What is a Commercial Lender
and do I need one?
A commercial lender is any type of lender who is prepared to lend money (the finance) in the form of spendable money to a business entity (as opposed to an individual). The terms may differ, but generally speaking, commercial loans will follow different criteria than a loan to an individual.
One of the most important differences between a commercial loan and a loan to an individual is covered in the Consumer Credit Code Act (https://asic.gov.au/regulatory-resources/credit/credit-general-conduct-obligations/national-credit-code/). In general terms, the act provides certain safeguards for consumer credit (that is any credit supplied to an individual – not a business) and the loan is for the use of the individual. The lender have certain obligations to provide, in case of a consumer, to ensure the consumer can afford the credit provided, and the terms are made clear with no hidden charges and so on.
A commercial borrower, representing his business or business interests is expected to have some understanding of his obligations and risks. The loan he receives will reflect this.
The lender may expect the borrower to provide more detail about the use of the loan. How it may increase the cash flow of the business – this is particularly important since the money lent may exceed the current cash flow to repay.
The lender may also expect business financials, such as a Profit and Loss statement, and a balance sheet. This in addition to a clear understanding of the business model and business plan.
In some respects, the obtaining of commercial funds may be a little harder, and in others, somewhat easier. Let me explain;
- The documentation you will need to provide may be a burden to obtain. It requires an accountant, perhaps a solicitor, and an educated person to guide you through (such as a commercial lending broker).
- The lender will take more care to asses your position, and potential. They will have to balance your current financial position, cash flow, assets, against what may be possible with the lent funds.
- The lender will, based on their assessment, provide funds based on terms that reflect the risk in their view. This means that the loan term, interest rate and amount provided might not be what you expect.
- You will probably have the right to negotiate these terms. Working with your broker, present a case why more funds or a better rate may be of interest to the lender.
- The lender may be able to take into account potential earning in their lending assessment. Their obligation to demonstrate that the terms of a loan offered are within the means of the borrower where that is a consumer loan is vastly different on commercial lending. Bear in mind they will still have to show good reason to think that the loan will be repaid and the terms themselves are not impossible.
- Time to asses the loan differs. A short term bridging finance might be able to be negotiated within days or even hours, substantial funding with longer terms might take several months to assess. So be prepared to wait if needed.
Is this type of lending appropriate for you? If you have a business that needs some cash to expand – buying stock, taking on new premises or employees, equipment investment are some possible uses.
It is highly recommended that presenting your case and needs to a commercial lending broker (such as Willow and Oak) and discussing possible outcomes. A good broker like W&O is able to understand business financials, look at where yout business is going, and what your plans for it are. Based on this they can help you to understand the risks involved, as well as the possible upsides. They can advise on what will be required by the lender, changes in the business that might be needed prior to application, and how to present this information.
They will narrow down the possible lenders based on your criteria that will be best suited to your business and your needs. They will then work with you to prepare the application, providing expected documentation in advance or as required, and helping to answer questions along the way.
Once an offer has been made by the lender, they will help you to determine if the offer is good, or if it can be negotiated to a better outcome for you.
If you have any questions about the process, or if this type of lending is right for you, contact us. We are happy to answer anything.