business term loans

September 13, 2022

In this podcast, Andrew Marques, VP and Commercial Loan Officer at Cape Ann Savings Bank, talks with John Maher about business term loans. Andrew explains the basics of these loans and how they differ from lines of credit. Then, he provides an overview of how businesses use these loans and what they need to know before they apply.

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Podcast transcription

Transcription Disclosure: Below is a transcript of the conversation between John Maher and Andrew Marques. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with Andrew Marques, VP and Commercial Loan Officer at Cape Ann Savings Bank. Today, we're talking about business term loans. Welcome, Andrew.

Andrew Marques: Thanks, John. Great to be here.

What Is a Business Term Loan?

John: Andrew, what is a business term loan?

Andrew: A term loan is a credit facility that's used for a specific purpose and it has a set payback period and ultimately a set time where that loan is to be repaid. It has an agreed upon repayment schedule and is due at maturity, which is the end of that financing term.

Uses for Business Term Loans

John: Tell me a little bit more about how business term loans are used and what they're for.

Andrew: They can have a wide array of uses. There's a lot of different purposes behind taking out a term loan for any business. And most commonly they're used for equipment, vehicles, leasehold improvements, permanent working capital needs such as an increase to inventory. Or if someone's looking to buy a business or buy out a business partner, a term loan would be used in that case as well.

Average Repayment Terms for Business Term Loans

John: Are there different lengths and terms available in general for term loans?

Andrew: Yes. It's often tied to the purpose of the loan. Generally we make business term loans over five year periods. They may be shorter, and we can look at doing a shorter term loan, or we could sometimes go out to seven and 10 years, and it really depends on the underlying asset. So if you're buying a new piece of equipment that has a long life, maybe 20 years, we could match that life, but generally we keep them at 5, 7, 10 years at the most.

Benefits of Business Term Loans

John: And are there certain benefits to taking a short term business loan?

Andrew: Yeah. A short term loan can be used to fill in a short term funding gap if it could be tied to a contract or receivable, but generally on a shorter term, the payments are going to be higher because they're not stretched out as long of a period, but you may save money on the interest rate and ultimately the interest accrued over time. So you could have a larger payment, but that debt's going to be paid off faster. Where on the flip side, you might enjoy a smaller monthly payment, but over the life of that loan you would be paying more towards the accrued interest and the payback of that.

John: So it's that typical balance that you have to figure out between what your monthly payments are going to be and how much interest you're going to pay over time. That sort of thing. You have to just figure out what works best for you?

Andrew: Yep. And we never want to make a loan that someone can't afford to repay, because it puts obviously the business in a bad position and in the back of that position, so we're really trying to find that perfect fit of where the monthly payment is comfortable and without stretching it out too long where it's just lingering outstanding for a long time.

What Factors Affect the Amount of a Business Term Loan?

John: How do I know how large of a term loan I qualify for?

Andrew: There's a lot of considerations that go into the size of the loan. When considering a loan, you should start by looking at what payment they would be comfortable with. So if you have a set budget for your business, you might have an area where you could plug that in and see how that fits into your cash flow. The bank's going to look at a lot of different factors to ensure we're making a loan that can be paid back in the agreed upon term.

It's also a function of the asset and the collateral value supporting that loan. So if someone was questioning how much they can afford, I would encourage them to reach out to me and discuss their financing needs and their operations and see where they're comfortable making a monthly payment and still operating in the same capacity that they're at now or that they plan to be going forward.

Are Short-Term Loans Less Expensive Than Long-Term Loans?

John: Are short term loans generally cheaper than long term loans? I know we talked before that with short term loans obviously you're paying less in interest over time, but do you generally have a lower interest rate as well with a short term loan? Does that factor into it?

Andrew: Yes. So just like on advertised mortgage products, if you look at a house, a 10 year loan would be cheaper than a 30 year loan, the bank looks at it the same way for business lending. So if you're going to promise to repay a debt in one year, there's less risk to the bank and you would save money on the interest rate because we're not fixing an interest rate for as long of a period.

On shorter term loans, there may be some upfront costs in a fee or origination point. So it really depends on, again, that use and every business and every loan and every industry is a little different in the commercial world, which is something I love. And I get to know the business owners, I get to know the businesses and see what their needs are, and our job is to design the loan product that meets their needs and has reasonable terms for the bank.

Business Term Loans Are Customized Around Borrowers' Needs

John: So it's generally not a cookie cutter thing, you're coming up with this product individually for each business customer, depending on what their needs are?

Andrew: Yep, exactly. It depends on their business cycle, it depends on their needs, the underlying assets and their cash flow as well.

Where to Apply for a Business Term Loan

John: Does it matter where I get a business term loan from?

Andrew: Yeah. Commercial lending is really relationship lending. Cape Ann Savings Bank prides itself in knowing our customers needs, operations, and the local industries that we work with. So having an established relationship with the bank and looking for financing there is really a good way to do it, because the relationship's important to the Cape Ann Savings Bank and really any bank that's making commercial loans.

So it's not ideal to go out and just look for the cheapest loan out there. They may be willing to give you that loan product, sign you up for a monthly payment, but they may not always be looking out for your best interest and building a long term relationship. In contrast, we would be happy to welcome and work with clients over time, because we know as a local bank, a small relationship can turn into a large relationship over time. The mutual success is really something that we look for and strive for.

Strategies to Repay Business Term Loans

John: That's great. How should a company repay a business loan? Are there certain strategies or anything like that to help with repayments?

Andrew: Yeah. So you always want to make the minimum monthly payments on time, but paying extra to principal is a good way to reduce the interest paid over time. So even if you have a fixed rate and the loan is set to be repaid over five years, if you can make small monthly principal payments beyond that regular monthly payment that would pay it off at the end of the loan, you'll save money over the life of that loan by making small payments.

If at the end of the year, you have some extra cash due to income or extra cash flow, you may want to apply some of that to the principal to reduce the debt in one chunk. So there's a lot of different strategies and it really depends on the cash flow of the business, because there's always that trade off between keeping cash on hand to fund growth and then reducing your debt.

So the strategy, I wouldn't want to advise in general the way to repay a loan because there's a lot of different nuanced pieces within that, but paying a little extra towards principal can always help reduce that effective interest rate and paying it down ahead of schedule.

Contact Cape Ann Savings Bank to Learn More

John: All right. That's good advice. Andrew, thanks again for speaking with me today.

Andrew: It was great to be here. John: And for more information on business loans and commercial loans, visit the website at capeannsavings.bank. Cape Ann Savings Bank, member FDIC, member DIF, equal housing lender.