The majority of businesses require money (capital) for the purchase of necessary equipment and to provide “working capital”. This capital allows your business to purchase goods for resale and to pay costs such as salaries and overheads, so you can focus on selling your products or services.

When you borrow money to purchase equipment or other items required for your business to succeed, this type of loan is called Financing.

In this section, we provide information on:

1. Types of Loans
2. Secured and Unsecured Loans
3. Loan Covenants
4. Personal Guarantees
5. Other Sources of Financing

Types of Loans

There are various types of lenders and loans available to business owners. It is important to recognize that this group will lend you the money and charge a rate of interest as payment.

The rate of interest that lenders charge will typically vary in proportion to the level of risk associated with you and your business and the actual amount of money that you wish to borrow.

We contract this to Investors who give you money in exchange for owning some (or most!) of your business. Refer to our Investors section for more information on this topic and various types of investors available in the marketplace.

Lenders generally provide two basic types of loans:

• Term Loans
• Lines of Credit

Term Loans

This type of loan is provided when you purchase assets with a useful life that extends beyond 1 year. Common examples of these assets:

• Equipment used in manufacturing
• Office furniture and equipment
• Automobiles
• Vans, trucks, forklifts and other automotive related equipment
• Computers
• Leasehold improvements

Banks will typically provide you with 2 to 5 years to repay these loans, and you will generally have a monthly repayment plan, which includes a combination of interest and principal.

Lenders often provide you with a letter, which outlines how much money they will lend you and the terms and conditions associated with the loan. This item is called a TERM SHEET.

Lines of Credit

Most businesses require a line of credit to provide them with some cash flow to bridge the gap between the timing of having to pay for the costs of operating your business (such as rent, wages and purchases) and the actual receipt of cash from payment by their customers. Most businesses sell their goods on credit and many customers will take a long time to pay.

These are typically revolving lines, so if you repay them, you can continue to reuse them. The lines of credit are unlike the Term Loans, which are repaid over time.

Secured and Unsecured Loans

Generally speaking, with the high failure rates of businesses, Lenders will typically ask you to provide them with a lien, mortgage or charge over some or all of the assets of the business; also known as collateral. This type of loan is called a “Secured Loan”.

Secured Loans - Liens, mortgages or charges:

In concept, this is similar to a mortgage on your home.  You provide the bank with a mortgage on your home, and in the event that you cannot repay the mortgage, the bank can legally foreclose and sell your home.

In a business scenario, you provide the lender with a lien over the business assets, which can typically include the fixed assets or equipment purchased (as in the case of a term loan), or Accounts Receivable {amounts due from Customers}, Inventory, Work in Process, Deposits etc.

Lenders typically require a signed General Security Agreement (GSA) that provides the lender with a charge over all of your business assets.

Loan Covenants

Depending on the type and amount of your business loan, lenders will often require that you comply with certain terms as a condition of receiving the loan. These terms include the following covenants:

• Submit annual financial statements to the Lender within 90 days of the business fiscal year end
• Provide the Lender with monthly reports
• Ensure the original amount of money loaned to the business owner is not withdrawn during the period that the lender has provided money to the business

Defaulting on Loan Covenants

In the same way that if you miss mortgage payments on your home, the bank can foreclose it and then put it up for sale; this can also happen to your business if you default on the Loan Covenants.

When you default on your business loans, the Lender can seize your business and sell it.This is called being in “Receivership”.

Personal Guarantees

Lenders will typically ask business owners to personally guarantee the loans that they provide for your business.
Some current loans in the financial market provide you with the ability to limit this to 25% of the loan. This is called a Small Business Loan.

Other Sources of Financing

In addition to Term Loans and Operating Lines of Credit, there are some other sources of financing available to consider:  

•  Asset based lenders
• Factors

Factors may be used as a way to complement your existing banking facilities.