Common Types of Business Loans
Rates for LOCs typically run one to three percentage pointer’s above the lender’s prime rate or cost of funds. You typically pay interest only on the outstanding balance. There may be other fees including a commitment fee or a requirement for a compensating balance (money required to be left on deposit with your lender during the term of the loan.
There are different types of LOCs. The non-binding LOC does not guarantee that the full amount of the loan will be available at all times. Changes in the regulatory environment for lenders, a downturn in the economy, a deterioration in the financial condition of your company can all affect the availability of monies.
For those that are willing and able to pay more for their loan, they may be able to obtain a binding or committed line of credit. This guarantees that your money will be available for the full term of the loan. This is also a terrific means for providing security to a note being held by a Seller.
A revolving LOC is similar to a credit card loan. You have a fixed amount available. When you use a part of that amount, your credit line is reduced. When you pay off the principal your line is restored.
Most LOCs are secured with accounts receivable and inventory. Typical loan amounts are 50 too 75 percent of A/R and 50 percent of inventory.
- Bridging a working capital gap.
- Purchasing Equipment.
- Paying off other debt (such as a balloon payment).
Typically lenders will require some type of collateral on a term loan. They can be secured with accounts receivable, inventory or a company’s fixed assets such as heavy equipment, manufacturing machinery, trucks.
Borrower Beware- Loan Covenants
Lenders can and will usually include restrictions or covenants to the loan agreement.
Covenants restrict what you can do with your business’ money. A fairly common approach is to tie the availability of funds in your credit line to the maintenance of specified financial ratios. As an example you may asked to maintain at least a 2:l or 3:l ratio on a quarterly basis.
You may also be asked to limit the amount of salary you take. You may also ask that any monies loaned be subordinated to the business, meaning the lender has first claim on the business and its assets in the event of a default. Your loan may also forbid you from borrowing from the business or switching to another bank until the loan is paid off.
If your business relies heavily on one or two key employees you may be required to obtain key man insurance. You may also be restricted from participating in high risk ventures.
Need help securing financing? We can help. Contact John McGovern, CEO, firstname.lastname@example.org, (917) 881-6563.
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