November 14, 2018 | By Peyton Sawyer
If you were to define commercial funding, it's essentially a debt-based funding agreement between a business/business owner and a financial institution. A financial institution, such as a bank or funder, is used to fund major capital expenditures or cover costs that a business cannot afford. Often times small businesses do not have access to traditional funding methods and rely on funding products that can provide them with a line of credit, term funding, or unsecured funding to make ends meet.
Qualifying for Commercial Funding
Commercial funding can be used for many business needs. Typically, commercial funding is used to receive funding for operational costs or purchasing new equipment, but it can also be used to purchase inventory and supplies or to even fund payroll. Commercial funding is a short-term funding option available to a large variety of business entities.
To be considered for approval, this type of funding will often require business collateral. The form of collateral can be in the form of property or equipment that can be used if the borrower is in default of their funding or files for bankruptcy. That means that the collateral used to receive commercial funding can be confiscated due to non-payment. There may be instances when a mortgage issued to commercial real estate can be used to qualify for commercial funding or even cash flow generated from future accounts receivable. This is determined by the funder.
Renewing Your Commercial Funding
A business that handles large orders on a seasonal basis can sometimes be considered for renewable commercial funding. This allows the business owner to provide their products and services to customers throughout the year. The word “renewable” means that a business owner may be able to extend their funding indefinitely after the initial funding is paid in full within the specified period. Once the first funding term is satisfied, it can be rolled into an additional or renewed funding period.
When applying for any type of funding, credit is the first hurdle to overcome. While a traditional banking institution will view your creditworthiness with a score, commercial funding will consider your approval based on spreadsheet and documentation that reflect a consistent cash flow. By doing this, the funder can determine if you are a good investment. Any funder, traditional or alternative, that provides business funding will want the assurance that funding with being repaid within the specified funding period. To reduce the risk of a bad investment, they must collect the necessary documentation.
The services a funder can provide with commercial funding may give your business the boost it needs to become more sustainable, but be sure your business can afford to repay it. If your business is approved for commercial funding, you can expect to pay a rate that falls in line with the prime funding rate during that time period. Check to see what that rate is before signing off on a funding agreement.