Business & Commercial Loans Different Types Of Corporate Debt Finance

Under-writing guidelines also vary from lender to lender and will be affected by a lender’s decision to increase or decrease lending exposure to a particular industry segment. For that reason, it may take extensive due diligence, phone calls and meetings to find the right lender at the most competitive rate and terms.

The list is sorted from the lowest cost of debt to the highest cost.

Industrial Revenue Bonds (IRBs)
•    Municipal bonds whose proceeds are loaned to individuals or to businesses to finance capital investment projects
•    Borrower has sole responsibility to make payments on the principal and interest
•    Exempt from federal income tax and therefore have lower interest rates than most comparable capital sources.

Cash-Flow Based Loans (Cash-Flow Lending)
•    For companies that generate significant cash flows from a relatively small asset base, often with significant intellectual property and intellectual capital
•    Lender will likely take a security interest in all company assets in case of default
•    Borrowing capacity based on a multiple of the agreed-upon cash flows.
•    Primary ratios are often minimum debt service coverage and maximum leverage.

SBA 504 loans (504)
•    Small Business Administration Program
•    Provides growing businesses with long-term, fixed-rate financing for major fixed assets such as land and buildings
•    Appropriate to use when a borrower wants to minimize equity investment
•    Personal guarantees typically required
•    Lower blended interest rates
Business & Industry Loans (B&I)
•    Provides guarantees of up to 90% of a loan made by a commercial lender
•    Borrower must be located in a rural area
•    One job must either be created or retained for each $40,000 of loan guarantee.

Asset-Based Loans (ABLs)
•    Asset-based lenders (ABLs) lend against the current assets of a business such as accounts receivable and inventory; other asset classes such as Property, Plant, and Equipment may serve as collateral
•    ABLs less focused on a company’s earnings or financial loan covenants
•    ABLs are not regulated by federal government and so more flexibility on deal structure.

SBA 7(a) Loans (7a)
•    Small Business Administration Program
•    Provides loan guarantees to small businesses unable to secure financing through normal lending channels at reasonable terms
•    Typically provided through a bank
•    Personal guarantees typically required of borrower and spouse
Equipment Leasing
•    True Lease: lessor takes the risk of ownership and as owner is entitled to the benefits of ownership including tax benefits, also called a ‘tax lease’
•    Finance Lease: requires the lessee to remit payments of lease rentals, which total the cost of the asset plus the lessor’s required profit. Lease is non-cancellable and requires the lessee to pay all of the taxes and other assessments, provide insurance, and maintain the asset according to the manufacturer’s guidelines.

Bank Leasing
•    Banks are a major source of equipment leases
•    Finance leases become a part of a borrower’s capital structure, having the same effect on the balance sheet as a loan
•    Appropriate to use when the least expensive method is sought and the residual value of the equipment is fairly predictable
Captive-Vendor Leasing (Captive Leasing)
•    Large manufacturers often provide financing to their customers, often in the form of an equipment lease
•    Captive leasing companies tend to be divisions or subsidiaries of these manufacturer where they offer the lease to the customers directly
•    Appropriate to use when a vendor subsidizes equipment sales with favorable lease terms
•    A lease versus a purchase analysis should be performed to determine the cheapest method of financing.

SBA CAPLines (CAP Lines)
•    CAPLines  helps small businesses meet short term and cyclical working capital needs
•    Five short-term working-capital loan programs are available for small business:
i)    Seasonal Line: advances against anticipated inventory and accounts receivable, revolving or non-revolving
ii)    Contract Line: finances direct labor and material cost associated with performing assignable contracts, revolving or non-revolving
iii)    Builders Line: used by small general contractors to finance direct labor and material costs; the building project serves as the collateral, revolving or non-revolving
iv)    Standard asset-based Line: asset-based, revolving line of credit for businesses unable to meet credit standards associated with long-term credit; provides financing for cyclical growth, recurring, and short-term needs; repayment through conversion of short term assets into cash
v)    Small asset-based Line: an asset-based revolving line of credit of up to $200,000, some stricter requirements of the standard asset-based line are waived due to the lower amount.

Bank Credit Lines (Bank LoC)
•    Allows a company to borrow against an established credit limit to meet short-term working capital needs
•    Appropriate to use when a borrower’s cash flow fluctuates within a month or season, causing a short-term working capital need
•    Borrower should also consider closing points, compensation balances, unused line fees and float days as additional costs of the loan
Mezzanine Capital (Mezz debt)
•    Subordinated debt lenders that seek businesses with high revenue and earnings growth potential but are currently not able to obtain all of the funds necessary from banks
•    Typically used for acquisitions, management buyouts, business expansion, recapitalizations, new product launches, diversification, dividends, equipment and owner-occupied real estate purchases
•    In contrast to equity investments, mezzanine financing offers lower cost, no management control, a predefined exit arrangement and it is less dilutive for already existing shareholders.

Factoring
•    Advance payments and assumption of receivables for a factoring fee
•    Appropriate when a less expensive method of financing is not available
•    The higher the factoring volume, the more likely it is that the client can negotiate better terms
•    Factoring cost can be prohibitively high.

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