Business Term Loans

What are Business Term Loans?

A business term loan is a commercial loan that is repaid over a specified period of time. The repayment period of a small business term loan can range from just a few months to as long as 10+ years. Term loans that are secured by collateral typically have longer terms since there is security for the term lender. Business term loans provide businesses of all sizes the ability to borrow capital for purchases that they might not have been able to make with just operating cashflow. Without the ability to use business term loans many businesses would have trouble expanding their businesses. There are many ways to utilize the different programs that are available and if you know where to look you will find the right program! Speak with one of our Lending Advisors to learn more about the business term loan programs available for business owners.

What are the different types of Business Term Loans?

Small Business Bridge Loans

A small business bridge loan is designed to meet immediate financing needs, such as bridging cash flow gaps, unexpected circumstances that require funding, or new business opportunities to capitalize on. Rather than using personal money or passing on opportunities that would result in additional profit for your business, apply for a bridge loan and the funds can be wired within 24 hours of applying. The most important thing is to make sure that your cash flow can support the payments on a bridge loan, as bridge loans are short duration, since they are just bridging a gap.

The process to secure a bridge loan is simpler than other types of financing. With an online application and limited documentation, funds could be available in as quick as 24 hours. The repayment periods are typically short, and payments can be made on a weekly, bi monthly, or monthly basis. In some cases, a business bridge loan can be fully amortizing and in others it can be structured as interest only.

Multi-Year Term Loans

A multi-year term loan is a business term loan that has a repayment schedule over 2 to 5 years. A term loan that amortizes over several years has low monthly payments and provides better ongoing cash flow for day to day operations. In order to qualify for a multi-year term loan your business must have good personal credit, strong business trade credit, and good historical cash flow. The terms and conditions of a multi-year term loan are going to depend on the overall strength of your business and personal credit. Underwriting will look at the enterprise risk of both the company, which includes; operating history, trade credit, cash flow, sales trends, deposit consistency, etc. and the owner, which includes; personal credit score, management bio’s, background checks, etc.

A multi-year term loan can be used by industries that sell to other businesses or industries that sell directly to consumers. Based on the wide variety of ways that the money can be used and the limited restrictions or covenants that coincide with this type of financing, a multi-year term loan is a perfect fit for businesses with strong credit profiles.

The application process to apply for a multi-year term loan is easier then applying for both Asset Based Loans and SBA Loans. Although there is less paperwork and lower requirements, the application process still involves company financials and tax returns to be available for a lender to review.

SBA Term Loans

SBA term loan programs are designed by the Small Business Administration to help small business owners secure long-term financing. There are three main SBA term loan programs that let you borrow money for nearly any business purpose – purchasing inventory or equipment, refinancing existing debt, purchasing real estate, and general working capital needs. The biggest benefit of an SBA term loan is the long payment terms, low interest rates, and large loan amounts.

SBA term loans are available to almost all industries and because you can use the money for a variety of reasons, it’s one of the best programs available to small businesses. The industries that are not eligible are gambling, mortgage servicing, pawn shops, religious teachings, bail bonds, life insurance companies, and vices.

The process to secure an SBA term loan is tedious and requires a long list of documents, however, knowing this up front makes the process easier and when you are approved, it is worth all of the work. From application to closing is typically 30 to 60 days, it can be shorter but only if you are organized! A full financial package including Business and Personal Tax Returns, Business and Personal Financials, Interim Financials, and a variety of other documents will be required.

Asset-Based Term Loans

When cashflow alone isn’t enough for your business to qualify for a loan, a lender will look to the business assets to gain extra comfort and security. An asset-based term loan will use collateral as the focal point to provide financing that’s needed. The terms and conditions of an asset-based term loan will also depend on the type of collateral that is available. Some of the collateral that a lender will consider for an asset-based term loan is the following; accounts receivable, inventory, equipment, real estate, intellectual property, and marketable securities. It’s important to note that the most crucial collateral to a lender is going to be the accounts receivable, inventory, and equipment. Other collateral, while in important, is not needed for an asset-based term loan but will be considered if there is a need for additional capital.

Asset-based term loans are generally best for business to business (b2b) industries. This is because b2b industries tend to have significantly more collateral than business to consumer (b2c) industries. For example, a manufacturer will have equipment, accounts receivables, and inventory/materials, while a restaurant will only have furniture, fixtures, and equipment.

The application process for an asset-based term loan is paperwork intensive and requires you to have all of your financial information organized. Outside of the standard documentation an asset-based term loan is going to require a detailed asset list so a lender can understand the collateral that’s available to them.

Equipment Term Loans

Equipment term loans are a great way to finance up to 100% of the new or used equipment that you’re looking to buy for your business. Rather than pay with cash, every business should use an equipment term loan program that has low monthly payments to ensure there is sufficient operating capital. An equipment term loan can be structured as a loan or a lease and can be used in virtually any industry. Whether your business is in an industry that’s b2b or b2c and equipment is a necessity, then an equipment term loan will provide the money and flexibility that you’re looking for.

The process for an equipment term loan will depend on the cost of the equipment. For equipment purchases less than $250,000 we only need a simple online application, an invoice for the equipment, and a credit report. There are no financials required for equipment term loans that are less than $250,000! For equipment term loans over $250,000 we’ll need a full financial package to determine eligibility.

What type of collateral is used for Business Term Loans?

Machinery and Equipment

Considered a hard asset, machinery and equipment are favorable assets for business term lenders. By taking the make, model, year, and the condition of the equipment a lender will have the ability to assign a value to the equipment. The typical advance rates or loan to value (LTV) for equipment and machinery is up to 100% for new equipment and up to 75% of forced liquidation value of used equipment. This means that a lender will provide financing based on what they would be able to sell the equipment for in the event of a default.

Commercial Real Estate

Commercial real estate is a hard asset and a great form of collateral for a business term loan. It’s not as liquid as equipment, A/R, or inventory, but it will provide a stable asset for a lender to lend against. Commercial real estate lenders and banks will normally only provide the first mortgage on commercial real estate. Nonbank or alternative lenders will provide second liens on commercial real estate loans.

Inventory

Although a tangible asset that might hold value to an operating business, inventory is not always as valuable as you would imagine. The type of inventory, the ease of liquidation, and the location of the inventory play a major role in determining the advance rate or LTV for a business term loan. For example, a company that manufactures its own jewelry might receive a 30% LTV from a lender while a steel manufacturer that holds raw steel as inventory might receive a 65% LTV. From a lender’s perspective the faster and easier they can sell the inventory, the higher the value they will assign.

What type of collateral is used for Business Line of Credit?

There are varying types of collateral that can be used for a secured business line of credit. Lenders are more comfortable providing business lines of credit when collateral is available. Collateral helps business owners secure larger lines of credit, better rates, and more liquidity. There are four types of collateral that are commonly used when securing a business line of credit.

Machinery and Equipment

Considered a hard asset, machinery and equipment are favorable assets for business lines of credit. By taking the make, model, year, and the condition of the equipment lenders will have the ability to assign a value to the equipment. The typical advance rates or loan to value (LTV) assigned to equipment and machinery is 60% of the forced liquidation value (FLV). This means that a lender will provide availability based on what they would be able to sell the equipment for in the event of a default.

Accounts Receivable (A/R)

A/R or accounts receivable is money that’s owed to a company after a sale has been made or services have been rendered. Like asset-based lending, accounts receivable is a favorable asset to secure a business line of credit. Typical advance rates for a business line of credit range from 70% to 95% of the face value of the invoice. For example, if the face value of an invoice is $100,000 and the advance rate is 85%, the lender will give $85,000 as a loan against the invoice.

Inventory

The type of inventory, the ease of liquidation, and the location of the inventory play a major role in determining the advance rate or LTV that an lender will provide for an inventory line of credit. For example, a company that manufactures its own jewelry might receive a 30% LTV from a lender while a steel manufacturer that holds raw steel as inventory might receive a 65% LTV. From a lender’s perspective the faster and easier they can sell the inventory, the higher the value they will assign.

Purchase Orders

PO’s or Purchase Orders are commonly used to secure business lines of credit. A Purchase order is a document generated by the buyer to authorize a transaction with a seller. PO’s typically outline the terms of the sale, which include price, quantity, payment terms, shipping date, etc. Once this PO is accepted by the seller, a lender can use it as collateral. The LTV against purchase orders is typically between 30-40%, but once goods are shipped or services are rendered, the PO becomes an invoice and the remaining 40-50% of the invoice can be advanced.

What are the best industries for Business Term Loans?

Business term loans are industry agnostic and can be used for a variety of reasons. A business term loan is a great option whether you’re in an industry that sells business to business, business to consumer, or business to government.

Interested in learning about your financing options?
Speak with a lending expert today!