As opposed to personal loans or household loans, commercial lending is far more complex in its offerings. A wide variety of financial structures are designed for the different aspects of business and the different stages of production and marketing. It covers everything from asset financing to receivables financing and even working capital loans. There are even overdraft facilities that are used for emergent situations.
Revolving Lines
One of the popular commercial lending instruments includes revolving lines. These, of course come under various structures and include bank overdrafts and accounts receivable financing. The way it works is rather straightforward. The bank will set up a facility and an account, where by the customer is able to draw finds from it and pay it back under different schedules. Interest is usually charged only on what is outstanding.
When this is used for the purpose of accounts receivable financing, the lender draws on the funds to complete the order, and when it is delivered, the buyer pays the account and this usually exceeds the amount that was initially take out. This procedure continues repeatedly and until the tenure of the revolving credit expires.
Asset Financing
As opposed to revolving lines, asset financing is specific in nature. It is still a subset of commercial lending, but it has a very specific intent. It is meant purely to finance assets, and in return, for collateral, the underlying asset is charges to the bank. This just means that in the event of default, the bank has the right to sell the asset to recover its loan.
Another characteristic of asset financing is that the loan is usually paid down and never resumed like revolving credit loans. There is a fixed repayment schedule and one paid; the loan cannot be draw on again.
Leasing
Leasing is another class of commercial lending. Leasing is a hybrid between renting and purchasing. It is treated differently in accounting statements and for tax purposes. However, it is primarily used for asset purchases. Leasing assets allow the company a better tax treatment of the asset and it also allows the company a structured disposal avenue. At the end of the lease, the terminal value is as agreed upon.
Fixed Term Loans
Commercial loans are predominantly occupied by fixed term loans, where the loan is not specified to its use, as it is in asset financing. There is still a requirement to tell the bank what it would be used for but it is not as restrictive. Instead the loan can be used for a myriad of corporate activities. It is usually secured, but depending on the amount, it can also be unsecured, depending on the credit worthiness of the company.
Fixed term loans can be secured; to lower the rate of f the amount is large, by a number of fixed or financial assets. It is possible to place land, building, property and even stocks of a company as collateral for fixed term loans.
Lending instruments have evolved in the last three decades and there are a number of innovative structures and products that are designed to suite various needs of a wide array of corporate customers. More advanced instruments are also available in the market for funding things like buyouts and other infrequent purposes.
Acquisitions are another use of financing that frequently gets overlooked. Acquiring a competitor is a great way to consolidate the market and take over the market share of an industry. There are loans that work in this scenario and what’s great about it is that the target company’s cash flow can be used to finance the loan. Loans are a powerful tool that allows companies to advance into the future.
