Business Term Loans
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What are Business Term Loans?
A business term loan is a type of traditional business loan where the borrowing business repays a commercial loan over a period of time specified in the term agreements. Usually, repayment periods for business term loans can range from a few months to as long as ten or more years, depending on the stability and structure of the borrowing business, their credit strength, and their borrowing or expense needs. Business term loans that use collateral to secure funds often have longer terms and lower rates associated with the loan agreement because the collateral offers security for the business term lender.
Business term loans provide businesses of all sizes with the ability to borrow capital for most types of business expense purchases, which might have not been affordable while only relying on operating cash flow for working capital. Without the ability to use business term loans, many business owners would have trouble covering every day working expenses, expanding their business by taking advantage of growth opportunities, paying for expensive equipment costs, or any number of costs that business term loans can help cover and ease the burden. There are countless ways that business owners have utilized the different business term loan programs available, and it is easier than ever to discover information online about how to apply for business term loans, or about how to qualify for business term loans, and some websites even offer a business term loan calculator to help business owners figure out specific problems like how to calculate payments on a short term business loan. One of our lending advisors can help business owners learn more about business term loan programs available and help to find the right program for any business.
What are the different types of Business Term Loans?
Whether looking for long term business loans, long term small business loans, short term business loans, or any other type of business term loan, it is important to first consider the different type of business term loans that are available for business owners. There are five common types of business term loans that are used most frequently by business owners: small business bridge loans, multi-year term loans, SBA term loans, asset-based term loans, and equipment term loans. Depending on the amount funds needed, the length of time the funds will be repaid over, and the type of expense the funds will be utilized for, there are several factors that influence the type of business term loan that will work best for a given business.
Small Business Bridge Loans
A small business bridge loan is a specific type of business term loan that is designed to meet immediate financing needs for business owners. Some examples of these types of expenses might be covering unexpected circumstances that require funding, bridging cash flow gaps, or taking advantage of new business growth opportunities to capitalize on. Instead of a business owner relying on using their own personal money, or even worse, passing up on opportunities that might result in additional profit, business owners should consider applying for business bridge loans. One main benefit of this type of loan is that the underwriting and approval process has a quick turnaround and funds can typically be wired to the borrowing business within 24 hours of application. When applying for small business bridge loans, the most important thing for the borrowing business owner to consider and understand is that the cash flow forecasted in the near future will be able to support the term payments for the bridge loan. Because bridge loans are typically used for short durations of time, as they are only intended to bridge expense gaps, it is important to be certain the funds will be there for the payments.
The process to secure a bridge term loan is usually very simple. Compared to other types of business term loans, a bridge loan will be less cumbersome to a business. In recent times, there’s been an increase in access to lenders online. A majority of term loan lenders offer online applications and submissions. These easy, quick applications, require limited documentation and the funds can be processed as quickly as one day. With this particular business term loan, the repayment periods are usually short, and payments can be made on a weekly, bi monthly, or monthly basis. In some cases, business bridge loans can be fully amortizing and in other cases the loan is structured as interest only. The specific details of the term agreements will be determined by the lender according the characteristics of the borrowing business and their specific lending situation.
Multi-Year Term Loans
Multi-year term loans are typically utilized in different kinds of industries where businesses sell their goods, products, or services to other businesses or also for industries where the businesses sell directly to consumers, unlike other types of loan options where the type of industry restricts the type of lending product available to borrowing businesses. Multi-year term loans are used by many businesses for a wide variety of costs, as this type of business term loan has very limited restrictions or covenants that coincide with the lending product. This makes a multi-year business term loan a great fit for businesses with strong credit profiles.
The application process for multi-year term loans is much easier than applying for other types of financing products, like an Asset-Based or SBA business loan. Although there is less paperwork and fewer requirements when applying for a multi-year term loan, the financial information, tax return, and other documents that the borrowing business provides for the lender to review will play a large role in determining the qualification status.
SBA Term Loans
Asset-Based Term Loans
Asset-based term loans are generally most appropriate for business to business (b2b) industries, because these types of companies have significantly more collateral types than most business to consumer (b2c) companies. For example, manufacturers often have large, valuable pieces of equipment and machinery that hold their value. Also, these types of companies have accounts receivables, inventory, and other types of materials, whereas a restaurant might only have furniture, fixtures, and equipment to offer as collateral.
The application process for asset-based lending programs is typically paperwork intensive, and will require the borrowing business to have all of their financial information organized to ensure a smooth application process. Outside of the standard documentation for other types of business term loan programs, asset-based term loan applications will require a detailed list of the assets the borrowing business has to offer so that the lender will understand the collateral available to secure the funds borrowed. Additionally, it is not uncommon for lenders to conduct a field audit by either visiting or sending a representative to visit the business to evaluate the value of the assets used for collateral.
Equipment Term Loans
An equipment term loan can typically be structured as a business equipment loan or an equipment lease program, which can both be used in virtually any and all industries. Whether the borrowing business is in a b2b or b2c industry, if equipment is a necessity for operation, an equipment term loan can most likely provide the funds and flexibility to cover the costs to obtain the best equipment available.
The process to apply for equipment term loans differs depending on the cost of the equipment being purchased. For less expensive, “small ticket” equipment purchases, which are equipment expenses under $250,000, lenders will only need to review an online application, the invoice for the equipment purchase, and a credit report for the borrowing business. Most of the time, there is no additional financial documentation required for equipment term loans less than $250,000. On the other hand, for more expensive, “big ticket” equipment purchases, which are equipment expenses over $250,000, most lenders will need to check a full financial document package to determine the eligibility for the borrowing business.
What type of collateral is used for Business Term Loans?
Machinery and Equipment
Commercial Real Estate
If the commercial real estate that a borrowing business has available to put up for collateral is extremely valuable, commercial real estate works as a great asset to use as collateral for a business term loan. In the event that the borrowing business has major issues, the lender can gain control of the commercial real estate from the borrowing business owner.
From a lender’s perspective, the faster and easier that they will be able to sell the inventory in the event of a default, the higher the value they will assign and the more money they will be able to offer the borrowing business. Depending on the specific type, in some cases, lenders will conduct field audits to assess the value of the inventory. By sending a representative to the location where the inventory is held, a more accurate value will be placed on the inventory to provide the maximum LTV amount.
What type of collateral is used for Business Line of Credit?
Machinery and Equipment
Accounts Receivable (A/R)
Lastly, purchase orders (PO) are one of the most common forms of collateral. A purchase order is a document made by your customer to authorize a business transaction with your company. It outlines the terms of the sale, including the payment terms, shipping dates, price, quantity, and more. Once you accept the purchase order, lenders can use it as collateral for your term loan. Generally, the LTV against purchase orders is between 30% to 40%. But once the purchase order is fulfilled, the PO becomes an invoice and you’re can advance the remaining percentage.