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Operating Line
Operating loans are also called working capital loans, line
of credit or overdraft protection. They are loans that fluctuates
with the day-to-day cash flow needs of a business. The maximum
amount you may borrow for an operating line is primarily based
on accounts receivable. Cash businesses such as restaurants
and retail stores generally do not qualify for an operating
line. Inventory is not generally financed (but exceptions
are made frequently)
Term Loan
A term loan is a loan that has monthly principal and interest
payments. The outstanding principal amount decreases each
month. Generally, term loans are established to assist in
financing long term assets such as computers or equipment.
The amortization period should closely match the useful life
of the asset purchased (a term loan for computers should have
an amortization period of not more than 3 years). Most term
loans have an amortization period of 5 years or less (but
there are exceptions).
SBA Loan (USA)
This is a loan where the Government partially guarantees
repayment to the Bank. SBA loans are used when the business
is slightly outside a Bank’s standard lending criteria.
A business must qualify for financing through a bank (using
regular banking guidelines) and gain further approval from
the SBA prior receiving any money.
SBA’s 7(a): Used to assist most types of small business
loans up to $1 million including: equipment, real estate,
working capital or purchasing existing businesses. In most
cases the SBA will guarantee no greater than 75% of loan value
and a maximum amortization of 6 years. SBA loans are targeted
at existing and growing businesses; it is difficult to finance
a start up business through this product.
SBA’s MicroLoan: Targeted at very small and start up
companies to purchase computers, equipment and materials required
to launch a business. You may borrow up to $25,000 for up
to 6 years. Interest rates do not exceed prime plus 4%.
SBA’s 504: Used to purchase real estate for businesses
that are likely to increase the level of employment at the
company. The guarantee value may be as high as 90% of the
appraised value of the property.
SBA’s Fastrak Loan: Some large, national Banks are able
to approve loans up to $100,000 without consulting the SBA.
The SBA may guarantee up to 50% of the loan value.
SBL Loans (Canada) renamed CSBFL
These loans are similar to SBA loans in the United States
where the Government provides a guarantee. Maximum loan value
is $250,000 where the chartered Bank’s approve the loan
without consulting a Government agency. These loans are targeted
to both existing and start up businesses.
While the program is more flexible on paper we notice the
following guidelines.
Uses of funds: To purchase computers, equipment or renovations
(cannot finance working capital)
Repayment: Maximum 5 years (3 years for computers)
Personal guarantee signed by the owners: 25% of the loan
value
Percentage of assets financed: Up to 90% of the asset value
depending on the type of asset being purchased and strength
of the business. It is rare for a restaurant to receive financing
greater than 50% of the asset value.
Costs: 2% upfront fee to the Government, legal fees, and
interest rates cannot exceed prime plus 3%.
Lease
The requirements for a lease are similar to a term loan as
the risks to a financial institution as identical. There can
be tax benefits applied to leasing. Leased goods are generally
owned by the financial institution or a 3rd party. The amortization
period should closely match the useful life of the asset purchased
(a lease for computers should have an amortization period
of not more than 3 years). The value placed on an asset varies
depending on resale value and the type of asset leased.
Corporate Visa Expense Cards
Corporate Visa Expense cards are held under the name of the
business for use by employees. A company should ensure that
all authorized cardholders have a clean credit history. Typically,
established companies have unsecured Visa cards where the
assets of the company and personal net worth of the owners
are pledged as security. Start up companies and companies
with minimal assets should expect to secure the Visa cards
through hard security such as cash.
Merchant Account
Merchant Visa risk applies to unsigned Visa drafts such as
taking orders through the Internet or telephone. Risks occur
to financial institutions due to fraud. Shop around, many
Banks do not require security for Merchant Visa and many E-Commerce
Internet sites have online applications for an account.
Mortgage
This is a term loan secured by a building on a piece of land.
The maximum amortization period varies greatly between Banks
- from 10 to 30 years. Your business must still meet standard
lending criteria such as debt serviceability. In general,
a business mortgage is more complicated and more expensive
than your personal mortgage; many Banks will require you to
pay for a full property appraisal, environmental audit, and
legal fees in additional to regular Bank fees.
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