Commercial Finance – Concept and Tools

Finance is to business what blood is to body. An irregular flow of finance can bring business to a standstill. In order to let the business grow in a smooth way many financial institutions have entered the scene. The function of lending loans to the business by a financial institution for meeting its uncertainties is termed as commercial finance.

There are various tools of commercial finance. Some common tools are –

Asset Based Loans
Asset based loan is a secured debt that is provided by a financial institution to a borrower on the for their working capital needs. Funds can be arranged against assets such as premises, machinery, outstanding invoices and even a brand.

Invoice Factoring
Invoices are hidden assets of the company. A financial institution can lend a company against the invoices it has issued. The funds can be arranged up to 90% of the invoice value in short time.

Purchase Order Financing
Financial institutions have come forward to provide loans on the basis of a written pay order. The pay order should specify the stipulated price and the time of delivery. The credit rating of the orderer is the key here.

Working Capital Credit Line
A line of credit is an arrangement between the financial institution and the borrower where the former agrees to lend the latter a sum up to a specified limit. Generally these funds are utilized to meet short term requirements or for working capital.

Inventory Financing
Inventory finance is a revolving credit facility that enables a business entity to arrange funds for a short term against its inventory. This form of finance is usually helpful for retailers and exporters whose funds get locked in the piled up inventory.

Expansion Financing
Loans are lent to the borrower for expansion on the basis of the existing demand for the product of the borrower.

Import and Export Financing
Loans that enable shipping or receiving of goods based on their existing market and demand. Opening a letter of credit is one such kind of financing.

Franchise Financing
Opening up a franchisee is one of the most popular ways to start a business. But it requires huge capital investment. Banks have some special products to offer for such franchise units

The list is not exhaustive. With the growth of business, banking and the finance market are also expanding. There are more tools that shall be developed to meet the growing needs of the business. Every business unit should shop around before going in for any of the options available to strike the best deal.

By Nancy Dodds of Financemate.co.uk