health, industry trends, and market conditions to structure financing solutions that are viable for both parties.

 

In conclusion, commercial finance is a dynamic and indispensable aspect of the business world. From providing working capital to facilitating international trade, the diverse range of financial products under the umbrella of commercial finance empowers businesses to thrive, expand, and navigate the complexities of today’s competitive markets.

For businesses seeking financial solutions, it’s essential to understand the specific needs of their operations and explore the array of commercial finance options available. Seeking advice from financial experts and reputable lenders can help businesses make informed decisions that pave the way for sustained growth and success.

 

What is the Difference Between Corporate Finance and Commercial Finance?

In the intricate world of finance, terms like “corporate finance” and “commercial finance” often intermingle, leading to confusion about their distinct roles and purposes. In this blog post, we aim to demystify these terms, providing clarity on the differences between corporate finance and commercial finance and how they each contribute to the financial landscape.

Understanding corporate finance


Scope and focus:

  • Corporate finance primarily deals with the financial decisions made within a corporation. It involves managing the capital structure, making investment decisions, and determining the company’s overall financial strategy.
  • The focus is on maximising shareholder value and ensuring the company’s long-term financial health.

Capital structure:

  • Corporate finance encompasses decisions related to the company’s capital structure, including how to raise capital and the mix of debt and equity. This involves considerations such as issuing stocks, bonds, and managing debt levels.

Investment decisions:

  • Corporate finance professionals evaluate potential investments, weighing factors such as risk, return, and the impact on shareholder value. This includes decisions about mergers and acquisitions, capital expenditures, and other strategic investments.

Dividend policies:

  • Determining the company’s dividend policies falls under corporate finance. This involves deciding how much of the company’s profits will be distributed to shareholders in the form of dividends.

Understanding commercial finance

 

Client focus:

  • Commercial finance, on the other hand, is broader in scope and focuses on providing financial solutions to businesses. It caters to the financial needs of a wide range of businesses, including small enterprises and large corporations.

Diverse financial products:

  • Commercial finance encompasses a diverse set of financial products and services aimed at supporting businesses. This includes business loans, lines of credit, invoice financing, trade finance, and other tailored solutions.

Operational funding:

  • The primary goal of commercial finance is to provide businesses with the necessary funding to support day-to-day operations, expansion, and strategic initiatives.

Risk management:

  • Commercial finance involves assessing the financial health and risk profile of businesses to structure financing solutions that meet their unique needs. It often includes risk-mitigating strategies tailored to the business environment.

Distinguishing between the two

 

Scope of operations:

  • Corporate finance is more internally focused, dealing with the financial decisions and strategies within a specific corporation. Commercial finance, on the other hand, extends its services to a broader range of businesses, addressing their financial needs.

Decision-making authority:

  • Corporate finance decisions are typically made by the company’s executives and financial management team. In contrast, commercial finance decisions involve collaboration between businesses and financial institutions, or lenders.

Scale of transactions:

  • Corporate finance often involves large-scale financial transactions, such as mergers and acquisitions, while commercial finance caters to businesses of varying sizes, including small and medium-sized enterprises.

In summary, the key distinction between corporate finance and commercial finance lies in their scope, focus, and target clientele. Corporate finance revolves around the financial decisions within a specific corporation, optimising its capital structure and investments. Commercial finance, on the other hand, provides a broader array of financial solutions to businesses of all sizes, supporting their operational and strategic needs. Understanding these differences is crucial for businesses seeking the right financial solutions to navigate the complex world of finance.

The Pros and Cons of Commercial Loans

You’ve undoubtedly heard of commercial loans as an opportunity to obtain money for your business if you’re a business owner or an aspiring entrepreneur. Although a commercial loan can alter the course your business takes, it also comes with a variety of difficulties. At UK Property Finance, we will provide you with a realistic picture of what to expect when contemplating this type of borrowing.

The pros of commercial loans

  • Access to Capital: Perhaps the most obvious advantage of commercial loans is their access to a substantial amount of money. The influx of capital can be a lifeline for any business.
  • Versatile Funding: One of the great things about commercial loans is their versatility. The funds can be used for various purposes, from purchasing equipment and property to covering operational costs or even refinancing existing debt you may have.
  • Potential Tax Benefits: In many cases, the interest paid on commercial loans is tax-deductible.
  • Building credit: Successfully managing a commercial loan can help establish or improve your business’s credit profile. This opens doors to better financing opportunities down the road.
  • Extended Repayment Periods: Commercial loans often come with longer repayment periods compared to short-term loans. Giving your business more time to generate revenue will result in a healthier cash flow.

The cons of commercial loans

  • Interest Costs: It’s not all sunshine and rainbows. Commercial loans include interest rates, and these rates might be significant depending on your creditworthiness and the lender.
  • Security Requirements: Many lenders require security to secure a commercial loan. This means you may have to put up valuable assets, such as a property or some form of equipment. If you don’t repay the loan, you risk losing those assets.
  • Stringent Qualification: Getting approved for a commercial loan isn’t a walk in the park. Lenders typically have strict criteria, including credit score requirements and detailed financial documentation. Start-ups and businesses with limited credit histories may find it particularly challenging.
  • Overleveraging Risk: Taking on too much debt with a commercial loan can be risky. Overwhelming financial commitments might limit your company’s potential for development and put it in danger.
  • Long-Term Commitment: Commercial loans are usually long-term commitments that can extend for several years. This long-term commitment could restrict your ability to change with the times or take advantage of fresh chances.

In conclusion, commercial loans may be a useful instrument for supporting the expansion and success of your company. They do not, however, offer a universally applicable answer. Consider your company’s specific requirements and circumstances while carefully weighing the advantages and disadvantages. Before deciding, speak with financial professionals and consider your choices. In the end, a carefully thought-out commercial loan may be a step towards realising your business goals.

 

How Easy Are Commercial Loans to Get?

As with most things, the answer to this question depends on whom you ask. For some, getting a commercial loan is as easy as walking into any major lender and filling out a form. For others, it is a very time-consuming and laborious procedure due to the presence of blemishes in their financial history.

The ease of getting a commercial loan is no different from that of applying for a conventional loan. There are two primary categories of commercial loans available: secured and unsecured, both of which come with their own terms, conditions, and requirements.

What are the differences between secured and unsecured commercial loans? Let’s find out.

Secured commercial loans

Most commercial loans are issued in the form of secured loans. This is where the applicant provides security (i.e., assets) of sufficient value to cover the costs of the loan, as something of an insurance policy for the lender.

This security can take the form of anything the lender is willing to accept but is usually something like a home or business property. The value of the asset will determine how much the applicant is able to borrow and can even influence the rate of interest they pay.

Secured commercial loans in general typically have a lower rate of interest due to the fact that there is very little risk of capital loss for the lender. It is also possible to qualify for a secured loan with poor credit, no formal proof of income, or a history of bankruptcy.

The assets used to secure the loan are at risk of repossession in the event of non-repayment as agreed in the loan contract.

Unsecured commercial loans

To qualify for an unsecured commercial loan, you need to demonstrate your creditworthiness and strong financial position to the lender. This is due to the fact that no security is required to cover the costs of the loan.

An unsecured commercial loan application is usually much quicker and easier to complete than a secured loan application. It can also be the ideal facility for smaller and newer businesses, which may not have the on-hand assets needed to qualify for a secured loan.

There is also no risk of property repossession, but unsecured loans are rarely available in sums of over £50,000. In addition, interest rates and borrowing costs on an unsecured loan may be slightly higher.

A case of qualification criteria

Whether any given applicant is able to qualify for a commercial loan will be determined entirely by the unique policies and lending criteria of the issuer in question.

Generally speaking, you will need to provide evidence of your fairly strong financial position at the time of your application, indicating your capacity to repay the loan on time.

Your creditworthiness and on-hand assets will determine whether a secured or unsecured loan is the better choice for your requirements.

Before applying, consult with an independent broker to discuss the available options and ensure you get the best possible deal from a reputable lender.

Why Is Commercial Finance More Expensive?

Commercial finance provides businesses of all shapes and sizes with access to essential funding for almost any legal purpose. Where available, commercial finance rates are usually slightly higher than those of a conventional residential mortgage.

For a rough idea of what to expect, use our helpful commercial finance calculator to see how commercial finance works in practice.

Where commercial finance rates and/or borrowing costs in general exceed those of conventional borrowing by a significant margin, particularly when it comes to mainstream lenders as opposed to specialist commercial finance providers, there is often a reason why, but what is it about commercial finance that makes it a costlier financial product than a comparable conventional loan?

Elevated risk for the lender

One of the factors that contributes to the higher costs of commercial finance is the elevated risk for the lender. Commercial finance is considered slightly riskier in the sense that the borrower’s ability to repay is often based largely on the performance of their business.

As there are no certainties in any sector or line of work, there are no concrete guarantees the business will be able to keep up with its repayments long-term.

This risk is, however, largely augmented by the provision of adequate security to cover the costs of the loan. This is also why the security a lender may request to cover the costs of a commercial loan would need to have a higher combined value than those used to cover a more conventionally secured loan.

Different types of commercial finance

Commercial borrowing costs can also be affected by the type of commercial finance the business or individual applies for. In some instances, commercial finance is applied for and accessed in the form of an overdraft, in which case the borrower can expect higher overall borrowing costs than a similar applicant taking out a commercial loan from the same lender.

Competition also plays a role in establishing commercial finance rates and overall borrowing costs. There is not quite as much competition in the commercial lending landscape as in the residential mortgage sector, which means lenders do not have to be quite as competitive with the rates they provide.

Along with these factors, additional considerations like the applicant’s credit history, the performance of their business to date, their business acumen, and so on may all influence the competitiveness of the deals they are offered.

In most typical cases, commercial finance costs at least slightly more than conventional borrowing.

Independent broker support

Irrespective of how much you intend to borrow and your intentions for the funds, seeking independent broker support at an early stage is essential. This will enable you to not only compare as many options as possible from specialist lenders across the UK, but also present your case in such a way as to open the door to competitive rates.

For more information on any of the above or to discuss your requirements in more detail, call anytime for an obligation-free consultation with a member of the team.

For International Individual Commercial Investors, Britain Is Best

The picture from a British investor’s view right now might not be quite so rosy. Nevertheless, it seems as far as private property investors on a global basis are concerned, commercial real estate in the UK is as hot as it gets. More people than ever before are eyeing up the UK as a commercial property investment hotspot, the latest figures reveal.

Specifically, the report reveals that private buyers accounted for around 27% of all global commercial property transactions last year, while 25% of private wealth is tied up in real estate investments.

“We predict that private investors will continue to take global market share as both the number of wealthy individuals and their assets grow. The number with $30 million or more in net assets rose by 6,340 in 2016 alone, taking the total to  193,490.

“We expect that the appetite from private investors for commercial property will continue to increase. The report shows that 32% of ultra-high net worth individuals will invest in cross-border real estate deals in the next two years.”

In terms of wealthy investor populations seeking overseas investment opportunities, the report showed that the United States is slowly but surely being challenged by Asia. As it stands, there are just over 27,000 fewer ultra-wealthy investors in Asia than there are in the United States. However, it is predicted that this will shrink to no more than around 7,000 within the next ten years.

One of the effects of the global financial crisis has been a growing tendency among investors to diversify, both in terms of their portfolios and their chosen geographical locations.

“The top markets targeted will primarily be those exhibiting solid fundamentals, including tenant demand, liquidity, and transparency.”

“However, increasingly, we are advising clients not only on prime office, retail, and hotel assets but also strategic investments in growth sectors such as urban logistics, leisure, and specialist operating assets, including student housing and multi-housing. Overall, property as an asset class remains high on the agenda of private investors.”

Closer to home, investors at all levels in the UK continue to view commercial property investment as a relatively safe haven for the immediate future, at least. Once again, capital values have risen 2.5% across UK commercial property, with rental value growth having come out at 0.8%. Not quite as strong as the 1.1% growth recorded during the same period last year, but reassuring, to say the least.

Of course, the effect Brexit is likely to have on all the above remains the single biggest unknown for domestic and global property investors alike. So while investment from overseas investors may be on the rise, few are throwing caution to the wind, having acknowledged that things could look very different just two years from now.

A Brief Insight on Secured Commercial Loans and Unsecured Business Loans

If you are thinking of starting up a new business or you are looking to expand an already successful corporate enterprise, the chances are that you will get absolutely nowhere and at light speed if you do not have access to the required type of financing you need.

When trying to source suitable commercial finance products, an applicant will typically achieve funding by means of at least one, but sometimes multiple, business loan(s). When the time arrives, the borrower will ultimately be required to decide whether to apply for a secured business loan or an unsecured commercial loan product.

With this in mind, we need to understand the main differences between these two types of finance so that we can make an informed decision and take the most logical route.

What are secured loans for businesses?

A secured business loan is a long-term borrowing product that is available exclusively to applicants who are able to offer some type of collateral as security against the sum being borrowed. In most cases, this type of financing is usually secured on a property or suitable commercial assets. Although the borrower will typically use a commercially owned building or business asset as security, there are cases where secured business loans are taken out against an applicant’s home or primary residence.

Provided you are entirely certain that you can pay the loan back on time and in line with the terms and conditions set out in the agreement, a secured loan is often the most affordable type of financing available to the modern business borrower. As the loan is secured against an appropriate property or business asset, the rate of approval is generally exceptionally high, and your personal credit history and company finances will not be scrutinised as they would normally be when applying for an unsecured borrowing product.

Secured business loans are usually paid out at quite a fast pace, and the application process itself is incredibly quick and simple to understand. Of course, there is a downside to all of this, which is the fact that your assets will be removed from your possession and sold on to a third party should you find yourself unable or unwilling to make the required repayments in a frequent and punctual manner.

What is an unsecured business loan?

Unsecured business or commercial loans are short- to mid-term borrowing products that are not secured against an applicant’s assets. The main benefit on offer here is that if you are unable to pay an unsecured debt, you will not lose your home or valued assets as a direct result. However, with an unsecured loan, you won’t be able to borrow anywhere near as much as you could if you secure the funds against something of value. The application process is also a lot less forgiving, with much tighter restrictions, and you will also find that the interest rates can be quite high if you are successful in terms of accessing the funds you need to help your business grow and progress to the next stage.