A Cash Business Loan might Just be Perfect for a Working Capital

A Cash Business Loan might Just be Perfect for a Working Capital
A Cash Business Loan might Just be Perfect for a Working Capital
December 30, 2016

The loan need for many businesses in Canada can be placed in two categories namely working capital term loans and revolving credit facilities. The different aspects of borrowing are important in their own way and for you to have financial success; you need to understand them critically. So, is there any lone form that is perfect?

A term loan has fixed payments

A term loan has a defined interest rate and fixed payment. Having this in mind and knowing about them even before the loans are taken up helps the owner or manager plan for repayment (a very important part of any borrowing) using the cash flow. The terms of payment is not only flexible but also affordable for the small business owners.

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

Your ability to pay a loan will be judged by the lender

The business of lending is a risky one and lenders always take steps to make sure they are not lending to a high risk business or a dubious customer. To do this, they take the time to judge the borrower by carefully analyzing their cash flow projections. Certain lenders will prefer that the borrower makes prepayments at certain times.

Prepayment may come with some form of penalties

There is often a penalty that comes with borrowers paying back the loan before the expiration of the agreed period. This is because such a move will deny the lender the interests they should have gotten in the coming months or years. Hence, when a borrower opts for prepayment, there may be some penalty as the lender will presume they intend to pay off the loan before its maturation.

Read also: What You Never Knew about the Small Business Administration Loans

Understanding the financial need of your business is a key to success

Different businesses have different financial needs. The proceeds from a business term loan are often used to acquire new assets such as equipment – although this need can be accomplished through equipment lease financing. The entire lease and buy topic is a diverse one and there are merits to both sides.

You can only claim you have maximized a capital term loan if the proceeds generate cash

Having a trusted and experienced handler of your projected cash flow is very important because you can only claim that your capital term loan has been put to optimal use if the proceeds are used to generate profits or cash flow in your business. For this reason, it is crucial to understand the asset life of your inventory.

Read also: Looking for Ways to Finance Your Company: Try Asset Based Lending

The requirement in getting a term loan may vary

Like every other loan, the requirement for a capital term loan may vary depending on the lender. However, there are some documents that remain critical and you should always expect your lender to ask about them and they include bank statement showing in and out flows of money, business financials as well as information about the ownership of the business.

The duration of your cash term loan will depend on your cash flow

Irrespective of the amount and duration a borrower seeks, the lender’s decision is always final. The lender will normally scrutinize the business to make sure they meet up with the loan they seek. For example, a term loan can range from one year to five years depending on whether the cash flow of the business warrants longer term.

Cash term loans can be put into myriads of uses

The use of the term loan is not limited to a particular area of the business. It can be sued to purchase new assets, build up inventory, design market initiatives and reduce payables. For a term loan that makes sense, you need to consult with a Canadian business advisor.

Read also: Commercial Mortgage Bridge Loan can be Your Life Saver in Various Situations

Article highlights

  • The loan need of many businesses can be grouped into two categories.
  • The term loan has fixed interest and fixed repayment.
  • Lenders usually take a step to avoid losing their money.
  • Paying back a loan before maturation may attract penalty.
  • Prepayment of loan is allowed in certain cases.
  • The secret to a successful business is to understand your financial need.
  • Capital term loan can be used to generate profit.
  • Different lenders have different requirements for loans.
  • Some loan requirements are constant.
  • The length of cash term loan will depend on the cash flow of your business.

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