Commercial financing: All you need to know

Commercial construction loans

Commercial construction loans are short-term funding instruments used to pay for building new income-producing properties or for the expansion, refurbishment or conversion of existing commercial properties. This type of loan typically pays out in instalments as each phase of the work is completed rather than all at once like a commercial mortgage. The loan is paid back when construction is complete, often by converting the debt to a less expensive commercial real estate loan. 

Invoice financing

Also known as account receivables financing, this type of loan allows you to borrow against the value of your unpaid invoices and is best for B2B organizations. The lender will usually provide up to 95% of the invoice value within a few days or even hours of the bill being raised.  Your invoices act as security for the loan, no added collateral required.

Equipment financing

Buying big ticket machinery and equipment can put a major dent in your cashflow, but equipment loans can pay for your new plant and machinery without causing financial stress. Equipment loans are ‘self-collateralizing’ – they use the asset you’re financing as security, similar to a car loan or a residential mortgage – so no added collateral is required. You use the equipment as you pay for it and the lender maintains a lien on the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright. 

Merchant cash advance

Available for businesses that accept customer payments by credit and debit card. You borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the merchant cash advance back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.

Revenue-based financing

Revenue-based financing functions like a merchant cash advance but with higher borrowing limits. Based on the size and regularity of their total revenues, (not just their credit card sales), businesses may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from their daily sales. This type of loan can usually be secured quickly as qualification rules are less intensive and credit scores are not so critical. No added collateral is required.

SBA Loans

There are many types of SBA loan, but for small and medium-sized businesses, regular SBA 7a loans, SBA express loans and SBA microloans may be the best fit. 

• SBA 7a loans

SBA 7a business loans are backed by the US Government up to 85% of loan value and can provide up to $5million to qualifying borrowers with repayment terms as long as 25 years. Government backing reduces risk for the banks, credit unions and online lenders who offer these loans meaning the funds usually come with much lower interest rates and fees than other commercial lending, However, meeting the SBA’s strict rules of eligibility can be tough. As well as an approval process that can take several months, organizations will typically need to have been in business for at least four years and have annual revenues over $180,000. Your personal credit score must be at least 680. Collateral may be required.

• SBA express loan

SBA express loans are a faster alternative to the standard 7a loan program. Offered by the same pool of lenders, express loans can give SMEs up to $500,000 to support their business and you will usually get a ‘yes/no’ indication within 36 hours of making your application. Note that SBA express loans are only 50% backed by the US Government, so lenders carry more risk. This means interest rates and fees are higher with express loans than their 7a counterparts. Collateral may be required.

• SBA microloans 

Nonprofit and community-based lenders can provide SBA Microloans to borrowers that may struggle to secure standard business financing. Available up to $50,000, these loans can be ideal for entrepreneurs who are seeking a smaller sum to start or grow their business. SBA microloans also come with more relaxed qualifying rules and can usually be secured with FICO scores as low as 500, or even with no credit score at all. However, applicants should be aware that these types of loan often require collateral to secure the debt or a personal guarantee that makes you personally responsible for the loan. 

Inventory financing

Inventory financing can come as a short-term loan, or a revolving line of credit and it is used to buy products that a business will sell at a later date. This type of funding allows businesses to pay for the stock that they must hold in warehouse, but which will take time to sell. Financing can reduce pressure on the organization’s cashflow and allow them to buy products in bulk to gain a discounted price. It is also particularly useful for businesses that have large seasonal trade swings. The loan is usually paid back in regular instalments and must be cleared before a new round of financing can begin. The products act as collateral for the loan, no added security is required.