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Exploring Loan Structures: Finding the Right Funding Option for Your Business

  • Date Posted: September 6, 2023

When seeking financing for your business, it’s crucial to understand the different loan structures available. Loan officers play a pivotal role in guiding borrowers through the decision-making process and recommending the most suitable funding sources. This blog post will explore various loan options, including lines of credit, term loans, SBA loans, and business real estate loans, to help you make informed choices for your business’s financial needs.

Line of Credit:

A business line of credit is ideal when you need access to funds as needed, such as managing cash flow gaps with accounts receivable or purchasing inventory. These credit lines typically have a 12-month term, with interest-only payments based on a variable interest rate and with the principal due at the 12-month mark.  Most lines of credit require a 30-day resting period during the 12-month period. Collateral, usually accounts receivable or inventory, backs the credit line. In some instances, collateral may include equipment or real estate.

Term Loan:

Term loans are commonly used for long-term capital investments, such as acquiring fixed assets, making tenant improvements, or investing in new technology. With term loans, you make monthly principal and interest payments over a specific time period, usually at a fixed or variable interest rate.

SBA Loans:

The U.S. Small Business Administration (SBA) partners with banks and financing entities to offer various loan programs to a majority of U.S. businesses. The SBA is not a direct lender but provides guarantees to lenders to encourage small business lending.

a) SBA 7(a) Loans: The SBA 7(a) program is versatile and can be used for working capital, business acquisition, equipment financing, export financing, and owner-occupied commercial real estate. Loan amounts range from $20,000 to $5,000,000, with terms from 3 to 25 years. Down payments can be as low as 10%. To be eligible, your business must meet certain criteria set by the SBA.

b) SBA 504 Loans: SBA 504 loans are designed for financing equipment purchases and owner-occupied commercial real estate, including land, new facilities, and long-term machinery. These loans cannot be used for working capital or non-owner-occupied real estate. The SBA provides guidelines for asset usage and promotes business growth and job creation.

Business Real Estate Loan:

Investing in real estate or constructing a location for your business often requires a business real estate loan. Loan structures can vary based on the purpose, whether it’s a purchase, construction, or renovation.

a) Purchase-Related Financing: Term loans are commonly used for purchasing real estate. These loans involve regular fixed monthly payments over a defined period, often with a balloon payment due at maturity. Loan terms typically range from five to ten years, but with SBA lending, terms can extend up to 25 years. Banks may lend up to 75% of the real estate value, while SBA loans can go up to 90%. SBA loan options include the SBA 7(a) program or an SBA 504 debenture, both offering higher advance rates.

b) Construction Loans: For building or renovating property, construction loans disburse funds progressively throughout the construction process. Monthly draw requests with supporting documentation determine the loan amount advanced. Construction loans can be structured as construction-to-permanent loans or refinanced into long-term mortgage loans after completion.

Choosing the right loan structure is vital for meeting your business’s financial requirements. Loan officers can provide valuable insights and recommend funding sources beyond their own institution, including SBA programs and local economic development initiatives. By understanding the various loan options available, such as lines of credit, term loans, SBA loans, and business real estate loans, you can make informed decisions that support your business’s growth and success. Consult with experienced loan officers who can guide you toward thoughtful proposals tailored to your specific goals.