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. Comapred 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

A multi-year term loan is a type of business term loan that typically has a repayment schedule over the course of two to five years. A term loan that amortizes over several years usually can offer business owners relatively low monthly payments and will provide the business better ongoing cash flow for their daily operations. Often, in order to qualify for a multi-year term loan, a business must be able to demonstrate good business trade credit, good historical cash flow, and the business owner will have to show strong personal credit. The terms and conditions of a multi-year business term loan will depend on the overall strength that the borrowing business can demonstrate and the personal credit for the business owner. The underwriting process will evaluate the enterprise risk for both the company and the business owner. For the company, the underwriting process will consider the operating history, business trade credit, the typical cash flow, demonstrated sales trends, deposit consistency, and other documentation to validate the potential for the borrowing business to support the term payments. In the underwriting process of this type of loan, the owner’s personal credit score will be reviewed. Additionally, the management biographies and background checks will be conducted. There is generally a need from the lender to understand the credibility of the owner and business.

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

SBA term loan programs are a specific type of business term loan designed by the Small Business Administration. This type of term loan program was created with the intent to help small business owners find long-term financing. There are several different types of SBA term loan programs that are popular among small business owners, which each allow business owners to borrow money for almost any business expense. Depending on the nature of the borrowing business and the type of expense the funds are needed for, there is an SBA program for most types business expenses. From purchasing inventory or equipment, refinancing existing debt, purchasing real estate, or other general working capital needs, there are many different SBA programs to offer borrowing businesses many advantages. The biggest benefits with these type of term loans include: long payment terms, low interest rates, and large loan amounts available for small business owners.

Asset-Based Term Loans

When cash flow alone is not enough for a borrowing business to rely on when applying to qualify for a loan, lenders can also consider the assets that the borrower has to offer to use as collateral in order to provide security and comfort for the lender. Asset-based term loans use collateral as the emphasis when considering financing business expenses. The terms and conditions for asset-based term loan programs will depend on the type of collateral that the borrowing business has to put up. Some examples of different types of collateral that lenders will typically consider for asset-based term loan programs are: accounts receivable or invoices, inventory, equipment, real estate, intellectual property, or marketable securities. It is also important to note that the most valuable types of collateral a lender will ideally consider when securing asset-based funding are accounts receivable, inventory, equipment and real estate. These types of collateral provide the most security for the lender to assure the funds can be capitalized in the long-run. If the borrowing business fails to pay back the funds according to the terms, the lender will need to liquidate the collateral. Not all types of collateral are easily liquidated, however those that are less liquid can still be considered additional backup for the loan. These are often called boot collateral as they will help in obtaining additional capital, but will often not be considered for the bulk of the borrowed funds.

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

Equipment term loans are a type of business term loan product that allows business owners to finance the entire cost of new or used equipment that they are looking to buy for their business. Instead of paying with cash, it is smart for business owners to consider using equipment term loan programs because they offer low monthly payments to extend the cost of large equipment purchases, rather than spending large up-front chunks of money. Instead, by making the monthly payments over the course of the terms of the loan, the business owner can ensure that there will be sufficient operating capital available for other expenses.

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?

When business owners are considering applying for a business term loan, in addition to working cash flow, the type of collateral that the business has to offer should be considered. Lenders will want to check to see if the borrowing business has a typical influx of sales or working capital to sustain payments, and if there is any reason to doubt that the borrower will be able to make their payments, lenders will especially want to see collateral that a business can offer to secure the funds. Collateral is used by lenders to secure funds in the case that if a borrower fails to make payments on the terms that were agreed upon, the lender can use the collateral the borrower put up to repay the amount borrowed. If a borrowing business does not have the working capital to sustain monthly payments, but has highly valuable assets to be used as collateral, the business owner might be able to secure funding with a business term loan, despite low cash flow. Some examples of the most popular types of collateral considered by lenders are: machinery and equipment, commercial real estate, and inventory.

Machinery and Equipment

Considered a hard asset, machinery and equipment are usually favorable assets for a business term lender to consider because this type of collateral typically hold their value for long periods of time. By taking the make, model, year, and condition of the equipment or machinery, lenders will be able to evaluate the value of each asset. Typically, advance rates or loan to value (LTV) for equipment or machinery can be up to 100% for new equipment and up to 75% of forced liquidation value for used equipment. Lenders are mostly concerned that in the event the borrowing business cannot continue to make payments, they will need to re-sell the equipment or machinery to secure the funds that were borrowed. By determining the amount that they could liquidate the assets for, the lender will determine how much they can capitalize for in the event of a default, which will set the terms for the business term loan.

Commercial Real Estate

Another type of hard asset is commercial real estate, which is a great form of collateral for a business term loan. While commercial real estate is not quite as liquid as equipment, accounts receivable, or inventory, this type of asset still provides stable value for lenders to lend against. Commercial real estate lenders and banks typically will only provide the first mortgage for commercial real estate, whereas non-bank or alternative lenders might provide second liens on commercial real estate loans.

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.

Inventory

Inventory is a tangible asset that might be able to hold value for an operating business, however, it is not always considered as valuable by lenders as borrowing business owners might hope. Whereas the inventory might cost a high price for the business owner, the lender might not place the same value on it. The type of inventory, the ease of liquidation, and the location of the inventory all play a major role in determining the advance rate or LTV that the inventory can provide for a business term loan. For example, a company that manufactures its own jewelry which they then hold as inventory might receive a 30% LTV from a lender, while the steel manufacturer that holds the raw steel as the inventory might receive 65% LTV.

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?

At SMB Compass, we accept different types of collateral to secure your business term loan. The value of your collateral can help you qualify for higher loan limits, lower interest rates, and more liquidity. There are different types of collateral, but here are the top four ones that are commonly used by our clients:

Machinery and Equipment

We consider machinery and equipment as hard assets, which means they’re strong assets to use as collateral. To determine the value of your equipment, we will consider the make, model, year, and the overall condition of your equipment. Generally, the loan to value (LTV) assigned to a piece of equipment is 60% of the forced liquidation value (FLV).

Accounts Receivable (A/R)

Accounts receivables (A/R receivable) is the money that your customers owe to your business after completing a sale. Lenders consider accounts receivables or invoices as collateral for multi-year term loans. We generally advance 70% to 95% of the total invoice value. For instance, if your invoices are valued at $100,000 and the advance rate is 85%, we will give you $85,000 upfront against your invoices.

Inventory

Another collateral we consider is inventory. To determine the value of your inventory, we check the location of the inventory, ease of liquidation, and the type of inventory. For example, a jewelry manufacturer may receive a 30% LTV, while steel manufacturers may get a 65% LTV. The lender’s main concern is the resale value of your collateral; the faster and easier they can sell it, the higher its value.

Purchase Orders

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.

Why Use Business Term Loans?

Business term loans are utilized by many business owners that need assistance with working capital or other business expenses. Because of the range and flexibility of costs and restrictions, and the variety of different types of programs, there is a business term loan to fit the needs of most borrowing businesses. Some of the most common uses for business term loans are: for business acquisition, for equipment purchases, for debt consolidation, for working capital, for inventory, for real estate, and for refinancing debt.

Business Acquisition Term Loans

Many business owners utilize business term loans in order to acquire new businesses. By using a business term loan to finance an acquisition, business owners can free up their funds for operating expenses and other costs. When using a business term loan for acquiring new or existing businesses, the primary characteristic that the lender will consider is the risk that the existing and new businesses will impose on the lender once the business owner is in control of the new ownership.

Term Loans for Equipment Purchases

Instead of taking a blow to working capital with expensive up-front purchases, many business owners utilize business term loans for equipment purchases. By capitalizing on business term loans for equipment or machinery purchases, business owners free up capital and other lines of credit for other expenses. Every business owner wants to maintain the highest level of state-of-the-art equipment for their business, but most of those purchases are extremely pricey. Business term loans provide one option to keep the best equipment without making the large purchases all at once.

Debt Consolidation Term Loans

Many business owners utilize multiple financing options in order to cover their daily and annual operating expenses. Business term loans offer one solution to the overwhelming debt that can pile up quickly across multiple avenues. By utilizing business term loans to consolidate debt, business owners experience the ease of making one payment to the lender by refinancing their debt, rather than making multiple payments to multiple lenders.

Term Loans for Working Capital

One of the most common uses for business term loans is for working capital needs. Many business owners need a boost in working capital, and term loans provide the best option by allowing business owners to put money in the bank and making smaller, easier to manage, monthly payments to cover their amount owed.

Inventory Term Loans

Businesses that experience high turnover of inventory often have trouble keeping up with the cash flow necessary to keep the shelves stocked. By using business term loans for inventory, business owners can make sure they have the inventory needed without expending all working capital on it.

Real Estate Term Loans

Another common use for business term loans is for real estate purchases. By borrowing funds from a lender in order to purchase new real estate, business owners can ease the burden of the expense by making payments over the terms of the loan agreement, rather than making the large purchase all at once.

What are the best industries for Business Term Loans?

Business term loans are industry-agnostic, meaning that they can be used for a variety of reasons across industries. A business term loan is a great option for business owners, whether they are in an industry that sells business-to-business, business-to-consumer, or business-to-government. With the range in flexibility and qualifications for business term loans, there is usually a business term loan product that can fit each borrower’s needs.

What are Business Term Loan Rates?

There are many different types of business term loans, and different loan products and packages will have different structures, rates, and terms. The specific details for business term loan rates will vary from lender to lender, and there are a number of factors that can influence the rates. Typically, most lenders can offer rates for business term loans ranging from 5.25% to as high as 20% or more. We offer both fixed rate and variable rate term loan programs, however the rate will vary depending on a number of factors. Specifically, the factors that will be used to determine business term loan rates are:

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Business trade history
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Profitability of the Borrowing Business
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Length of Time in Business
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Operating history
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Personal Credit Score of Business Owner
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Collateral available to secure the loan
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Subordinate or First Position
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Use of funds
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Length of term
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Quality of clients

FAQ About Business Term Loans

What is a Business Term Loan?

A business term loan is a type of business loan that allows borrowing businesses the ability to receive a lump-sum of money from a lender given that the borrower agrees to repay the amount borrowed over the course of agreed upon terms of the loan. These types of loans can range in length from a couple of months to several years, where the borrowing business makes monthly payments to the lender over the course of the terms of the loan. Business term loans are beneficial for business owners because they provide funds to help bridge working capital gaps or cover daily operating expenses, or any number of business costs, as the restrictions are extremely flexible for business owners.

How to Apply for a Business Term Loan?

Applying for a business term loan is easier than ever before. The level of documentation necessary for the application will vary depending on the lender and the type of business term loan program that the borrowing business is applying for. If the borrowing business can provide documentation to demonstrate strong cash flow and credit history, the application process can be extremely quick and easy. For borrowers that are using assets as collateral to secure funds, the documentation process might be extended, and might include a field audit to determine the value and liquidity of the asset.

How to Secure a Business Term Loan?

The first necessary step to secure a business term loan is to determine the expenses necessary to cover with the funds. Because the business term loan programs vary, typically based on the purchases that the funds are needed for, the borrowing business should first determine what the fund will be spent on. Next, borrowing businesses should determine if their working capital and cash flow are stable enough to apply for the business term loan without using collateral to secure the loan, or the borrowing business should consider what assets they have available to secure the funds for a business term loan. Once the purpose and the amount necessary are determined, the final step is for the business owner to organize their financial information and documentation to provide for the lender. The more organized the business owner is, the smoother the application process will be.

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