Small businesses involved in manufacturing or wholesaling may be most interested because they tend to need to be highly collateralized. Because commercial finance companies typically offer only loans secured by commercial assets, these institutions are used primarily by established businesses, not startups. As with consumer finance companies, the higher cost of borrowing from a commercial finance company may make this type of lender appealing only after a loan application has been denied by a bank. Moreover, the security for the loan is closely scrutinized for value and liquidity . Assets must be readily accessible and marketable.
Typical collateral includes equipment, inventory, or accounts receivable.
Because the loan may be riskier, commercial finance companies usually charge higher rates of interest than banks. Commercial finance companies may also have significant prepayment penalties to deter a borrower from refinancing with a conventional bank if the borrower improves his or her creditworthiness. Less-standard loan terms allow for flexibility, but also require careful review of the terms of the loan, including interest computation and payment method, prepayment rights, and default terms. All Rights Reserved.