What is commercial finance and which type is right for you?

Jacob Overs

Thursday, 06 February 2020

Every business owner knows that in order to make money, you have to spend some.

But knowing how to get fast funding, or even appropriate funding, is a different story. On top of that, business owners can save tons of money just by shopping around before choosing a lender, in order to find the most appropriate offering for their business needs.

But finding commercial finance that works as it should (and doesn’t break the bank, or more specifically—your business) isn’t a matter of chance. Valiant works with over 80 lenders, from big banks to smaller fin-techs, and they can narrow down your options to find a stellar deal on your commercial business loan. But first, you’ll want to understand how commercial finance actually works.

What is commercial finance used for?

Commercial finance helps businesses grow, expand and achieve their goals, both short and long-term. The type of commercial finance you apply for will depend on what you’re looking to invest in.

For example, if you’re looking to open a second office for your business, a commercial property loan may be the best fit for you. Perhaps you’re looking to invest in new staff, expand your line of products, build out teams or purchase new equipment. In this case, you may want to look into a standard commercial loan.

Of course, there are several types of commercial finance (and ways to structure each type of loan). Let’s dive in…

How does a commercial loan work?

Commercial loans often require collateral, also known as security, used as a back-up or ‘plan B’ in case you default on your loan or declare bankruptcy—touch wood! Your lender will typically require a property, piece of machinery or other (large) asset that your business owns as security.

But not all properties are considered equal. Securing your loan against a commercial property, such as an office space, building or warehouse is ideal, as this makes you less of a risk in the eyes of your lender. Reason being: your lender is aware that an office space is typically easier to value and sell, compared with, say, a childcare centre or car yard.

Also note that commercial loans differ from residential loans in that you typically need a larger down payment (deposit) upfront. Rather than the typical 20% deposit recommended when borrowing for a mortgage, commercial loans may require a 20-30% down payment, minimum.

For this reason, commercial loans are usually better suited to larger businesses with more cash to burn, but if you’re still growing, don’t worry—you have options, including unsecured loans, which do not require assets for security.

Types of commercial business loans

There are a range of commercial business loans available, including but not limited to:

Commercial property loans

Good for: a dazzling new office or retail space.

Commercial property loans may be a good option if you’re looking to purchase land or property for your business. Imagine what you could do with a new office, shopfront or entire apartment block. A commercial property loan can really help your business expand and grow—after all, a new space means more room for larger teams, facilities, more stock... Whatever your business could use more of.

Similar to a regular home loan, there are different ways to structure and pay back a commercial property loan. Choose from fixed and variable interest rates, interest-only repayments, or principal + interest repayments.

Business term loans

Good for: businesses who need predictable payments.

Business term loans are a little more versatile than commercial property loans. They can be used to invest not only in property, but a range of business assets like equipment, vehicles and machinery.

You may choose to have a fixed or variable interest rate, and a set loan term that is comfortable for you. Just like a regular home loan, a term loan allows a business to make consistent repayments over time, which is especially useful if you like the idea of knowing exactly when your next payment is due.

Line of credit

Good for: businesses who need flexibility.

A line of credit is an arrangement made with your lender in which you can access funds (up until a set agreed amount) if and when you need to. Though the cash is accessible for you at any time, you’ll only pay interest on the money you use.

This can be an attractive option as it means you have funds to fall back on, but you only pay for what you use. In other words, consider the peace of mind free of charge. The accessibility and flexibility can be a huge plus, because every business owner knows you just can’t predict everything… Sometimes you have to go with the flow.

Unsecured loans

Good for: small businesses.

Unsecured loans are, unsurprisingly, riskier for lenders to offer. Rather than having a property or asset for your lender to use as collateral, the loan is not secured by anything. While this makes funding easier to access for small business owners, it’s not the safest bet for a lender, as they’ll be left with nothing if you default on your loan.

For example, let’s say you have a secured loan, using your office block as security. If you find yourself in an unfortunate situation where you’re no longer able to pay back your principal and interest, your lender will take your office block away, and essentially use it to pay the loan off themselves. Lenders don’t have this peace of mind with unsecured loans.

Because greater risk is involved, unsecured loans usually come with higher interest rates.

Equipment finance

Good for: a new company car...or whole fleet.

If you run a transportation company, or simply need a new vehicle for work, an equipment finance loan could be a good option for you. These loans are specifically designed for purchasing equipment, which includes anything from a fancy fleet of cars to a new photocopier.

Equipment finance may also be suitable for tradesmen or truck drivers who are always on the move, or need to carry equipment with them on the job.

Is commercial finance right for my business?

Commercial finance is something to consider if you’re looking to grow or expand your business or increase cash flow. But there is no one-size-fits-all answer to this question. The right commercial loan for you will depend on your unique needs and business goals.

Need a hand? Commercial finance brokers have the industry knowledge and expertise needed to help business owners, like you, understand their financing options.

At Valiant, we have a team of friendly product specialists ready to help you find the right commercial finance for your business. They have years of industry experience and knowledge at their fingertips, and it takes just minutes to apply for funding. Call us on 1300 780 568 or get started online.

Jacob is the Director of Sales here at Valiant. He has a wealth of experience in helping small business owners with their everyday finance needs, and is our go-to guru for all things working capital.

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