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
Short term loans are used for seasonal build-ups of inventory and receivables. Generally they are 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
A lender advances funds based on a percentage of your current assets. The loan is used as source of funds for working capital needs. A 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
Term loans are 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 collaterized. Your projected profit 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
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 you with all the information needed to make a complete and accurate choice.
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