Ogilvie Young

Financial and Management Consultants

First Off, Why Do You Need Commercial Financing?

Every small business reaches a point where they need an infusion of capital to solve a problem, or just keep growing.

And while you could technically fund all or some of your company out-of-pocket, not every small business owner has the bank account to do so. So if you can’t finance it yourself, who can?

These days, there are a lot of financial institutions and lenders that can give you the commercial financing you need—whether that’s in the form of business loans, investments, or donations. Before we get into all the different types of commercial financing out there, let’s cover this first: why you need commercial financing.

Two Commercial Financing Paths You Can Take

Now that you know why you need commercial finance, the big question on your mind is probably: “Who can give it to me?”

There are two general paths you can take when you’re on the hunt for commercial financing.

Debt Financing

When you take out a business loan, you’re financing your business by taking on debt.

With debt financing, you borrow money that you’ll promise to pay back later—for a price, of course.

You can borrow money from a commercial bank, an online lender, or any other financial institution. You can also take on debt in the form of a business credit card. There are a whole bunch of ways to financing your business through debt, and we’ll get into them all.

Equity Financing

With equity financing, someone invests money in your business in return for a percentage of ownership in your company. This investor can be a single person—an angel investor—or a whole bunch of people that are part of one company—a venture capital firm.

Equity financing can be a smart option for certain businesses, and we’ll get into how you go about using it below.

Which Commercial Financing Solution Works For You? Ask Yourself These Questions:

Before we dive deep into ins and outs of each financing solution out there, you should have these questions in mind as you consider your options:

  • Where is your business now, and where will it grow?
  • Who are your customers?
  • What kind of product do you sell?
  • What’s your borrowing history like?
  • How much money do you need?
  • How soon do you need the capital?
  • How do you want to repay the capital?

You might not be able to answer all these questions just yet—some of them are pretty complicated when you really think about it.

But as you go through your commercial financing options, keep them in mind. They’ll help you find the best financing fit.

Commercial Financing Through Debt 

1. Traditional term loans fill the first spot on the list because they’re probably what you think of first when you hear “debt financing.”

And for good reason, too. They’re the most common financing solution available for businesses.

A bank was the most common place a small business owner would look for a traditional term loan. And you might be able to score a term loan from a commercial bank. But notice we say “might.” These days, 4 out of 5 small business owners get rejected when they apply for a traditional term loan from a bank. But with the many alternative lenders these days, you can still get a traditional term loan if a bank won’t give one to you.

Traditional Term Loans: What to Expect

With a traditional term loan, you’ll be loaned a fixed amount of capital that you’ll pay back—plus interest—over a set amount of time.

Their terms can last between 1 and 5 years, with interests rates of 7 - 30%.

If you choose this commercial finance solution, you can get up to $500,000. But it won’t happen overnight. In fact, traditional term loan (especially those from a bank) take a long time to fund. In the best cases, you can get funding in 2 days. In the worst cases, though, it can take months.

Why You Should Get a Traditional Term Loan

Traditional term loans work for established businesses that have a specific financing need.

If you’ve been in business for a while and have a strong credit score, you should consider using a term loan for commercial financing.

2. Short-Term Loans

No surprises here—a short term loan is just like a traditional term loan, but shorter. With a short-term loan, you’re given a lump sum of cash to finance your business. You’ll pay your lender back in daily, weekly, or monthly payments until you’ve paid your loan off in full—plus interest.

Short-Term Loans: What to Expect

Short-term loans come with terms ranging from 3 to 18 months, and as you can imagine, you won’t be getting as much as you would with a traditional term loan. Short-term loans can be as little as $2,500.00 and as big as $250,000.00.

Here’s what you’ll want to pay attention to with short-term loans: their interest rates. The interest rate attached to a short-term loan tends to be higher than most—you can expect a rate of 14% and up… way up.

Why is this the case? Well, a short-term loan can be approved in as little as 2 days. But you’ll pay for this fast access to capital in the form of interest rates.

Short-term lenders can approve your small business loan so quickly because they don’t require a lot of documentation—and the less documentation they need to process, the quicker they can fund your business.

What is a Term Loan?

A traditional term loan is a lump sum of cash you pay back, plus interest, over a fixed period of time.

What Do I Need to Qualify?

  • 2+ years in business
  • 620+ credit score
  • $100,000+ in annual revenue
  • Term loans are traditionally a bank product, but there are many lenders that offer longer-term loans at affordable rates.

When Does a Short Term Debt Make Sense?

Why You Should Get a Short-Term Loan

Every small business owner needs capital to run a business. But when it comes to financing a business, not everyone can qualify for the best options out there. If you’re just starting out, or don’t have a strong credit score, you probably don’t meet a lot of lender’s requirements. On top of that, you might not have the time to wait around for a bigger loan with lower interest rates. If you just need a small amount of money and you’re confident you can repay your loan quickly, a short-term loan might make a lot of sense.

You might find yourself in a situation where the next source of revenue for your small business only comes from investing in new equipment. But what if that new equipment comes with a pretty big price tag? You can use equipment financing. 

3. Equipment Financing: What to Expect

With equipment financing, you’re advanced a sum of money that you can use to purchase the equipment you need—whether that’s machinery, cars, computers, and so on—right away.

How much you can borrow in an equipment loan depends on the equipment you’re buying.

What kind of equipment is it? How much does it cost? Is it new or used? These are the kinds of things equipment financing companies will need to know before they approve your equipment loan. In some cases, you can finance up to 100% of the equipment’s value. And in general, your equipment loan will come with a fixed interest rate, ranging from 8 - 30%.

How long you’ll have your equipment loan depends on the type of equipment you’re financing, and the anticipated lifetime of that equipment. Understandably, not too many lenders will want to extend the term of your equipment loan for longer than the useful life of that equipment.

If You're considering An Equipment Loan, Read This First:

Why You Should Get an Equipment Loan

You know without question that you need to purchase the piece of equipment for your business. But here’s what you should consider: could you save some money by dishing out, say, $15,000 for the equipment now—and avoid paying interest on your equipment later? If so, you should probably just pay for the equipment out-of-pocket. But if doing so will hurt your business’s cash flow too much, then equipment financing is a smart move. Plus, with an equipment loan, you can use the equipment while you’re paying the commercial financing off—so you’ll see some return on investment right away. One more thing—an equipment loan is a great option for small business loans who don’t have a sufficient amount of collateral to secure a loan otherwise. With equipment financing, the equipment itself acts as collateral for your loan.

Commercial Financing Through Equity

The list of all the different ways you can finance your business with debt goes on and on. Considering all the small business loans available from traditional and online lenders these days, you’re bound to find one that fits your small business’s needs.

But here’s another commercial financing option you might want to consider: equity financing.

With equity financing, you’ll give up partial ownership of your business (or your future profits) in return for the funding you need to grow your company.

Who exactly will agree to this and invest in your company?

Let’s go over your first option: angel investors.

What is an Angel Investor?

Angel investors are individuals who personally invest their money in a wide variety of business ventures and startups.

As you can probably imagine, angel investors have the money and time to spend investing in your small business.

Why You’d Want to Work With an Angel Investor?

  • Angel investors bring a lot to the table—and we’re not just talking about money.
  • Angel investors can not only provide you the commercial finance you need to get your business off the ground, they’ll also give you guidance along the way. Many angel investors were or are entrepreneurs themselves, and they can give you valuable business advice alongside your financing. In the best cases, your angel investor is your partner.
  • But, you’ll want to make sure that you (and your business) work well with the angel investor before you give them valuable ownership in your company. If you have reason to believe that your goals and priorities aren’t in sync, you might want to consider other financing options.

Why an Angel Investor Wants to Work With You

It’s pretty clear why a small business owner would want to work with an angel investor—you can get substantial funding and valuable business advice.  

But why does an angel investor want to work with you?

Well, here are some reasons why angel investors put their money in small businesses:

  • They’ll make money when your business does well.
  • They want to give back to other entrepreneurs.
  • Investing in another company is exciting and challenging.
  • They’ll get decision-making power.

Instead of just working with one investor to secure your financing, you could work with a whole company.

Another way to finance your business with equity is to work with a venture capital firm.

What are Venture Capital Firms?

Venture capital firms are meant to invest in other businesses. In fact, it’s all they do. The basic concept behind venture capital is pretty much the same as angel investing: they offer to meet your small business financing needs in exchange for a percentage of your business. But here’s where it gets a little different: venture capital firms are fully established organizations that fund larger-scale business ventures. They’ll purchase a percentage of the business—and give you money in exchange—in “rounds” of funding.

Funding rounds can get pretty involved, but here’s the fundamentals:

As a business owner, you’ll put a plan together, determining how much capital you want to raise and how much equity you’re willing to give. You’ll then pitch your business plan to a few different venture capital firms, in the hopes you’ll find a good fit. When it comes to equity financing, venture capital firms play in the big leagues—most firms make minimum investments in the million dollar range.

Ready to Take the Next Step?

There’s a whole world of financing out there, and you might be overwhelmed by it.

Where will you find the best commercial financing and how will you know when you’ve found it?

Well, that’s why Ogilvie Young is here: to help small business owners find the best financing for their company!