Many businesses look to term loans as a way to get the needed financing. There are three main types of term loans. The most common might be the short term loan. The second most common is the long term loan. The least common is the intermediate financing.
Even though not as common intermediate financing is a key component in large and small business capital structures. Learn more about financial ratios to make getting the loan easy
What is Intermediate Financing
Intermediate term loans differ from the short term and long term loans primarily due to the term length of the loan. An intermediate term loan’s term is from one to three years. Businesses find this type of financing useful for acquiring assets that have shorter life spans than a long term asset.
The Five Keys to Consider .
First: and maybe most important is the lifespan of the asset. If the asset’s expected life is less than three years. This is an indication that the intermediate term loan is appropriate. Rental equipment is a good example. This equipment’s expected lifespan is 2.5 years.
Second: How will the loan be repaid? The financed asset should generate enough revenue that the monthly payment is paid from the extra revenue. Additional profit generated from the additional asset that is over and above the loan repayment schedule improves cash flow. The rental equipment purchase example, generates revenue from the rental plus profit off of each rental, and the asset is paid off before the term of the loan is complete.
Third: An intermediate term loan can help to improve cash flow and reduce long term liabilities. Improved cash flow is realized by adding a revenue producing asset that can service the loan and add additional revenue.
Fourth: When applying for this type of funding, a careful review of using fixed or variable interest rate to fund the loan is critical to achieving the best rate of return. Most lenders will offer the choice between a fixed or variable interest rate. Generally the trade off will be a lower interest rate for variable. But current market conditions can affect the discount. Using the fixed interest rate will decrease your risk so this is usually more expensive.
Fifth: Secured or unsecured this may or may not be a choice for you. If your business is strong, the asset you are planning on acquiring makes good business sense, and you have a good relationship with the lender, you will be able to get an unsecured loan. But securing the loan with a personal guarantee, or an asset may provide you with the best return, because it can reduce the cost of the loan. A secured loan equates to less risk for the bank and because of this they will likely reduce the cost of borrowing.
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