If there’s one thing that can derail a business, it is not using the correct cash flow management techniques during a crisis. In fact, not effectively managing cash flow is one of the main reasons that almost two thirds of small businesses end up closing their doors within two years (even if they’re recording a profit on the books), according to the U.S. Small Business Administration.
So how can a small business learn from the cash management mistakes of others? We took a look at the cash flow management techniques that made some small businesses succeed with their cash flow, while others fumbled and ran into crises that stifled company growth or shut down business for good.
What is a Cash Flow Problem?
Before we delve into how to properly manage a cash flow problem, it’s important to understand exactly what cash flow is and how it works.
Cash flow is the money being transferred into and out of a business, especially as it affects liquidity (how much cash you have on hand).
For instance, your company may have billed out $100,000, but if a client who owes you $30,000 pays a month late, you won’t have that cash on hand and may need to replace that money temporarily to pay overhead expenses.
These types of cash flow problems almost always happen in a company’s lifetime, and if a business owner doesn’t plan for them, it can place a huge strain on the business or even shut down operations.
There are techniques that help manage a cash flow problem, though, and following these steps will help you figure out why you’re having a cash flow issue and how to find a solution.
Effective Cash Flow Management Technique – Identify Source of Deficit
Effectively managing any type of cash shortage starts with a cash flow analysis to identify the source of the cash deficit. Maybe your clients didn’t pay their bills on time, you ordered too much inventory, or an emergency required a large unexpected outlay of cash.
Whatever the reason, understanding what caused a lack of liquidity in your bank account can help you take the necessary steps to fix the problem and make sure that it doesn’t happen regularly.
Develop a Temporary Cash Flow Solution
The next step in managing a cash flow problem is to find an immediate temporary solution. If you’ve planned ahead, you’ll have a business line of credit or borrowed money to pull from until you get your cash flow back on track.
If you don’t have a source of credit to cover your expenses in the short-term, there are other ways to manage cash flow temporarily. One way is to negotiate paying vendors at a later date.
Many vendors – especially other small businesses – will be understanding and be willing to work with you to negotiate a later payment date since it’s in their best interest for you to continue to be a customer.
Other ways to quickly secure cash are to temporarily discount prices to increase sales (this obviously isn’t an option for every type of business), as well as selling off additional inventory or equipment.
Balance Future Income and Outlays to Prevent Future Crises
Once the immediate cash flow crisis is solved, it’s important to take a look at your cash receipts and cash outlays in order to manage cash flow coming into and leaving your business. This can help prevent future cash shortages, and will certainly help alleviate stress associated with cash flow issues.
Many business owners also try to implement policies and processes that can help them avoid a cash crunch in the future, such as offering incentives to customers or clients that pay before their bill is due, finding ways to cut overhead costs, or revamping their inventory ordering schedule to allow more cash to stay in their bank accounts.
Setting up Maryland merchant credit card processing can be a major source of growth for many businesses. In fact, it may soon be the only acceptable way to take payment.
In 2011, according to a study conducted by Javelin Strategy & Research only 27% of transactions in the US were conducted with cash. By 2017, that number is projected to decline even further, to 23%. Cash, once the king of retail transactions, is now taking a backseat to online credit card processing.
The rise of online credit card processing and the decline of cash leaves many small businesses wondering what exactly they need to do to tap into the huge pool of consumers who rarely keep cash on hand and prefer to make all their purchases with credit and debit cards, or through services such as eBay-owned PayPal.
Setting Up Maryland Merchant Credit Card Processing
Setting up merchant credit card processing begins with research. While most major processors are very similar in terms of offerings, rates, and credit card processing fees; they vary enough that choosing poorly can lead to significantly higher costs over the life of your business.
Interested In Setting Up Credit Card Processing for Your Business?
The first thing to look at when researching Maryland merchant card processing vendors is the cost per transaction. For new businesses who don’t know what their average transaction value is or how many transactions they get per month, this may be difficult to figure out, use projections in place of actual values.
Calculating Cost Per Transaction
To find the cost per transaction, multiply your average transaction value by the average number of transactions you receive in a month. Take this number and multiply it by the rate the processor charges to calculate your average processing cost. If the provider also charges a flat per-transaction fee, you need to add this amount to the average processing cost.
Finally, if the processor charges a monthly fee, take that and divide it by your average number of transactions and add the result to the average processing cost to get your per-transaction fee. In general, the lower this number, the better, letting you keep more of your credit card revenue.
While this seems fairly simple, it can quickly get complicated since some processors charge different processing fees for different cards. Similarly, transaction costs are much lower for debit card transactions than credit card transactions. If you aren’t sure exactly what kind of mix of card and transaction types you will see, it’s best to assume that they will be more rather than less expensive.
Support for Point of Sale System
While cost and credit card processing fees are important, it isn’t the only consideration when it comes to choosing a Maryland merchant card processor.
Another major point to look into is support for your point of sale system. While many merchant credit card processors let you purchase stand-alone card readers that can work independently of your main POS, it’s usually better to integrate the entire system into one unit.
This will make keeping up with sales, inventory, and other reporting as simple as possible. If you don’t already have a POS system in place, this point is less important, since you can choose your POS based on your processor. If you do have one, however, you should carefully check to make sure that integration exists between the processor and your POS.
Also worth noting are the newer technologies that are smart phone- and handheld POS systems. They’ve drastically lowered the entry cost and increased ease of use for retail establishments, restaurants or mobile businesses.
Merchant Credit Card Processing Contract Terms
The last thing you’ll want to look into is contract terms. More and more merchant card processors are eliminating contract requirements, but it is still the norm for many traditional processors.
Check the contract thoroughly for things like the minimum length, as well as dispute resolution terms, and terms related to your payment.
Pay close attention to how long the merchant card processor takes to transfer money into your account, how many transactions you are allowed per month, and how refunds and customer disputes are handled. While these items may not initially seem critical, ignoring them may cause issues down the road.
Managing a small business growth spurt is a challenging experience for business owners. Oftentimes an initial cash outlay is needed to take advantage of growth opportunities—whether it’s increasing manufacturing, hiring more employees, or investing in new ideas and new products. While company growth is a good thing, the popular aphorism “it takes money to make money” still rings true.
In order to finance growth, many business owners turn to a business line of credit to help them through inevitable financial pains that can be a result of quick company growth.
What is a Business Line of Credit?
A business line of credit is a pre-approved sum of money offered by a bank that can be drawn from when needed. It offers a few noticeable advantages to small businesses over using credit cards or other types of financing. First, a business line of credit will usually offer much lower interest rates than a credit card will. Secondly, it offers the benefit of being able to access cash when you need it, making it easier to borrow smaller amounts of money and avoid paying interest on a large lump sum like you would with a traditional business loan.
How to Get a Business Line of Credit
It’s important to start the process of getting approved for a business line of credit before you actually need it. Like applying for a business loan, a business line of credit requires putting together both financial documentation and a business plan for how the funds will be used. To get started, you’ll need to compile all of the documents that the bank needs to review, including:
- Revenue projections for the next 12 months
- Cash flow projections for the next 12 months
- Bank statements for the last 12 months
- Most recent business tax return
Depending on how long you’ve been in business and whether you’ve built up business credit, you may be asked for additional documentation—even personal financial documentation. Make sure to find out what other information you might need to submit so that you have plenty of time to prepare any additional financial reports that your bank may need.
Some business lines of credit are offered unsecured, meaning they don’t require any collateral from the person taking out the line of credit. If your business is relatively new and hasn’t had a long history of positive credit, you might be asked to put up collateral to secure a line of credit.
Collateral for a business line of credit can range from personal collateral (such as a vehicle or a home) to business assets that your company owns (commercial real estate, inventory, machinery or equipment, etc.). The type of collateral needed will depend largely on the amount of credit that you’re applying for, with larger sums requiring more substantial collateral.
Keep in mind that putting up collateral can help you get a better interest rate, since it lowers the risk of lending for the bank. However, make sure that you will be able to make payments on your line of credit, since defaulting could cause you to lose your collateral.
Build a Strategy for Business Growth
Having financial documentation prepared and collateral ready is a good first step, but you’ll also need to provide a detailed plan of how you will use a business line of credit to finance your company’s growth. Having a business plan that outlines the individual steps you plan to take, as well as how much and how quickly you anticipate revenues to grow can help a bank better understand how you will use the money and determine the likelihood of you paying back money borrowed.
For many Maryland small businesses, securing a business line of credit is a considerable milestone. As a business matures, however, it may become clear that the initial business credit line isn’t able to keep up with the growing need for financing. Here are a few ways Maryland small business’s can increase their line of credit.
Increase Your Line of Credit with Additional Collateral
The easiest way to get a credit limit increase on a business line of credit is to offer up additional collateral.
Additional collateral for the purpose of business financing may include: real estate, equipment, inventory or assignment of account receivables. The amount of collateral you will be required to offer can vary greatly based on the size of the line of credit, the health of your business, and your borrowing history with the bank.
Often, especially if you haven’t been in business for very long, or your borrowing history with the bank is short, you may need to put up 120% of the line of credit in collateral. This covers the maximum amount for the loan, as well as any fees and interest that are incurred in the case of non-payment.
Strong Financial Statements Mean Safe Investments
If your small business is experiencing growth and consistently exceeds projections, and you have the financial statements to go along with it, most banks will consider allowing you to increase your business line of credit limit.
As with consumer loans, proving an ability to repay larger loans is often enough to assure banks that increasing your credit limit is a safe investment.
Responsible Borrowing History
Similarly to the previous point, when requesting a credit line increase, displaying a strong history of responsible borrowing will help increase your chances.
Building a responsible borrowing history often takes time, paying off any balance on your business line of credit in a prompt and regular manner helps prove creditworthiness.
This is a good method for smaller but steady increases to the business line of credit, and is an absolutely essential prerequisite for any increases in credit limit.
Business Owner Guarantor
In extreme scenarios a business owner can come on as a guarantor—essentially nominating himself as next in line to repay the loan in the event that the business is unable to. This involves a high degree of risk, as it eliminates many of the protections offered by structuring your company as a corporation.
A personal guarantee can help increase the limit on a business line of credit, but only if the business owner has impeccable credit and a solid financial footing. In the event the business defaults on the line of credit, the personal guarantor will be responsible for all remaining debt.
Often, the critical ingredient for getting a higher limit approved is timing. Since borrowing against a credit line is flexible and can be done on an as-needed basis, businesses should carefully consider when to apply for an increase.
The ideal time is when a business does not actively need to borrow money. Having recent positive news, such as opening of a new location or a launch of a successful new service or product line, can go a long way towards getting the limit increased on a business line of credit. The worst possible time to apply for an increase is when your business is actually strapped for cash or desperately needs a loan.
One of the least understood but most powerful small business financing tools is the standby letter of credit. While it’s used fairly extensively by larger companies, many small business owners frequently wonder what a standby letter of credit is, and aren’t aware of how it can help them and their enterprise succeed.
What is a Standby Letter of Credit?
A standby letter of credit, or SLOC, is at it’s core a loan of last resort and a type of warranty for financial contracts. It is issued by your business bank at the beginning of a contract, and acts as a guarantee that if you fail to fulfill your obligations by the end of the contract term, the bank will make payment on your behalf.
Unlike most types of financing, the standby letter of credit is never meant to be used, instead functioning as a backstop to prevent contracts from going unfulfilled in the event that your company closes down, declares bankruptcy, or is otherwise unable to pay for goods or services provided.
Performance SLOC’s and Financial SLOC’s
Standby letters of credit come in two primary forms: the performance standby letter of credit and the financial standby letter of credit. The performance standby letter of credit works to ensure that work you have agreed to perform is performed in a timely and satisfactory manner.
For example, if you own an architectural firm and are contracted to build a museum, you may be asked to provide a performance SLOC that guarantees that you will finish the plans by the end of your contract term, and that the structure you design is sound and meets all requirements. If, for some reason, you are unable to finish, or your design is deemed unsafe or unbuildable, the SLOC will take effect and pay the museum a preset amount.
A financial letter of credit generally works on the other party in the exchange—in our example, the museum can be asked to provide a financial SLOC to your firm for the total amount of the project. If they fail to pay you after work is finished, the bank will issue payment to your business on behalf of your client.
These types of SLOCs are often required when performing international trade or other large purchase contracts where other forms of payment protections (such as litigation in the event of non-payment) can be difficult to obtain.
How to Obtain a Standby Letter of Credit
Obtaining a standby letter of credit is similar to obtaining a commercial loan, though with a few key differences. As with any business loan, you will need to provide proof of your creditworthiness to the bank.
Unlike a loan, the process for approval for a SLOC is much quicker, with letters often being issued within a week of all paperwork being submitted. Also unlike traditional loans, the bank will require a fee of between one and ten percent of the SLOC amount before issuing the letter. This fee is usually charged per year that the letter of credit is in effect. If the terms of the contract are fulfilled early, you can cancel the SLOC and not incur additional charges.
For small business owners, the standby letter of credit can be a powerful tool for establishing trust with suppliers and vendors. Obtaining an SLOC is proof that you and your company have good credit, and can put many suppliers at ease about providing you favorable financing terms. Furnishing a financial SLOC can often allow you to negotiate payment and financing terms with suppliers from a position of strength in order to get the best interest rates and payment schedule, while maintaining a good relationship with your suppliers.
If you provide services, on the other hand, offering to furnish performance standby letters of credit can be extremely useful to helping your business secure large contracts. Putting your clients at ease by being willing to guarantee your work financially can overcome many of the objections business owners face in the selling process.
Getting a commercial mortgage loan in Maryland can seem daunting, especially for small business owners who are just setting foot in the commercial real estate market for the first time. One of the biggest causes for stress is simply the fact that for many people, a commercial mortgage is the single largest loan they will ever take out in their lives. More than that, however, the process of obtaining a commercial real estate loan can be convoluted, long, and very involved.
Local Banks v. National Banks
One way to make the process much easier is to get your loan from local banks v. national banks or regional chains. There are many advantages for choosing to pursue a commercial mortgage loan from a Maryland community bank instead of a larger bank. All of them can make the process significantly easier to navigate, and end up saving you time and money.
Better Access to Decision Makers
When you apply for a commercial real estate loan from a large bank, the person you will be dealing with on a daily basis is rarely the same as the person who ends up approving or denying your loan.
In fact, it’s highly unlikely that the person you interact with ever talks to, or even knows, the final decision makers. With a local bank, your lending representative might not be the final decision maker either, but they are certainly much closer to the top of the decision pyramid.
Because community banks are smaller than large chains, the lending process tends to be more inclusive, and your lending representative will have plenty of opportunities to bend the ear of the final decision makers to support your loan.
Understanding of Maryland Commercial Mortgage Loans
Lending managers at larger banks base much of their decisions and processes on the directives that get passed down from the top. This formulaic approach to issuing commercial mortgage loans give them less of an insight into what is actually happening in their back yards. They also tend to move from branch to branch far more often, and aren’t as plugged in to the local market the way that community banks in Maryland are.
A lending manager at a local community bank, on the other hand, will usually be much more plugged in to the real estate market in your area. With the experience that comes with doing mainly small business commercial mortgages, your community bank lending manager will be able to advise you on what similar deals have passed through their office have closed for, what kind of prices other buildings are going for, and whether now is really a good time to buy or not.
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These kinds of insights are only possible when lending managers spend the majority of their time talking to small business owners and focusing on small business commercial mortgages.
More Investment In Your Success
Large banks rely on high churn to constantly keep profits high. That is, they are far more interested in doing a large number of deals with a large number of customers than they are in helping their customers get larger and larger deals. Community banks often don’t have the luxury of a customer pool numbering in the millions. Instead, the focus of your lending manager is customer retention and growth.
Rather than seeing you as just another number in the line of mortgages they will issue, your business is central to the bank’s financial success, and your growth is essential to future success. To that end, your lending representative is more likely to go out of their way to help you succeed, in the hopes that when it comes time for you to expand to a larger building or a new location, you will come back to give them your business. The better they can make your financial situation, the sooner you can be their customer again.
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Equipment purchases are a vital part of starting a small business in Maryland, especially for manufacturing and retail companies. They can also be necessary investments once your business is up and running. Equipment updates and modernizing old equipment can make your business more productive, efficient, and even save you money in the long haul.
Equipment, however, is a significant investment and very few small businesses have the cash on hand needed to outright purchase large scale equipment. With costs that can easily run into the hundreds of thousands of dollars, finding a way to finance equipment purchases is something that many small business owners have to look into to grow their company. While there are many ways to finance business costs, many business owners turn to something called an equipment term loan for acquiring or updating new machinery and equipment.
What Is an Equipment Term Loan?
An equipment term loan is essentially a business loan that offers either a fixed or floating interest for a pre-specified term (seven years on average). If the loan is longer than a few years, a fixed interest rate is what generally draws business owners to an equipment term loan, since the stability of having a locked-in interest rate is often times a safer bet than financing with a floating interest rate loan or a credit card. Those types of financing could have an unexpected increase in the APR, potentially adding thousands of dollars in additional interest.
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Getting Started with Equipment Term Loans – Things to Consider
- You might need additional collateral for your loan. Depending on the amount of money you’ll need to finance, standard collateral for a personal loan (like a vehicle) might not be sufficient enough for an equipment term loan. Be prepared to find other types of collateral that will be accepted by your bank. Real estate is the most common type of collateral for a long-term business loan, given that it’s one of the most common types of assets that are available to business owners. Other types of collateral that are commonly accepted for equipment term loans are natural reserves, inventory, plants, and machinery.
- Though the average term loan for business equipment is around seven years, some term loans can extend as long as twenty years. This largely depends on the cost of the equipment being purchased, as financing for a larger sum of money generally takes a longer term to pay off. Depending on your company’s financial situation, and how much money you can afford to pay back each month, you can work with your bank to find a term that works well for you. Longer terms will rack up more interest, resulting in a larger overall payment, but will have smaller and more manageable monthly or quarterly payments. Shorter term loans will keep your overall repayment costs lower, but you’ll have to take on larger monthly or quarterly payments.
- It could take two to three months to get approved. The process for securing an equipment term loan isn’t an altogether quick and easy process. Keep in mind that in best case scenarios, a few weeks is needed to process an equipment term loan. In a worst case scenario, it could take anywhere from a month to 2-3 months to review your company’s financial statements and finalize the paperwork before any money makes its way into your account.
- You’ll need to prove your credit worthiness. Business term loans, especially ones for high ticket purchases like manufacturing equipment, have a very thorough loan approval process. Be prepared to not only have your personal and business credit reviewed, but also your company’s financial statements, including cash flow, revenue projections, and possibly even your personal financial statements. The bank will want to make sure that you’re in a good financial position to be able to take on monthly or quarterly equipment term payments for the duration of your loan term.
With the U.S. economy on the road to recovery and banks feeling more comfortable with lending, commercial real estate lending is expected to pick up significantly over the coming year nationwide as well as here in Maryland. If you’re in the market for commercial real estate or want to increase your company’s assets, purchasing your company’s operating space or expanding operations to other locations is a good move.
However, buying commercial property is a big step and one that requires a lot of thought and planning. In the right circumstances, it can be a hugely beneficial move, creating more value for your business and also allowing you to potentially add new revenue streams to your bottom line. But before you jump in, there are three things you should know about commercial real estate lending in Maryland.
Business and Personal Credit
Business credit is a common tool for helping banks figure out how creditworthy your company is, and what the likelihood is of you being able to pay back a commercial real estate loan. Building business credit takes time and is not unlike building a strong personal credit history.
Making vendor payments on time is a great way to start building business credit, as is opening up a business credit card that you pay off each month. Keep in mind, though, if your business doesn’t have sufficient credit, the bank will need to pull your personal credit history to approve you for a loan. And, just like with personal loans, a better credit history will get you much more favorable loan terms and lower interest rates.
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Understand the Appraisal Process
An appraisal of the commercial space intended to be purchased will have to be completed before a commercial real estate mortgage can be approved. The purpose of an appraisal is to figure out how much money the bank will need to lend to the business owner, as well as what the actual value of the property is, since it acts as the collateral for the loan. Additionally, an appraisal will help make sure you’re paying a fair price for the commercial real estate you’re interested in buying, based on similar properties and other available housing and neighborhood data.
The appraisal process for commercial real estate is quite different from the appraisal process for residential real estate. Commercial real estate appraisals are undertaken by the lender and a full appraisal can take anywhere from a few days to a few weeks. While a lot of different factors play into an appraisal, there are a few that are standard to any appraisal.
First, an appraiser will conduct an inspection of the space. This is to check the size and the condition of the building. Additionally, an appraiser will research the neighborhood the space is in, as well as similar buildings in the area, and draw upon publicly available data to get a well-rounded and unbiased value for the property.
Be Patient Throughout the Approval Process
Getting a commercial real estate loan is a time-consuming process. From gathering all of the right financial documentation and finding the perfect commercial space to going through the appraisal process and getting a decision from the lender, the entire process can take up to 4 months. Sit down with your lender and discuss what steps you’ll need to take to get the ball rolling and make sure to have all of your financial information organized and ready. This will help make the process as smooth as possible and help move things along towards closing on your commercial real estate loan.
Most small business owners know that at some point they will likely need some form of small business financing to grow and expand their business in Maryland or anywhere. Many of these entrepreneurs, however, don’t have a great understanding of the different factors that banks take into account to determine the terms of small business financing.
Not understanding the factors that go into the final lending decision puts small business owners at a disadvantage: without knowing what they need improvement on, it’s harder for business owners to take steps to get better terms. This, in turn, increases the cost of borrowing and decreases the speed at which companies can grow.
The good news for entrepreneurs seeking a loan is that the factors that influence terms and interest rates for small business financing are very similar to the factors that influence personal lending terms and interest rates.
In other words, if you can figure out how to make your personal loan terms better, you can do the same for your business.
The most important factor, of course, is your personal credit score. If you run a partnership or corporation, all founders or major stakeholders may need to have their credit score checked. After that, though, there are three main factors that banks use to determine your creditworthiness.
#1: Payment History
Do you pay your bills on time? Are your vendors or previous lenders satisfied with how promptly you pay back your obligations? Are you in default on any loans? These are some of the questions that banks ask when looking over your previous payment history.
A strong history of making all payments on time and not borrowing more than you can afford to repay makes lending institutions feel more comfortable financing your small business.
How do you build up a strong payment history? A common myth states that the best way to make banks want to loan you money is to make sure that while you repay on time, you always leave a small balance on your account that generates interest. This, we’re confident saying, is probably a terrible decision. Instead, simply make sure that you always pay off balances on time. If you can pay them off early, do so. Banks, especially these days, are looking for safe investments. If they know they can loan you money and have it back when your term expires or earlier, you look like a much safer investment.
Another idea is to pay vendors on account, especially vendors that report accounts payable to an organization like Dunn & Bradstreet. This helps you build up credit easier without having to go through the process of applying for a loan, which can be difficult if you have no previous borrowing history.
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#2: Cash Flow
Do you spend more than you make? Are you reporting a profit regularly? Can you afford payments on the loan after paying operating expenses? These questions help banks understand whether your cash flow, both past and future, can comfortably sustain repayment on your small business financing.
Banks will want to look over your past accounting to make sure that you are spending money responsibly and that you have high enough margins to cover the loan, as well as possible unforeseen expenses. They will also want to take a look at your projections and compare them to your past spending to see if you will continue to operate at a profit over the term of the loan.
The best way to pass this requirement with flying colors is to spend less than you take in, and keep good records. It also helps to use a reporting service that can keep track of your historical profits and losses. Having a verifiable way to show positive cash flow can be a good way to make sure you get the best rates on your small business financing.
Always Keep Up to Date Records
#3: Business Plan and Company Structure
How are you going to use the money you get? Who controls the bank’s money? What kind of projected return do you see on the loan? These questions help banks get a feel for whether you have thought your loan all the way through, as well as being able to gauge whether you will be able to pay it all off by the end of the term.
Make sure that your business plan is rigorously researched and supported by evidence. If you have projections for how the financing will make money for your company, be ready to support those projections with hard evidence. It also helps to have a loan point person, especially in corporations with multiple co-owners or partnerships. This gives the bank assurance that the money will be spent the way you say it will be, and that one single person will be responsible for preventing mismanagement of funds.
Is a Small Business Term Loan Right for Your Company?
Looking for capital to make a large business purchase or provide working capital for your company can be a long, arduous process, with many small business owners not fully understanding the process. With so many options to consider, it can be difficult to focus in on one to determine if it might be right for your business. The fact that banking jargon can vary so much between commercial lending and consumer lending doesn’t help things one bit. Many first-time business owners looking for a point of reference in their own personal banking are often just as lost as people who have never taken out a loan in their lives.
Few things are as exemplary of this confusion as the small business term loan. While easily being among the most common loans available to businesses, many business owners don’t actually know what a small business term loan is or what it means for their company.
What Is a Small Business Term Loan?
Put simply, a small business term loan is just a standard business loan offered by a commercial bank to a business. Most often, these loans go towards large capital improvements or capital purchases. Term loans are frequently used to purchase new equipment, renovate or expand facilities, or upgrade equipment. Less often, business term loans are used to purchase other businesses or to provide working capital.
Small business term loans often come primarily in two varieties: intermediate-term loans and long-term loans. Intermediate-term loans typically last no more than five years. They are often smaller, and more likely to be used for working capital or equipment purchases. Intermediate-term loans are usually paid monthly and are fully amortizing. Intermediate-term loans usually require collateral.
Long-term loans, on the other hand, are given out for durations of up to twenty years, or more in very special circumstances. These loans tend to be for significantly higher amounts than intermediate-term loans. They are often used to fund large-scale capital purchases or expansion, such as opening up a new plant or location, or building a new company headquarters. Long-term loans will definitely require collateral, and often include other specialized requirements such as limits on how much total debt from all sources a company can take on.
Term Loans are A great Way to Finance Your Business
Whatever small business term loan you are looking for, keep in mind that while term loans are a great way to finance your business, they always come with a very thorough approval process. You will need to open your books to the bank and show that your business is profitable enough to support the added risk. You will also need to put up some form of collateral, and will likely need to demonstrate that you have enough cash flow to repay the loan. Having a strong business plan and a historical set of projections that you have either met or exceeded will go a long way towards securing your small business term loan.
Knowing that, why are term loans considered to be a great deal? Unlike many other types of business loans, the interest rate is many times fixed and remains steady throughout the term. This gives business owners security and predictability, knowing that their loan amount will remain constant. They can be cheaper overall than other types of loans. When spending tens or hundreds of thousands on capital improvements, even a percentage point or two difference can mean huge savings. That means a much higher return out of large-scale improvements; something every business owner loves.