Commercial finance companies have in recent years become a favorite option for entrepreneurs seeking small business loans. Commercial financing institutions generally charge higher interest rates than banks and credit unions, but they are also more likely to approve a loan request. Most loans obtained through finance companies are secured and the assets used as collateral can be seized if the entrepreneur defaults on the loan.
Consumer finance companies make small loans against personal assets and provide an option for individuals with poor credit ratings. Commercial finance companies provide small businesses with loans for inventory and equipment purchases and are a good resource of capital for manufacturing enterprises. Insurance companies often make commercial loans as a way of reinvesting their income. They usually provide payment terms and interest rates comparable to a commercial bank, but require a business to have more assets available as collateral.
In general, finance companies want to see strong assets to back up a loan and will monitor those assets much more carefully, one expert told Entrepreneur. “For that reason, they can loan more against the assets. So chances are a smaller business might get a larger loan from a finance company” than from a bank. Paola Banchero of Kansas City Business Journal noted that commercial finance companies have also grown because they are more flexible in arranging loan repayment schedules than are banks. Whereas banks typically require a seven-year repayment schedule on term loans and 15-year schedules for loans on commercial property, finance companies may extend payment schedules up to 10 years for term loans and up to 25 years for loans on commercial real estate.
Finance companies have experienced sustained growth throughout the 1990s. By the end of the decade, finance companies had become America’s second largest source of business credit, behind banking institutions.
Larger commercial finance companies often offer small business owners a variety of lending options from which to choose. These include factoring, working capital loans, equipment financing and leasing, working capital loans, specialized equity investments, collateral-based financing, and cash-flow financing. Some also offer additional services in connection with those loans, such as assistance with collections.
Commercial finance companies come in all shapes and sizes. The size of the firm usually has some bearing on the exact services it offers. The nation’s largest finance firms (The Money Store, AT&T Small Business Lending Corp.) have established networks of offices across the country, and they sometimes offer lending services that even banks do not. For example, The Money Store— which made more than 1,700 loans worth $635 million in fiscal year 1996—offers loans to entrepreneurs looking to take ownership of a franchise, an option that is not available at all banks. But as Entrepreneur’s Cynthia Griffin noted, “in addition to the mega players, the commercial finance industry is populated by hundreds of smaller firms.” These firms generally make asset-based loans, providing services to small business owners who are unable to secure loans from their banks.