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Types of Loans
by CreditSunrise
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.
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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.
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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%.
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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.
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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.
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Uses of funds: To purchase computers, equipment or renovations (cannot finance working capital)
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Repayment: Maximum 5 years (3 years for computers)
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Personal guarantee signed by the owners: 25% of the loan value
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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.
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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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