Commercial lending offers a wide array of financing options for all the cash needs of its business customers. The commercial lender, local Chamber of Commerce, or other business owners are sources of information for current financing options, which may include:
Credit Line, or Line of Credit – the lender supplies funds intended to ease temporary cash flow issues the business may experience. Cash flow issues typically arise from timing differences of when receivables are due and when they are paid. A business line of credit will also commonly be used to finance inventories, special projects, or contract related work.
Short Term Loans - these are secured loans with a fixed maturity date, usually of less than a year, from the date the loan is made. Short term loans may also be used to finance inventories and receivables, especially of a seasonal nature.
Asset Based Loans – this type of loan is typically used to provide working capital. They are based on a percentage of the value of the current assets of the business. The lender will normally take a security interest in those assets.
Contract Financing – funds are advanced as work against a contract is performed. Repayment is made to the lender by the contracting party.
Factoring – Businesses may look to a factoring company, rather than a traditional commercial lender, to supply instant capital for increasing inventory, paying bills or solving other cash flow problems. This type of financing generally involves the sale of accounts receivable to the factoring company after the business has been denied a loan by its commercial lender.
Term Loans – similar to a Short Term Loan, the term of this type of loan is based on the economic life of the assets being financed or collateralized. Term loans may be used to finance permanent working capital, capital improvements, refinancing, and acquisitions. The projected profit and cash flow are key factors the commercial lender uses when evaluating term loan requests.
Equipment and Real Estate Loans – Equipment loans are completely secured, or collateralized, by the equipment being purchased. The commercial lender will determine the maximum LTV for this type of loan, which may vary from other financing types. The term of an equipment loan is determined by the economic life expectancy of the equipment being purchased.
Real estate loans are also collateralized by real estate assets owned by the business, again with the lender establishing the maximum LTV for the loan. The term of the loan will be for a fixed number of years. Lenders also make second mortgages on real estate. The amount of the second mortgage will be based on a percentage of the appraised value, and the amount of the first mortgage.
Leasing – although leasing is not the same as a loan, the business will be subject to the same type of review, especially of its cash flow, creditworthiness, the value of the object to be leased and its anticipated economic life. Lease terms change with market conditions but there are generally several options at the end of the lease:
- Purchase the leased property
- Renew the lease
- Return the leased property
Terms for all options at the end of the lease should be discussed prior to signing.
Balloon Loans
Balloon loans are fixed rate loans that may have attractive terms for the initial repayment period but require a final, “balloon” repayment at the end of the initial period. For example, the loan may amortize over 20 years and have a balloon term of 5 years. The payments for the first 60 months are thus kept low, since the loan amortizes over 20 years, but the remaining balance of principal and interest, the balloon payment, is due and payable at the 61st month. Repayment typically is made either by refinancing the loan balance or paying the balance in cash. The commercial lender will be able to discuss any available balloon loans and their terms.
Adjustable Rate Loans
An adjustable rate loan amortizes over the full term of the loan although the interest rate may reset, based on the then current margin plus index, annually after the initial period. There may be a maximum adjustment (cap) at the end of the first period, with another adjustment cap for annual adjustments, and an adjustment cap over the life of the loan. For example, a 5/1 ARM has payments fixed for the initial 5 years then recalculated every year thereafter for the remainder of the loan term or until the life cap has been reached. Again for purposes of example, the interest rate will be reviewed and/or adjusted, to a maximum of 2% to the interest rate at the first adjustment, with potential annual adjustments of 1% to the rate for subsequent adjustments, and with a lifetime cap to the rate of 6%. These figures are provided only as examples. As with all types of financing the terms may change with market conditions and should always be discussed with the commercial lender.
SBA (Small Business Administration) Loans
A SBA backed loan, grant, or bond may be an option for your business. The SMA does not make loans directly to businesses but will work with the business and commercial lender to provide the financing the business needs to start or grow. Complete information, including tips and checklists, is available on their web site at www.sba.gov.
State and Local government financing
Some state and local governments also offer financing options for small businesses. The local Chamber of Commerce and other small business owners may be the best resource to provide information on the availability of these types of financing.