What are the Commercial Financing Basics?
Business owners will often look into Commercial Financing Basics as they may have a lot of Business Expenses to cover. They look into various options in order to build and maintain their businesses. It often happens where their budget ends up lower than the necessary expenses due to expensive upfront costs and other expenditures related to regulation matters. This is when the commercial loans comes to the scene.
A commercial loan is debt-based financing to advance funds to a business by a financial institution. The main purposes of those loans are to help with the financing of some expenses or operations related to equipment, inventory, or start-up capital which they cannot manage without additional liquidity. It’s normally a short term loan, which can go from 30 days to 1 year.
Commercial Financing Basics: The Types
Commercial Financing can be either secured or unsecured, single payment or installment.
Secured vs. Unsecured. A secured loan is a loan with guarantee of payment return from the business receiving the loan, on the other hand, an unsecured loan is a loan without guarantee of payment.
Balloon Payment vs. Installments. A single payment loan is a loan that requires a single payment of the total loaned amount, including the applicable interests, at the term of the loan duration. In that case the borrower doesn’t have to make a monthly payment. Such method is convenient by giving a lot of flexibility in the borrower’s budget and also by allowing the lenders to only focus on one single final payment. However it can also cause that people cannot pay at the end of the loan duration by not being prepared enough, and cause some financial issues.
An installment loan is a loan that requires several payments based on an established payment schedule. It allows the lender to be aware of the amount he has to repay, but they can be a bit problematic in case they have high interest rates.
Commercial Financing Basics: Pros and Cons
The advantages of a commercial loan are:
- You are guaranteed the financing during the established loan period.
- The lenders usually have different loan options to fit the borrower’s needs and budgets.
- You don’t have to share your benefits or your company with the lender, which is the bank in most cases.
- Some banks provide loans at low interest rates making it easier for the borrowers to repay.
- Banks also provide some tax benefits to small businesses.
The disadvantages of a commercial loan include:
- It can difficult to keep up with the monthly payments.
- The banks will likely have to verify all your credentials before accepting to provide you the loan.
- You might lose your personal properties if your loan is tied up on them.
- Some banks will prefer running businesses.
- The repayment interest rates may change at any moment making it harder for the borrower to repay.
In Conclusion, Commercial loans are done by mainly banks or alternative lenders to business owners to help them pay some extra expenses. There are several types of loans such as secured loans, unsecured loans, single payment loans, and installment payments. Each of them has its advantages and disadvantages. Because of these reasons, every borrower should keep those factors in mind when they are thinking about getting a commercial loan, as they might help them with good planning and preparation of the repayment process, and help them avoiding some financial problems with their budget.