A Basic Guide to Commercial Lending

Many businesses at one time or another will need to access a commercial loan. This could range from a company just starting up but having a solid business plan backed up with some realistic sales projections, to a company needing money for plant & machinery, looking to expand overseas or requiring larger premises. For the former the lender would certainly expect proven experience in their chosen field, signs of a gap in the market the new company could exploit or a brand new idea or project that would appear to be a viable proposition. They would probably want a stable employment record allied to possible personal guarantees and, if possible, an initial injection of cash. Regarding the latter the decision is much more straightforward as they should have audited accounts, preferably over at least 2 years with a projection for the third year showing an increase in profits. For obvious reasons Lenders are very reluctant to lend when companies start showing a decline in profits.So what’s the difference between a residential mortgage and borrowing for commercial reasons? Generally speaking a residential mortgage is secured against property so if the borrower defaults on the loan the lender has the right to repossess the property as they have control of the deeds. Commercial lending is a much more complicated process as it may not be secured against property. This is because many businesses will rent their property as they may not have the resources or desire to purchase the building or buildings they operate from. This of course leaves the lender vulnerable because if the borrower defaults there is no guarantee they will recover the loan.To compensate for the extra risk involved the lender will certainly charge a higher rate of interest than if lending in the residential market. Over a period of time this of course means a greater profit for the lenders, especially if it’s a bank as there are other charges they will levy on the borrower. There will usually be an overdraft facility in place for which there will be monthly or quarterly charges. On top of this there is what is generally termed account charges so each time you pay by cheque, cash a cheque in or make a payment by transferring money to settle an invoice or purchase goods this will be charged to your account at the end of each month.A typical charge for processing cheques is fifty five pence so if on average you cash 100 cheques per month the overall cost for that year is £660. To a successful business this is not the end of the world even though there are other charges and of course the payment of the interest charges on the loan at the end of each month to be taken in to account. However for a start up business the way they manage their account is crucial to building a successful company over a long period of time. Many firms fall by the wayside, not because of poor sales but because creditors pull the plug due to cash-flow problems so it is important to make sure you take out your commercial loan with a flexible and understanding company as you may regret it further down the line if you don’t.

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