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Commercial Loans - The Ultimate Guide For Small Businesses

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Information about Commercial Loans - The Ultimate Guide For Small Businesses
Business & Mgmt

Published on February 12, 2014

Author: FitSmallBusiness

Source: slideshare.net

Description

Thinking about using commercial loans to fund your business? Here is everything you need to know about the different types of commercial loans and how to qualify.
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Commercial Loans The Ultimate Guide For Small Businesses

Should you consider going after a Commercial Loan for your business?

Should you consider going after a Commercial Loan for your business? Commercial loans are one of the cheapest forms of capital for small businesses.

However only a small percentage of businesses will be able to get a commercial loan.

However only a small percentage of businesses will be able to get a commercial loan. As a general rule of thumb, you will need to be in business for at least 2 years

If You Have a New business

If You Have a New business Click Here For Our Guide To Funding New Businesses

For an existing business to qualify for a commercial loan, you will also need free cash flow and a solid debt service ratio.

Free Cash Flow Is the cash that is left over after you have paid all your monthly expenses.

Your Debt Service Ratio Is your free cash flow divided by your monthly loan payment.

Your Debt Service Ratio Is your free cash flow divided by your monthly loan payment. ! Lenders are generally going to want this number to be 1.25 or higher.

In other words, If your business generates $5000 in free cash flow, banks will generally not be willing to give you a loan where the monthly payment is more than $4000.

In other words, If your business generates $5000 in free cash flow, banks will generally not be willing to give you a loan where the monthly payment is more than $4000. This means that both the size and length of the loan are important.

Collateral Lenders are going to want collateral that is worth the full amount of the loan. They also want that collateral to be easy to reliably price and sell.

For those Without Collateral SBA Loans Are An Option.

For those Without Collateral SBA Loans Are An Option. Click the link below to learn more about SBA loans. http://fitsmallbusiness.com/sba-loans-ultimate-guide/

Loan Concepts

Term Loans Are what most people think of when they think about loans. They typically pay a lump sum upfront, have fixed interest rates, and monthly payments that begin right away.

Term Loans Are what most people think of when they think about loans. They typically pay a lump sum upfront, have fixed interest rates, and monthly payments that begin right away. Term loans are typically used for large capital investments, commercial real estate, and large acquisitions.

Lines Of Credit A business line of credit is a pre-approved amount of credit that your business has the option of borrowing within a certain timeframe.

Lines Of Credit A business line of credit is a pre-approved amount of credit that your business has the option of borrowing within a certain timeframe. This gives you capital when you need it, without having to worry about submitting a new loan application that might be rejected.

Short-term vs. Long-term Short term loans are generally less than 3 years. Long term loans generally range from 3 to 20 years. Most small businesses will not be able to get a long term loan unless the loan is backed by real estate.

Secured vs. Unsecured and The Personal Guarantee Secured loans are backed by collateral, while unsecured loans are not. Most small businesses will not be able to get an unsecured loan.

Secured vs. Unsecured and The Personal Guarantee Secured loans are backed by collateral, while unsecured loans are not. Most small businesses will not be able to get an unsecured loan. In addition to collateral banks generally require small business owners to personally guarantee the loan.

Fixed Rate vs. Floating Rate Fixed-rate loans have interest rates that do not change over the life of the loan. Before you commit to the loan, you 
 will know the monthly 
 payment and the total you 
 will pay throughout the 
 life of a loan.

Fixed Rate vs. Floating Rate Variable-rate loans have interest rates that are based on the prime rate or another “index” rate. As the index rate changes your interest rate will fluctuate, which means that your interest rate and monthly payment may go up.

Types of Commercial Loans And What They Are Used For

Term Loans Term loans have a monthly principal and interest payment. As you pay it back, the outstanding principal amount decreases. Term loans are best for financing large long-term assets such as real estate or equipment.

Short-Term loans: Short-term loans are used as cash for accounts payable, inventory needs, and working capital. They usually require less collateral and have lower interest rates.

Line of credit loans Line-of-credit loans are loans designed to meet the day-to-day cash flow needs of your business. Your credit limit is primarily based on the size of your accounts receivable.

Line of credit loans Line-of-credit loans are loans designed to meet the day-to-day cash flow needs of your business. Your credit limit is primarily based on the size of your accounts receivable. These loans can be used to buy inventory and pay operating costs, but not designed for the purchase of real estate or equipment.

Revolving lines of credit Revolving lines in which the lender allows the business to borrow the same amount again once repayment is made.

Mortgages Mortgages are a type of a term loan secured by a building on a piece of land. Typical amortization periods range from 10 to 30 years.

Mortgages Mortgages are a type of a term loan secured by a building on a piece of land. Typical amortization periods range from 10 to 30 years. In general, business mortgages are more complicated and expensive your personal mortgages, as Banks may require a full property appraisal, environmental audit, and legal fees.

business acquisition loans These term loans are designed specifically for the purchase of an existing business. Franchise Start-Up Loans These term loans provide the capital necessary to purchase a franchise.

Debt financing These term loans are designed to help you pay off and consolidate previously held debts. They are normally done through a bank or traditional lender and are normally limited by the personal guarantee of the business owner.

Micro-loans Micro-loans are smaller loans of up to $35,000, although the average is around $13,000. These loans are usually used to purchase equipment, inventory, machinery, supplies and as working capital.

Micro-loans Micro-loans are smaller loans of up to $35,000, although the average is around $13,000. These loans are usually used to purchase equipment, inventory, machinery, supplies and as working capital. You generally cannot use these loans to pay off existing debt. They normally carry a term of 6 years or less.

Professional loans Professional loans are a type of term loan for certain specific professional businesses, such as CPA’s, dentists, doctors, and lawyers.

Secured Working Capital Loans: These are term loans designed to be used as working capital. UNSecured Working Capital Loans: Unsecured working capital loans do not require collateral, and are designed to be used as working capital.

Start-Up Loans These are term loans designed to provide capital to new entrepreneurs.

Crowd-funded Loans Crowd funding websites such as Kiva Zip offer unsecured microloans that are funded by other people, not a bank. These loans generally range from $2,500-10,000 and carry 0% interest rates.

Crowd-funded Loans Crowd funding websites such as Kiva Zip offer unsecured microloans that are funded by other people, not a bank. These loans generally range from $2,500-10,000 and carry 0% interest rates. The advantage is that they do not require collateral or a long business history. The disadvantage is that there is some uncertainty in whether your loan will be fully funded.

SBA LOANS The Small Business Administration offers a wide range of loan products for businesses that do not qualify for traditional business loans.

SBA LOANS The Small Business Administration offers a wide range of loan products for businesses that do not qualify for traditional business loans. Click here for our Ultimate Guide to SBA Loans

FACTORING Factoring is a form of cash advance backed by your accounts receivable. A factor is an independent company or bank that buys a business’s invoices based on the customer’s credit.

FACTORING Factoring is a form of cash advance backed by your accounts receivable. A factor is an independent company or bank that buys a business’s invoices based on the customer’s credit. Factors generally advance your business 75 to 80 percent of the receivable. Once your customer pays the factor, you receive the remainder of the amount owed.

And Finally...

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