Short term loans are used for seasonal build-ups of inventory and receivables. Generally, they are repaid in a lump sum at maturity, made on a secured basis and are for a term of a year or less.
This is where a lender advances funds based on a percentage of your current assets. The loan is used as a source of funds for working capital needs. A lender typically takes a security position in the assets owned by the business.
These loans are fully secured by the equipment being purchased. Typically, banks loan 60-80% of the value of the equipment which can be repaid over the life of the equipment. Lenders make long term loans secured by commercial and industrial real estate. The loan is usually made up to 75% of the value of the real estate to be financed. Repayment terms range from 10 to 20 years. Lenders also make second mortgages on real estate. The amount of the second mortgage is based on the appraised market value and the amount of the first mortgage.
Balloon loans offer interest rates that are fixed for a period of years. Typically, these loans are pegged to a treasury index. Terms are for 3, 5 ,7, 10 or 15 years. The amortisation schedules are generally for 20 or 25 years. When a balloon loan matures at the end of the agreed term, the remaining principle balance outstanding becomes due. The borrower can pay off the loan by either selling the property or refinancing. Investment property is typically owned for a previously defined period of time. Analyse your investment strategy before securing a balloon – having to redo a loan can be expensive!
An adjustable rate loan will typically fully amortise with no balloon features. These loans may or may not have adjustment caps. The rate is determined by an index plus a margin. The indices used are generally U.S. Treasury bond rates. Rates are adjusted at a certain point in time using either the current rate of the index in question or the average of the index for the prior year. In either event, the index used will correspond to the adjustment term. If the loan is a three year adjustable, then the index used should be the three-year treasury index. Some adjustable rate loans are fixed for an initial period of years and then will adjust after that period. For example, a 5/1 adjustable is fixed for the first five years and there after will adjust each year. The index used will be the one-year treasury rate.
Under a credit line agreement, the lender supplies a business with funds intended to fill temporary shortages in cash that are brought about by timing differences between outlays and collections. They are typically used to finance inventories, receivables, project or related work.
Leasing can be accomplished through a bank, leasing or finance company. Your business will be subject to the same type of review as when seeking a loan, specifically cash flow of company, value of lease object and useful life. Lease terms range from 3 to 5 years. At the end of the lease, there are generally 3 options: purchase, renew and return.
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