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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
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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