Long Term Loans | A Step-by-Step Guide
Our long term loans are a fantastic way to fund your business if:
- Your Personal Credit Score is 680 + or higher
- You are looking for a significant amount of money
- Term Loan approvals that are up to twenty percent of your business’ gross annual income.
How do we keep the interest rates so low? Like a bank, we require a Personal Guarantee (PG).
- 5.49% starting Annual Interest Rate
- Terms ranging from one to five years
- Payments are MONTHLY
- No Prepayment Penalty
- You can use the funds for growth of the business
- You can refinance current business loans,
- You can refinance equipment loans
- You can refinance business credit cards
- Get Funding in 5 to 10 days (from start to finish)
- Get $50,000 up to $500K
- You need a 680 Credit Score
- You need a small loan to debt ratio (not maxed out on debt)
- In the past seven years, no bankruptcy
- At least one of the last two years should be profitable
- Minimum 3 years in Business
- Need all owners that are 19% or more on Application
- No Sole Props
- Tax Liens in the past three years’ total must be less than $1,000 and must have a payment plan. Tax liens filed within last decade (but not in the previous three years) must be less than $5,000 outstanding.
- Each 19% or greater business owner must Complete & Sign Application – click link below to download
- 6 Months Business Bank Statements
- Business Tax Returns – 2 years (if most recent Tax Return is not ready then also include Year to Date P&L)
- Personal Tax Return – 1 year (most current for all owners)
- Business Debt Information – we will email you for this information
What is a Long Term Loan?
The next consideration is the interest rate. Besides the actual percentage, the only question is whether it’s a fixed or floating rate. The loans made available to most small to mid-sized businesses are almost always of the fixed variety.
What are the Advantages and Disadvantages of the Term Loan?
Before we list the various pros and cons, it’s important to remember that these loans are “secured” loans. What that means there is a personal guarantee. This personal guarantee reflects the lower rates available to you as the borrower.
It’s your PG (personal guarantee) that backs the loan. Your PG serves as the collateral security. That is why there is a requirement to have a minimum credit score of 680 or better.
The PG now places the obligation of the repayment of principal and interest on you and not solely on the business. This PG also means that in the event of a default or bankruptcy, you are still responsible personally, and it will affect your FICO score.
These are not to be confused with short term loans for business with bad personal or business credit or unsecured short term business loans.
The incredibly attractive feature of this loan is the interest rate. Starting at 5.49% means you don’t need a business loan calculator to figure out that these loans compete for your business head to head with any lending institution, especially a bank.
The terms go out to five years. Again, this means that your payments are extremely attractive and affordable. Perhaps the only loan that offers a slightly more competitive advantage on terms but not rates is the SBA loan.
What are the Advantages?
Perhaps the best way to describe the loan is that it is cheap. This relatively short term loan is your best option if you have the personal credit, and you are willing to put up that Personal Guarantee.
Comparatively to the short term business loans that require no collateral or assets (therefore no personal guarantee) are much shorter in duration. While you may find this type of loan extending for up to 3 years they typically range in the six months to 18-month range.
The biggest difference is the cost of funds. The unsecured loan will usually have a factor rate, and it may range anywhere from 1.18 to 1.50. This pricing means a $100,000 loan will cost anywhere from an additional $18,000 to $50,000 over the course of the loan.
Don’t take me wrong. There is a definite place for this type of loan. It’s for those that need what is called a bad credit business loan or for those that do not want to use the personal guarantee to secure the loan.
Besides the fact that these loans are inexpensive, you have a tremendous tax benefit. The interest on a term loan is a tax deduction. I think this gets lost from time to time with business owners regardless of the type of loan they get and the rates they pay.
Let me preface this by saying that I am not an accountant and suggest you consult with a qualified CPA. Let’s look at a potential scenario. Your business needs to acquire a piece of equipment. I’m going to make a few assumptions. First, this is something you need for your business? Can you afford not to have it?
Next, we’ll assume that by having this piece of equipment you’ll be more profitable. Your business will be able to grow and expand by making this purchase.
Now I’ll assume that by securing this fixed asset you will be able to depreciate this equipment over its useful life. My preference is not to get into the weeds on the details. Let’s leave that for your accountant. Suffice it to say you can “write-off” this depreciation yearly.
What this write off is offsetting is your business income. Technically, the cost of the equipment is “less” than the actual expense. Do I make sense so far?
Here is another consideration. You consider the fact that the interest write-off from the term business loan is also a write off which reduces your net cost. Hence the tax savings.
I think a useful tip regardless of the type of business loan you acquire is that the cost of funds is not an expense. Indulge me for a second. The loan is an investment in your business. Is that too bold a statement? I don’t think so.
When you borrow money whether it’s one dollar or $1M, you must repay the principle back, right? OK. So, what we’re talking about is the interest expense. It’s this added amount, which in my opinion, is an investment into your business and not an expense.
Our very best business clients all see it as an investment. Think of this way. What is the money going to do for your business? What will be your return on investment? Better yet, can you afford not to make that investment? It’s food for thought.
Another advantage of the term loan is its flexibility. The reward for having good credit is your ability to negotiate a bit with your lender. Will your lender have any wiggle room? Maybe and anything is better than nothing. Right?
The payments are made monthly. Here is a big difference between the secured term loan and the ones with no personal guarantee. Those loans will typically require repayment either with daily or weekly payments.
If I did a survey, I could probably guarantee that the overwhelming majority will spurn the ACH 5 day a week debit in favour in of the monthly fixed fee. What I’ve found over the years is that many of the clients that didn’t prefer the automatic daily payment say that they like it now.
Can you believe that?
The reason is that they say they do not miss the small daily payments. Let’s call a spade a spade. No one ever likes writing a large monthly check. I digress, and I’ll talk more about that later.
Lastly, this type of loan doesn’t require you to sell shares of your company. There is no shareholders’ dilution, and you remain in control instead of giving up equity.
As one of the top small business loan lenders not only in Florida but across the United States, we provide alternative business funding to over 700 industries. Anytime we can provide working capital to companies we see it as a win-win situation.
We believe strongly in providing a real economic benefit to companies from New York to Texas to California. The funding for a small business is critical to the U.S. economic recovery and the growth of this great nation.
Naturally, there are some disadvantages to these types of loans, and we’d be remiss not to review them.
What are the Disadvantages?
The most fundamental challenge with a loan is that you have created an obligation. Whether it’s for six months or 10 years, you must repay the principal and interest. Let’s not forget that if you miss payments or default, it will negatively impact your personal credit.
Another disadvantage is the risk that’s inherent in acquiring debt. I’ve consistently preached throughout these pages that you must know your number. Right?
The risk I’m talking about now is the risk when the internal rate of return is less than the less than the cost of capital. This IRR goes back to the use of the funds and what it will do for your business. The IRR also means that you need to know your margins.
Many years ago, back in the 1980’s, you could borrow money on margin in your stock account and then purchase a GNMAE (Ginnie Mae). The coupon rate or the amount of interest it paid was around thirteen percent.
One of the big advantages is that you did not have to pay any state income taxes on the bond’s interest. During most of the ‘80’s the top tax bracket reached fifty-percent.
Are you with me so far? The strategy was simple. Buy a government-backed bond at 13% plus and your cost to borrow was only eight percent. Add back the fact that you did not pay any state taxes on the income and Bingo! You netted at least four percent – risk-free.
What a business.
Well, it’s the same thing for your business. You’ll borrow money at “X” percent. You’ll invest it. I guess your margins are 20, 25, maybe 35% or more? Now you understand your IRR. The internal rate of return.
The additional risk is a change in either your business, the industry, or the overall economy. Factors can range from losing key employees or accounts to a new technology displacing the need for your business.
Then some factors are out of your control. It may be weather related or economic crises. Either way, you are responsible for that loan payment.
Another risk that most business lenders do not consider are the covenants placed on the loan. The covenants are “promises” contained within the loan agreement. Depending on the lender will determine whether they may be detrimental to the operation of your business.
Let me briefly explain. A creditor may tell you that you need to maintain different financial ratios in your business. Not meeting these benchmarks may be a violation of your loan agreement.
These violations can trigger the lender giving you a demand notice. The demand notice is typically a notification telling you to pay the loan in full.
Another covenant requires that you continue your business as usual. If you are a carpenter and borrow money, you are not funding your new ice cream venture. It may mean that if you pledged an asset as collateral that it remains unencumbered. You get the point, right?
You do not get to pass “go,” and you do not collect $200.
Most of the small business loans have a clause that prevents you from taking out another loan getting written permission of the primary lien holder and doing so is a violation.
In the alternative lending space, this is called stacking. We’ll need another discussion to talk about the merits of this practice.
Suffice it to say that the practice of taking out multiple loans either simultaneously or before the first loan matured is a huge red flag. This practice is also potentially deleterious to the cash flow health of your business. Be very careful.
Do I Do Short Term Loans or Long Term Loans?What is the difference?
The “Short Term Loan” are for those projects that have a three to twelve-month window. Typically, you will take this loan when you have an immediate return on your investment. Some examples might be a quick renovation or sprucing up your location.
Perhaps you need additional inventory that will turn around quickly. Maybe you have an ad campaign that can bring in some quick money? Some businesses that have very short term seasonal needs like employees or inventory will look at the short term loans.
This shorter term loan compares to the loans that are a little longer in duration. The long term loan will typically be between fifteen to sixty months.
The proceeds will finance larger projects that are a little slower in paying you back. An expansion or new locations are the types of projects that make sense with these loans.
Business owners use the funds for larger inventory purchases or equipment. You might have a new product in development that needs more time to pay itself back.
The rates on the short term loans are usually a touch higher than the rates on loans with longer terms. Why?
Sometimes a business doesn’t qualify for the longer term loan due to risks with either the industry, time in business, cash flow or credit history.
Likewise, the lowest rates are for those who demonstrate an excellent history or prior business loans successfully paid off.
No More Daily Payments
Most business owners reply when asked, that they would rather make one monthly payment. These loans are designed to be paid back monthly rather than the daily or weekly type of repayment schedules. This monthly payment affords you the best opportunity to manage your cash flow. Are you doing better than expected? Would you like to pay off the loan early? You can pay it off early with no prepayment penalty.
The Bottom Line
Most business owners tell us that they want a business line of credit or working capital. Unfortunately, most banks have retreated from offering the LOC. Lines of credit are best for the management of cash flow.
Another useful tool is the business credit card. These credit cards are valuable for items like office supplies or business travel. Neither of these options makes sense for the bigger ticket items and investments in the business that require payments made over time.
In today’s business loan environment, it’s the long term loan that fits the bill.
Chances are you’re quite familiar with the term, “term loan.” If you have a home mortgage or a car loan you have a type of term loan. The concept is to purchase an asset and have the payments structured around the useful life of that investment.
Think of it this way. A computer may have a useful life of three years. It’s logical to try financing that equipment for the life of the computer.
Is there a great deal on some inventory you can sell in the next 30 days? Do you need to buy some advertising to match the sale? Then a 3 to 6-month repayment term probably makes the most sense. Do you agree?
Invest in Your Business
It gets back to the idea that you need to know your numbers. What is that rate of return on the investment? It’s all about the risk and rewards.
Calculate your all-in total costs. This calculation includes the interest rate and any fees. Now, what can you expect as a Return on the Investment? This calculation is what we call your ROI.
The difference between your costs including all your overhead and the additional income are your margins. Typically, your margins are expressed as a percentage.
By reinvesting that margin back into your business, you have a tremendous opportunity to explode your business. In my opinion, investing in your business today makes the most sense. Do you agree?