Business 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 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.

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 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.

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 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.

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.

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.

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.

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.

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.