A commercial finance company, also known as a commercial credit company, is a non-bank corporation created for the purpose of making loans to businesses, as opposed to individuals. Commercial finance companies are often subsidiaries of larger companies that are created to assist the parent company in financing sales. The subsidiaries may be wholly owned or not.

Unlike commercial banks that accept customer deposits, commercial finance companies use their own capital and bank lines of credit to make loans.

Commercial finance companies are usually more flexible in approving loans than commercial banks. Generally, their credit criteria is less strict and they usually process application much faster than banks. However, they usually charge higher interest rates than commercial banks.

Types of loans generally offered include: (1) Business term loans, (2) invoice factoring. (3) inventory financing, (4) lines of credit, (5) warehousing lines of credit, (6) SBA loans, (7) equipment financing, (8) insurance premium financing, and (9) accounts receivable financing.

 

Subordinated Debt

Subordinated debt is high risk, unsecured junior debt that ranks below senior debt, but above equity in the event of a liquidation. The interest rate on subordinated debt is always higher than on secured debt because the lender's risk of default is always higher. Subordinated debt is most common in mergers and acquisitions, and in private equity transactions where senior lenders cannot or will not provide full funding. The debt may be evidenced by bonds or a standard loan agreement.

 

Mezzanine Debt

Mezzanine debt is a type of hybrid debt that is subordinate to other debt. It is frequently associated with acquisitions, mergers and buyouts. Mezzanine debt is often long term debt with flexible repayment terms. The loans often provide the lender with warrants or options.

 

Private Money - Private Money Lenders

Private money refers to loans made to individuals, companies, and other entities by non-institutional individuals or private lenders. These loans normally carry higher interest rates than institutional loans made by banks, credit unions, and insurance companies because these institutional lenders generally have more stringent underwriting requirements. Private money lenders generally rely more on the asset value of collateral and less on the credit rating and/or the cash flow or income of the borrower.

 

Evergreen Loans

An evergreen loan is a revolving line of credit requiring the borrower to pay only monthly interest. The principal is expected to be made at the end of the loan term which is usually two to three years from the effective date. These loans are regularly extended by the lender at maturity making them long term loans.

 

Chattel Mortgage

A Chattel Mortgage is a loan secured by personal property, also known as chattel, as opposed to real property, generally land and buildings attached to the land. Chattel mortgages are commonly secured by machinery, vehicles, manufactured homes, aircraft, and boats. To secure personal property, the lender files a UCC-1 Financing Statement to establish a public record of their interests. Chattel mortgages are made by some commercial banks. The interest rates are typically higher than on real estate loans and the terms are usually less favorable to the borrower. See: Security Agreements.

 

Non-Recourse Loans

A non-recourse loan is a secured loan that limits the lender's recovery to the collateral that has been pledged as security. This is nearly always real estate or marketable securities such as stocks and bonds. In the event of a default, the borrower is protected from personal liability unless he or she has committed fraud or other misconduct as defined in the loan agreement. Given that lenders can only look to the collateral for repayment, their risk is higher. Consequently, the interest rates and credit requirements for non-recourse loans are always higher. The majority of commercial banks will not make non-recourse loans. Those that will usually limit these loans to existing preferred customers with excellent credit.

 

 

Seller Financing

Seller financing, also referred to as owner financing, can be secured or unsecured financing where the owner or seller becomes the lender. Seller financing has both advantages and disadvantages to the seller and buyer, but this type of financing almost always results in an earlier closing. Seller loans may be assumable subject to defined conditions or they may not be assumable. Loans provided by sellers may be short-term loans and may have high interest rates. Terms vary depending on market conditions and the motivation of the parties. Sellers are always cautioned to check the buyer's credit score before offering financing.

 

Usury Law in California

California's usury law caps interest rates at 10% per year for loans made for personal, family, or household purposes by non-exempt, private lenders. For non consumer loans, the limit is the higher of 10% or 5% over the Federal Reserve discount rate. Many exemptions exist, particularly for licensed lenders, banks, and loans arranged by real estate brokers. Courts view interest broadly; fees, bonuses, commissions, and points can make a loan usurious if they push the total cost above 10% APR. Banks, credit unions, and California Finance Lenders (CFL) are exempt. Loans arranged by a licensed CA Department of Real Estate (ORE) broker and secured by real estate are exempt. Violating usury laws can be severe. Borrowers may sue to recover all interest paid (not just the excess) in the two years prior, recover triple interest damages, or cancel the interest entirely. Purchase money loans(seller carryback loans) are generally exempt. If you are a private, non-licensed individual making a loan, you should consult an attorney to ensure strict compliance because violating the 10% cap can lead to significant legal and financial consequences.

 

 

Debt Service Ratio for Business Loans

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Vendor Financing-Loans

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