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Commercial Financing Options
Credit Lines
Under a
credit line agreement, the lender supplies a
business with funds intended to fill temporary
shortages in cash that are brought about by timing
differences between outlays and collections.
Typically used to finance inventories,
receivables, project or contract related
work.
Short-Term Loans
Used for seasonal build-ups of
inventory and receivables. Generally repaid in a
lump sum at maturity, made on a secured basis and
are for a term of a year of less.
Asset Based Loans
Lender advances funds based on a percentage of
your current assets. The loan is used as source of
funds for working capital needs. Lender typically
takes a security position in the assets owned by
the business.
Contract Financing
Funds are advanced to you as work is
performed. Payments by the contracting party are
generally made directly to the
lender.
Factoring
Factors actually buy your receivables
and rely on their own credit and collection
expertise. Essentially, your customers become
their customers. Factoring is used by firms who
are unable to obtain bank financing. The cost of
financing is usually higher than other forms of
S-T financing.
Term Loans
Used to finance your permanent
working capital, new equipment, buildings,
expansion, refinancing, and acquisitions.
Commercial banks are the major source of funding.
The term of the loan is based on the useful life
of the assets being financed or collateralized.
Your projected profitability and cash flow are two
key factors lenders consider when making term
loans.
Equipment and Real Estate
Loans
Loans are fully secured by the
equipment being purchased. Typically banks loan
60-80% of the value of the equipment and is repaid
over the life of the equipment.
Lenders
make long term loans secured by commercial and
industrial real estate. The loan is usually made
up to 75% of the value of the real estate to be
financed. Repayment terms range from 10 to 20
years. Lenders also make second mortgages on real
estate. The amount of the second mortgage is based
on the appraised market value and the amount of
the first mortgage.
Leasing
Can be accomplished through a bank,
leasing or finance company. Your business will be
subject to the same type of review as when seeking
a loan, specifically cash flow of company, value
of lease object and useful life. Lease terms range
from 3 to 5 years. At the end of the lease, there
are generally 3 options: purchase, renew and
return.
3-15 YR Balloon
loans
Balloon loans offer interest
rates that are fixed for a period of years.
Typically these loans are pegged to a treasury
index. Terms are for 3, 5,7,10 or 15 years. The
amortization schedules are generally for 20 or 25
years.
When a balloon loan matures at the
end of the agreed term, the remaining principle
balance outstanding is due at that time. The
borrower can pay off the loan by either selling
the property or refinancing. Investment property
is typically owned for a previously defined period
of time. Analyze your investment strategy before
securing a balloon. Having to redo a loan is
expensive.
Adjustable rate
loans
An Adjustable rate loan will
typically fully amortize with no balloon features.
These loans may or may not have adjustment caps.
The rate is determined by an index plus a margin.
The indices used are generally U.S. treasury bond
rates. Rates are adjusted at a certain point in
time using either the current rate of the index in
question or the average of the index for the prior
year. In either event, the index used will
correspond to the adjustment term. If the loan is
a three year adjustable, then the index used
should be the three year treasury index.
Some adjustable rate loans are fixed for
an initial period of years and then will adjust
after that period. For example a 5/1 adjustable is
fixed for the first five years and there after
will adjust each year. The index used will be the
one year treasury rate.
Please note that
commercial lending is not standardized as it
relates to programs and to guidelines. Banks must
meet certain federal standards, but the index,
margin, amortization, term and fees are components
that are controlled by the investor based on their
risk profit analysis. Remember that this mortgage
will be the greatest expense your investment
property will be responsible for.
As such
we recommend that you consult your real estate
agent and your loan officer to assist in providing
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