Things are looking up for businesses that are ready to expand and that are in need of financing. And, with interest rates hovering near their historic lows, now may be the best opportunity to lower your overall financing costs. If your business is need of working capital for expansion, acquisitions, equipment purchases, or simply to meet growing operating expenses, it would be worthwhile to review the different types of business loans we're offering our business customers today.
The best way to take advantage of low interest rates is with term loans which have always been the commercial loan of choice for both borrowers and lenders. Because they are usually issued with fixed rates and monthly or quarterly repayment schedules, they provide businesses with predictability for cash management and financial projections. There are several varieties of term loans, the two most widely used are intermediate-term and long-term loans.
Intermediate-term loans: With a maturity of three years or less, these loans are structured more like an installment loan with fixed monthly payments and, in some cases, a balloon payment at the end. The actual length of the loan term is sometimes based on the useful life of the underlying asset that is being financed.
Long-term loans: Loans with maturities of more than three years are considered to be long-term. Some maturities are as far out as 20 years, but most range between three and ten years. Generally, these loans require collateral which is usually the assets of the business. Most arrangements require that the business put down as much as 20% towards the total amount of the loan.
In both cases, term loans are best suited for small businesses that have achieved a certain level of financial stability and are seeking to expand their operations by constructing new facilities, buying an existing business, or making a substantial capital investment in equipment.
Because a significant amount of the costs can be recovered through depreciation allowances, the business should seek guidance from a tax professional to ensure they can take full advantage of available tax benefits.
Business Equity Loans
For businesses that own high-value assets, such as real estate or high-end equipment, a business equity loan would enable them to leverage those assets for expansion. As with a home equity loan, business equity loans are issued at a percent of loan to equity (LTV) which it typically around 80%.
Short-Term Loan Options
It's not uncommon for a business to run into a capital shortfall or the need to cover operating expenses until receivables come in. For these purposes, loans such as an accounts receivable loan or a working capital loan can be more easily obtained as long as they can be repaid within a short period of time.
Accounts receivable loan: When a business is expecting receivables from customers, but their cash flow is short, they can use the receivables as collateral for a short-term loan. Generally, these loans can be approved for as much as 70% of the total value of receivables, not including those that are more than 60 days late. The repayment schedule is based on the expected timing of the receivables.
Working capital loan: In some cases, short term financing can be made available purposes of business expansion, i.e., hiring new employees, purchasing equipment, or starting a marketing campaign. The terms are usually set for short maturities and the interest rate varies depending on both the personal and business credit scores.
If you are considering financing your business expansion now or in the future, we encourage you to sit down with one of our business lending specialists to discuss which loan options would best meet your needs.