Commercial Lending

An investment in your small business

By CE Wynn

Whether you're just starting out or have been running your small business for a considerable time, at one point or another you may need to consider some form of commercial lending. Some types of debt in business can be good, and will assist in helping you in getting started or in achieving growth.

Commercial finance is essentially money lent to fund certain activities involved in starting up or growing a business. From a bank’s perspective, commercial lending is high risk - and no wonder with such a large number of small businesses failing in just the first few years. This being the case, a commercial lender is usually kept separate from personal lending, and therefore commercial lending rates can differ quite significantly.

Types of Commercial Lending

There are two main types of commercial lending, available to businesses:

  • Overdraft. Usually attached to your normal business transaction account, with a set limit on how much the business is able to go into debt while still using the account to pay ordinary expenses. This type of account is very convenient for business, and is often used where assistance maybe required improving cash flow.
  • Business Loans. A separate account, where a lump sum is provided, by either drawing directly from the account or transferring the available funds to a transaction account. There is usually a set repayment period, and if additional funds are required it is generally necessary to refinance the loan. This type of loan is usually better where initial finance is required at startup or in the purchasing of business assets.

Commercial Lending Benefits

There are two main reasons why a small business would take on debt. The first would be at start up - unless you had a windfall in cash or you had a large sum stashed away, without this initial finance it may be impossible to start the business you dreamed of.

Startup commercial financing could be used to:

  • Purchase an existing business.
  • Cover possible delays in income and the need to pay for outgoing expenses until income starts rolling in.
  • Purchase necessary assets, including anything from a forklift to furniture for the office.

The other reason for obtaining commercial financing is if your company is experiencing growth, and finance is required to assist in this phase. At this stage the business has become relatively successful and has possibly started to make some profit. However, the issues with growing a small business can be huge, and a few reasons for finance may include:

  • Need for a larger site due to staff increase or larger inventory.
  • To purchase another existing business, thereby increasing potential income or market share in the business.
  • For the funding of cash flow required to employ staff, buy inventory or pay for materials, which may require payment before income will be received for the goods or services provided.

Be Warned on Commercial Lending

When looking at financing a business, especially at startup, it's very important to do as much research as possible. Research not just the financing you may be able to obtain, but also the business itself. Will the business be able to make the necessary repayments to meet the conditions of the finance agreement, or will additional funding be needed until the business gets up and running?

The biggest problem with starting out in a small business is that there are a lot of unknowns relating to just how much money the business will earn. What happens when the income you thought the business would earn, or that contact you were guaranteed to win, doesn't eventuate? Do you have a backup plan that will allow you to continue on with the loan repayments and costs that continue to come in, even when the business is not making any money?

All these concerns may contribute to the high failure rate of small businesses. Although commercial lending can be enormously beneficial for any small business, it can also be very risky. So do your research, have a plan and be prepared for the unexpected.