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Term loans are a lump-sum disbursement with payback over a
specified period of time. It’s important to structure a term
loan so that debt repayment matches your business cash flow. |
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"Call us today to
see if a Term Loan is right for
your business. No pressure . . . just my sincere effort
to help you."
Diane Homa,CCFC
Tollfree:(800) 663-7517
Phone: (727) 573-5533
Fax:(727) 299-9034
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The most important component is whether the business's ongoing sales
and collections represent a sufficient and regular source of cash
for repayment of the loan. Consideration must be given to your
existing debt repayment obligations as well as potential needs that
you may have over the term of your loan.
Secured loans
vs. unsecured loans considerations
Debt financing can be secured or unsecured. Secured business loans
are a promise to pay a debt which is "secured" with specific
collateral of the debtor. In order to ensure that the particular
collateral provides appropriate security, the lender will want to
match the type of collateral with the loan being made. The useful
life of the collateral will typically have to exceed, or at least
meet, the term of the loan; otherwise the lender's secured interest
would be jeopardized. Consequently, short-term assets such as
receivables and inventory will not be acceptable as security for a
long-term loan, but they are appropriate for financing a
line of credit.
How do you determine the value of your collateral? There are 3 types
of appraisals: fair market value, orderly liquidation and forced
liquidation. You can expect lenders to minimize their risk by
conservatively valuing your collateral (most lenders tend to use the
forced liquidation value) and then loaning only a percentage (70%)
of its appraised value.
For startup and young businesses, both long and short term loans
need to be secured with adequate collateral.
Unsecured loans are also a
promise to pay a debt. Unlike a secured loan, the promise is not
supported by granting the creditor an interest in any specific
property. The lender is relying upon the creditworthiness and
reputation of the borrower to repay the obligation. Unsecured or
cash flow loans typically start at around $1,000,000 up to well over
$100,000,000. Generally, the borrowing company must be in business
for a minimum of three years with good revenue and net income
numbers confirmed by audited or reviewed financial statements. Until
a business has a good established credit history, it cannot get an
unsecured loan because of the business's risk.
Short-term vs.
Long-term loans
Debt financing can be either long-term or short-term. Long-term debt
financing is commonly used to purchase, improve, or expand fixed
assets such as your plant, facilities, major equipment, and real
estate. If you are acquiring an asset with the loan proceeds, we
will want to match the length of the loan with the useful life of
the asset.
Although short-term commercial loans are sometimes used to finance
the same type of operating costs as a working capital line of
credit, they differ from lines of credit in that a commercial loan
is usually taken out for a specific expenditure (to purchase a
specific piece of equipment or pay a particular debt), and a fixed
amount of money is borrowed for a set time with interest paid on the
lump sum.
For startup businesses, and most existing businesses, a short-term
commercial loan will have to be secured by adequate collateral. Cash
flow and a regular sales history are also of key importance. While
some short-term loans may be as brief as 90-120 days, the loans
usually extend one to three years. These loans may be secured by
accounts receivable or inventory, as well as fixed assets (see
Asset-based
loans).
Long-term commercial loans (those repaid over more than one to three
years) are typically more difficult to obtain for smaller businesses
because the longer the term of the loan, the greater the risk to the
lender. With small businesses, a lender may not be willing to assume
the risk that the business will be solvent for, say, 10 years;
consequently, funders will require collateral and limit the term of
these loans to about five to seven years. Of course, loans secured
by
real estate or commercial mortgages
can carry an extended term.
Interest rates
Interest rates vary per loan commitment as they are a function of
risk. Ability to repay, creditworthiness and collateral are
considered when pricing a commercial loan. Interest rates may be
fixed, variable or a combination of the two. Fixed rates may be
fixed to term or fixed for a period of time then reset. This type of
pricing is most commonly used for financing of fixed assets such as
owner-occupied commercial real estate, machinery and equipment,
vehicles, etc. Variable rates adjust from time to time and are
common for shorter term uses such as inventory purchases, working
capital and business acquisition loans. They are also common for
U.S. Small Business Administration
(“SBA”)
7(a) guaranteed loans and lines of credit, especially
in rising interest rate environments.
Click on right to view and print our
SBA
guaranteed loans
white paper.
Loan commitment fees and prepayment penalties are common costs
associated with commercial loans and should be expected.
In order to better serve you, please provide us with some basic
information by completing our Term Loans Financing Worksheet.
View and print our
Term Loans Financing Worksheet:
 Click Here for Adobe pdf version: Term
Loans
Financing Worksheet
Click Here for
Microsoft Word version:
Term Loans Financing
Worksheet
Thank you for the opportunity to assist you. We look forward to it.
Contact us today to discuss if a Term Loan is appropriate
for your business.
(727) 573-5533 or Toll free (800) 663-7517
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