Business 2 Business Funding

What are Term Loans?

Term business loans are a standard debt financing facility with standard payments (usually monthly) with a maturity and amortization schedule, ranging from anywhere in 6 months to 30 years in length (depending on use). Term loan sizes for small and medium-sized businesses can be as small as a few thousand dollars, and can range up to $500,000.00 for loans with SBA-enhancements, and well above that for other traditional facilities. The repayment associated with most term loans are made monthly, although some alternative lenders will require payback be made on a weekly or even daily basis.

Term loans vary in size, structure and uses depending upon the commercial lending institution. A term loan from a bank may have a very different underwriting criteria than that of a mid prime lender that specializes in buying-out high-interest merchant cash advances. Term loans are usually collateralized with the borrowing company’s assets (building, land, equipment, accounts receivable, cash flow, etc.). While each lender has their own requirements, its common for a blanket lien to be placed on all the company’s assets when a term loan is provided to the business.

While each lender is different, a term loan provided by a conventional, private investment bank or SBA-preferred lender usually requires and extensive amount of business and personal financial documentation for due diligence during the underwriting of the loan. Traditional commercial lenders will require that the business prove it has an acceptable debt-service-coverage-ratio to ensure the lender will get paid back.

What is a Business Line of Credit?

A business line-of-credit is a type of flexible pre-approved commercial financing in which a maximum loan balance is set by a bank or lender in which the borrower can draw on the funds whenever they wish. A line-of-credit can range in sizes from $5,000 for very small businesses, to well over $1.500,000.00 for mid-size companies. Repayments for lines-of-credit are made in various fashions, including monthly, weekly and even daily by some lenders.

While each lender has their own criteria for their lines-of-credit, a large number of lenders like to secure their lines of credit with assets such as accounts receivable or the equity in their hard assets. A lender will extend a line-of-credit to a business based of a percentage of the A/R or net value of the hard asset. Other banks and commercial lenders will provide lines-of-credit on an unsecured basis provided the company is creditworthy, and the financials support the facility.

While there are many advantages to a line-of-credit for a business, the most advantageous may be the fact that a LOC allows a company to borrow as much money as they need without having to go through an approval process with a lender. The financing is pre-approved and is readily available to draw upon until they reach the maximum allowed.

What makes a line of credit most advantageous is the fact that interest is only paid on the amount that is drawn from the line of credit, and not from the overall size of approved funding related to the financing facility.

What is a SBA Loan?

SBA Loans are bank and commercial loans provided to new and existing small businesses that are backed by the United States Small Business Administration. The purpose of SBA lending is to provide financing for small companies that haven’t been able to secure traditional bank financing. The bank or SBA lender provides enhanced financing to the small business, while the government agrees to shoulder the great majority of the lenders’ losses should the small business default on the loan. In theory, by reducing risk to the lending institutions with the SBA guarantee, the banks and lending institutions are more inclined to approve loans they would not normally fund. Since the government is taking the majority of risk with this type of financing, the SBA requires the small business and the commercial lender to meet certain guidelines before they will get an SBA guarantee before funding.

SBA 7(a) Financing

    Loan Amounts: Up to $500,000.00
    Rates: 3-15.99%
    Terms: 1-25 years
    Funding time: 30-90 days

The SBA 7(a) is the Small Business Administration’s largest lending program which is an umbrella for a number of other SBA financing options. SBA 7(a) loans can be as much as $5 million, but the government will only guarantee up to $3.75 million for any one small business. Other debt finance programs under the 7(a) program include: SBA Express Lender Structured Loans, Export Express lender structured loans and lines of credit, International Trade Loan, Export Working Capital Loan, CAPLines (Seasonal, Contract, Builders, Working Capital). Use of SBA 7(a) loan proceeds include starting a business, purchasing an existing business, purchase a building, construct new buildings, working capital, purchasing of inventory, fixed assets and raw materials, leasehold improvements and, in some qualifying situations, refinancing and consolidation of business debt. SBA 7(a) financing is offered as both a term loan facility and also as a line of credit.

SBA 504 Financing

    Loan Amounts: Up to $10,000,000
    Rates: 5-7%
    Terms: 10-20 years
    Funding time: 30-60 days

The SBA 504 program was created to help small business owners finance long term fixed assets (such at commercial buildings and business equipment) and in some cases refinance long-term equipment loan terms at market or below market prices. While there isn’t a limit on the SBA 504 commercial loan size, the SBA will only guarantee $5 million of the facility. The SBA 504 loan is administered through three parties: the small business owner, a conventional bank lender and a non-profit Community Development Corporation lender. Under this program the borrower would agree to put up 10% of the loan facility, the bank would agree to put up 50% and the CDC would agree to put up the remaining 40% of the loan.

SBA Microloan Program

    Loan Amounts: Up to $250,000.00
    Rates: 6-13%
    Terms: Up to 6 years

The SBA Microloan program provides loans up to $250,000.00 to small business owners and non-profit childcare centers. Qualification and use-of-funds for the SBA microloan program are similar to the 7(a) program in that there are a wide uses allowed. The major difference in the microloan program as opposed to the 7(a) program is how its administered: the SBA provides funding to non-profit micro-lenders who then disperse the funds to qualified companies.

What is a Merchant Cash Advance?

Merchant cash advances are not loans but instead a business-to-business transaction that involves the selling of a company’s future credit card sales or a portion of the company’s bank deposits to a commercial lender in exchange for an upfront lump sum of funding at a discount. Loan sizes range anywhere from $5,000 up to $2,000,000 with terms ranging anywhere from 3 months to 2 years. Repayment for these transactions are usually made every business day (sometimes weekly) by an automatic deduction from a company’s credit card sales or bank deposits.

This financing tool is usually used by small and medium-sized businesses that have a time-sensitive cash crunch, because approvals for merchant cash advances can take as little as 2-24 hours, with funding in as few as 2-5 business days. Since this type of commercial financing is cash flow driven, a company get approved even with poor personal and business credit. This financing tool is usually used by small and medium-sized businesses that have a time-sensitive cash crunch, because approvals for merchant cash advances can take as little as 2-24 hours, with funding in as few as 2-5 business days. Since this type of commercial financing is cash flow driven, a company get approved even with poor personal and business credit.

There are a number of advantages to merchant and business cash advances. Regardless of business and personal credit, nearly all applicants are approved for some sort of cash advance financing. The simplicity and speed of the process is fairly painless, with much of the process handled online, over-the-phone, or by use of email. Minimal documents are required, and sometimes all that is required is to verify your bank account. Because there are no restriction on how the company uses the business cash advance, oftentimes this type of financing is used as a bridge until more permanent traditional financing is put in place. By using this financing facility as a bridge loan, small and mid-size businesses are meet their cash flow needs when there is a dip in receivables.

    Factor Rates: 1.16 - 1.50
    Terms: 3-24 months
    Loan Amounts: $5,000 – $2,000,000
    Time to fund: As Little as 1 Business Day
    Repayments: Daily or Weekly
    Collateral Required: No

    Factor Rates: 1.16 - 1.50
    Terms: 3-24 months
    Loan Amounts: $5,000 – $2,000,000
    Time to fund: As Little as 1 Business Day
    Repayments: Daily or Weekly
    Collateral Required: No

What is Equipment Financing?

Equipment financing relates to any and all forms of financing businesses use to obtain commercial equipment. Types of equipment financing include equipment loans, equipment leasing and equipment sale-leaseback. Each equipment financing option varies in credit and capital requirements, structure of the financing facility, along with rates, terms and fees. Leasing equipment allows companies to obtain equipment immediately, without having to pay upfront costs. Equipment loans allow companies to purchase equipment and have full-control over the equipment both during the loan term and once payback is completed. Sale-leasebacks allow companies to sell their equipment, while still retaining the ability to use the equipment.

Equipment loans are debt financing facility used to purchase new or used business equipment. Getting a business loan to purchase equipment allows a company to obtain equipment quickly, without having to pay the full price upfront. Types of business loans used to purchase equipment include SBA loans, bank term loans and lines of credit, alternative loans, factoring and merchant cash advances. Sale leaseback is a way for a company to leverage their own business equipment to obtain financing by selling their equipment to a lender, and then leasing the equipment back for a period of time. Sale leaseback can help a company deal with dips in cash-flow and increase working capital for the businesses needs.

Equipment leasing is the purchase of equipment by a business lender with the intention to lease the equipment directly to a business. Equipment leasing is a good financing tool for companies that don’t have upfront money to purchase equipment, companies that want to obtain business equipment but not be stuck with the equipment should it become outdated, and for companies looking to tax advantage of tax incentives for capital leases. Equipment leasing allows companies to obtain new and used equipment, and at the end of the term they are often offered the option to purchase the equipment (for as little as $1). Step-Up Leases allow your company to start with lower payments that increase over time. Skip-Leases allow companies to skip payments during certain months of the year. Deferred-Leases allow businesses to defer lease payments for a significant period of time. Master-Leases provide companies with additional equipment that can be added to the leasing agreement.

What is Invoice Financing?

Invoice financing is a business-to-business transaction that provides a company the ability to leverage unpaid 30, 60 and 90 day invoices to obtain specialized short-term business financing before your customer actually pays the invoice. With invoice financing (often called other terms like “factoring”, “invoice factoring”, “accounts receivable factoring”) a lender will provide specialized asset-based financing by using your business’s unpaid invoices as collateral to advance your company between 70-92% of the invoice’s total dollar value. When the factoring lender provides your company or small business the initial advance they will charge you a fee (usually between 1-3 of the total invoice, along with an additional fee added each week) and hold the rest until the invoice is paid. Once the invoice is paid-in-full, the remainder of the invoice amount is released to your small business.

Rather than relying on your company’s creditworthiness to secure financing, invoice financing companies actually look more at the creditworthiness of your costumer, as it is their future payment they are buying at a discount. Invoice factoring company’s will usually only advance commercial and government invoices (meaning that they tend not to buy invoices in which the company whose invoice they are buying sells products to consumers rather than other businesses. Most small business factoring companies offer small companies the ability to “spot factor” a single invoice — a one time factoring transaction in which the relationship between the business and factoring company ends when the invoice is paid — as opposed to traditional factoring where there is a continued relation beyond a single invoice.

There are many advantages in deciding to factor your invoices as compared to other forms of business and commercial financing. Factoring your company’s invoices allows you quick access to needed cash without having to present the factoring company all of your business and personal financial statements. The funding process when selling invoices is about as fast as a merchant cash advance and other short term business loans — which usually take between 1-4 days to fund, without having as high of a rate as those financing options. While credit is a factor in making a final decision whether or not the factoring company will purchase your company’s invoices, its not the only factor in the decision. In fact, what matters more to the purchaser of the invoice is the creditworthiness of the debtor of the invoice. And while the creditworthiness of the debtor is an important metric in deciding whether to approve final funding, the factoring company is able to keep the transaction discreet so the debtor doesn’t have to know that such a transaction took place, allowing your company to continue doing business with the company that owes the invoice without causing friction in the business relationship.

There are obvious disadvantages to selling your selling your unpaid invoices, but the main would be that you are only getting a percentage of the total invoices value. But a company may need to balance the need for full payment, with the need for immediate cash for such business needs as inventory, working capital, buying or repairing equipment, marketing, payroll, etc. But the longer the invoice goes unpaid, the more fees the factoring company will charge your business. Usually, these fees are in the 1-2% range (of the entire invoice’s cost) and they are added each week the invoice goes unpaid. Over the course of 30, 60 and 90 days, these fees can become quite expensive, and leave you with only 2/3 of the invoices initial value.




 

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