Business Term Loans
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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 bridge loan is a type of small business term loan that’s created to address immediate business needs like bridging cash flow gaps, paying for unforeseen business expenses, or seizing profitable business opportunities.
You don’t have to miss business opportunities just because you don’t have enough cash on hand. And you don’t have to resort to using your personal assets either! With a bridge loan, you’ll be able to receive funding in as little as 24 hours.
While bridge loans are a great way to support cash flow gaps, make sure your cash flow can support bridge loan payments. Since they’re mainly for bridging problems with cash flow, repayment terms are shorter compared to other types of business term loans.
Applying for a bridge loan is quick and easy. The first step is to fill up an online application, submit the needed documentation, and your application is good to go! Once approved, you’ll be able to receive funding within the day.
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 the most common type of business loan. Lenders will give you a lump sum and you have to pay it back within a specified period of time. For a multi-year term loan, the repayment schedule is usually within two to five years. This type of loan amortizes over several years and it has low monthly payments, which is better for your cash flow.
To qualify for a multi-year term loan, you need to have a strong personal and business credit, as well as a good historical cash flow. It’s important to demonstrate positive credit and business history because the terms and conditions of your loan will depend on it. Lenders often look at your business’ operating history, sales trends, cash flow, trade credit, and deposit consistency among others. They will also check out your personal credit score, as well as do background checks.
Different types of industries can apply for multi-year term loans. It’s also easier to apply for a multi-year term loan than for an SBA loan or asset-based loans. However, lenders often require you to submit company financials and tax returns.
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.
While anybody can apply for asset-based loans, it’s especially best for business to business (b2b) industries since b2bs often have more collateral to offer than a business to consumer (b2c) industries. For instance, manufacturers and suppliers usually have accounts receivables, inventory and materials, as well as equipment to put up as collateral. On the other hand, restaurants only have furniture, fixtures, and kitchen equipment.
Potential lenders will need to see your financial documents before you can qualify for an asset-based loan. Additionally, you’ll also need to submit a detailed asset list along with the standard documentation.
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.
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?
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.
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.
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 would you use a Business Term Loan?
Business Acquisitions Term Loans
Term Loan to Purchase Equipment
Debt Consolidation Term Loans
Term Loan for Working Capital
Inventory Term Loan
Real Estate Term Loan
Term Loan to refinance Debt
The business owners personal credit profile
The current cash flow in the business
Business historical cash flow
The credit history of the business
Years in business
Diversity of customers
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.
What are Business Term Loan Rates?
There are many different types of small business term loans which have different structures, rates, and terms. Rates for business term loans can range from 5.25% to as high as 20%+. We offer both fixed rate and variable rate term loan programs. The rate for your small business term loan is going to depend on the following factors.
Business trade history
Profitability of your business
How long you’ve been in business
Personal credit score
Collateral available to secure the loan
Whether subordinated or first position
Use of funds
Length of term
Quality of clients
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