Business finance is also referred to as commercial financing and is an asset-based financial or lending service, in which the borrower pledges his business property for availing a business loan. This financial service also demands the borrower to mortgage the papers related to his property.
Business financing enables large as well as small business houses to secure funds for their organization. This service incorporates asset financing, revolving lines of credit, equipment leasing, growth capital and various loan products. Besides, the business finance companies also help the borrower in starting new projects and expanding their operations. All sorts of capital requirements of the borrower are taken care of by the business finance companies.
A bank, in return of a real estate property, usually provides business financing service. It is easier for large companies and corporate houses to avail the business loan provided by the banks, as they easily fit into their lending criteria. However, small business firms can also avail the business financing service from Small Business Administration (SBA). In addition to providing business loan, the SBA also insures the people who offer to provide business finance to smaller companies.
Types of business finance:
Business finance includes:
- Inventory loan – This form of business finance is known as flooring. To avail this type of loan, the borrower is required to mortgage equipment or stock. Mostly availed by resellers and distributors, inventory loan is used for stock maintenance. The maturity period of this form of business loan is more than 30 days.
- Asset-based loans – As the name suggests, Asset-based loans requires the borrower to pledge his assets. The borrowers can mortgage his property, as well as finished inventory to avail this loan.
- Bankruptcy reorganization financing – This loan is mainly used by the companies that are on the verge of bankruptcy. The bank usually provides such loan by keeping the companies accounts receivables, equipment, purchase order or inventory as collateral.
- Accounts receivable factoring – Mostly used for financing working capital, the accounts receivable factoring demands the borrowing companies unpaid invoices as collateral.
- Secured credit line financing – Purchase orders or existing accounts receivables are mortgaged for receiving secured credit line financing loan. This type of loan has a fixed credit limit. A significant factor of this loan is that the borrowers are not required to pay the interest of the amount unused, rather than the entire loan amount.
- Import and export financing – Import and export financing are two different types of business finance that is given to borrowers that have a letter of credit from the domestic, as well as overseas customers. This type of business finance loan enables the borrowers to finance nearly 100% of their order.
- Purchase order financing – The borrowers are required to pledge their purchase orders for availing the Purchase order financing loan. This type of business financing service is usually availed by the business houses that have used their resources in producing goods and have payments lined up.
Although divided under different categories, all the types of business finance help the business houses to overcome their financial crunch and operate smoothly. When going for business finance it is imperative that you always run or do a background check first. With a plethora of online options available for loans, you can easily get tricked into lower interest rates. The idea is to minimize your interest rates; else you will end up paying much more than planned. Also, read through terms and conditions carefully to eliminate the risks of legal hassles, especially with technical implications being a hurdle.