Securing Commercial Finance
When you first decide to take up Commercial Finance from a Commercial Lender, you need to consider what you have to offer as security for the loan. Items that you can use to secure a Commercial Finance package are generally property, revenue and equipment.
In the UK, most Commercial Lenders will require up 75% of the value of the loan. You will need to come up with as much as possible to secure the loan. The items you put up to secure the loan will be confiscated by the Commercial Lender should your fail to honor the terms of the loan. Let’s look at each of the things that can be used and how they work.
This can be in the form of residential property owned by the principles involved in the business. It can also be existing commercial property that is owned by the business. Finally, it may also include the property you are purchasing, if the Commercial Finance package is being used to purchase property.
When you put up property to secure the loan, the lender will be looking at the equity value of the property first and the total value of the property second. They will also look at the payment history of any property that has not been paid for outright. When the lender has finished looking at the property you have, they will look at your account receivables.
The amount of revenue generated on a regular basis. This can be weekly, monthly, quarterly and even annually to see if the income is there to support the payments on the Commercial Finance package. The lender will also look at what your potential for grow is for your receivables. Your previous growth history will help them figure that out. They will look at how much is left when you subtract all your account payables, except the loan repayment and it should be greater than 1.35:1.
The degree to which this is helpful will depend on the type of commercial financing you are looking for and the type of equipment you are planning to use to secure the loan. If the equipment has a long shelf life, it will be more desirable than things that have a short shelf life. If your business is a trucking company, the vehicles and the equipment used to fix them could be used to secure commercial financing.
The parts that you would use to keep them running could not be used to secure commercial financing. This is because, once the part is used, it no longer exists to secure the loan. The use of a truck to secure the loan is better because it will presumably be around for a much longer period of time.
If your business is a factory, you could use the equipment you use to make the product you sell to secure commercial financing or a Commercial Mortgage. The supplies used to make the finished product would not be good because they are not going to be around once the product has been made.
This does not mean that short life-span materials cannot be used, but they are counted as general inventory in much the same way as office supplies would be. You need to keep in mind that anything you use to secure the financing from your lender will be lost if you fail to honor the terms of the finance package. The longevity of the equipment is something that will be looked at carefully by the lender.
This is because some equipment, in some industries, out date very quickly and loose value very quickly as well. If you work primarily with computers, your equipment and software will be outdated and worthless long before a loan would be paid off. Factory equipment, on the other hand, will still retain its value many years after the Commercial Finance start date and should satisfy your Commercial Lender.