Commercial Loan

2 Key excerpts on "Commercial Loan"

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  eBook - ePub

  The Law (in Plain English) for Small Business (Fifth Edition)

  • Leonard D. DuBoff, Amanda Bryan(Authors)
  • 2019(Publication Date)
  • Allworth

    (Publisher)

  Intermediate-term loans, which require payment in between one and five years, and long-term loans, which extend payments over ten or even fifteen years, are more appropriate for purchases of fixed assets. Repayment on the loans is expected to be made not from the sale of these assets but from the earnings generated by the company’s ongoing use of them. Those assets produce income at a much slower rate, hence the bank’s willingness to allow repayment over a longer period. Bear in mind that commercial lenders are interested in offering funds to successful businesses in need of additional capital to expand and increase profitability. They are not particularly inclined to make loans to businesses that need the money to pay off existing debts.

  Depending upon your credit reputation, short-term loans may be available with or without security. It is more likely that long-term loans will require adequate security (which may include securing the asset to be acquired) and necessitate a pledge of personal, as well as business, assets.

  Loans that are characterized as lines of credit basically provide the business with the opportunity to borrow up to a specified amount at any given time. This can be used to facilitate purchases, help pay salaries when the business is experiencing cash flow problems, or the like. A line of credit is typically available on a long-term basis. Most lenders require the line to be paid off at least once a year, even though the money can be borrowed again immediately thereafter.

  The term of the loan is an important legal obligation that your business will accept and could include modifications that restrict early payoff or trigger termination upon a certain event. Considerations of this kind could entice a financial institution to accept a certain payment term, but it is important that you understand what each proposed modification may mean for your business.

  REPAYMENT

  When and how the loan will be repaid is closely associated with the questions of how much money is needed and for what purpose. The banker will use judgment and professional experience to assess your business ability and the likelihood of your future success. The banker will want to know whether or not the proposed use of the borrowed funds justifies the repayment schedule requested. As the borrower, you must be able to demonstrate that the cash flow anticipated from the proceeds of the loan will be adequate to meet the repayment terms if the loan is granted. As mentioned above, repayment may be restricted or triggered by certain events. Contemplating a provision of this kind may be a useful negotiating tool, but if you propose such a term, be prepared to demonstrate how the business will deal with such an event.

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  eBook - ePub

  Raising Capital

  • Andrew Sherman(Author)
  • 2012(Publication Date)
  • AMACOM

    (Publisher)

  These loans are almost always secured not only by the assets being purchased with the loan proceeds, but also by the company’s other assets, such as inventory, accounts receivable, equipment, and real estate. This arrangement usually calls for a loan agreement, which typically includes restrictive covenants that govern the company’s operation and management during the term of the loan. The covenants are designed to protect the lender’s interests and to ensure that all payments are made on time, before any dividends, employee bonuses, or noncritical expenses are paid. Long-Term Loans. These are generally extended for specific, highly secured transactions, such as the purchase of real estate or a multiuse business facility. When such a purchase is being made, a lender will consider extending a long-term loan to a small company for 65 to 80 percent of the appraised value of the land or building. (As a general rule, commercial banks don’t provide long-term financing to small businesses. The risk of market fluctuations and business failure over a 10- or 20-year term is simply too high for a commercial lender to feel comfortable with such a loan.) Letters of Credit. These are issued by commercial banks solely in connection with international sales transactions, to expedite the shipping and payment process for those transactions. In a typical letter-of-credit scenario, the seller demands that payment be made in the form of a letter of credit, and the buyer must then make arrangements with its bank to issue the letter of credit

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