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.

Mezzanine debt loans occupy the risky echelon beneath the bank but ahead of the equity in a capital structure. They are naturally subordinated to the bank loan via an intercreditor agreement wherein the senior lender retains the power to block their interest or force them to standstill.

In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.

The deal world thrives on the belief that the institution providing acquisition financing will deliver on their promise. Lenders usually telegraph their capital capabilities early on during the sales pitch and give their deal sizes and hold levels for their fund.