Term/ Asset Based Loans

The fixed and variable rate term loans are ideal for funding your purchases of long-term assets that support your business growth. Take advantage of fluctuating interest rates through a variable rate loan. If you are concerned with rising interest rates, a fixed rate term loan will help you budget your monthly finances.

• Loans to purchase new or used capital assets
• Can be used to refinance an existing debt, business expansion or acquisitions
• Flexible repayments when you need it

Fixed rate loans:

• Normally start at $25,000
• Stabilize your payment schedule by providing consistent payment amounts
• Provide peace of mind by maintaining your loan carrying costs when interest rates rise
• Offers an annual 10% prepayment privilege at no charge
• Payments can be blended to include both principal and interest
• Monthly payments are usually required
• Available in Canadian or U.S. funds

Variable rate loans:

• Usually starts at $5,000
• Benefit from lower interest rates immediately when the prime rate changes
• If interest rates rise, the loan can be converted to a fixed rate term loan
• Make partial or full prepayments to your loan without penalty
• These are secured loans for a term usually up to 7 years but not exceeding the useful life of the asset being financed
• Payment amount set to ensure repayment of the loan remains within the agreed to specified period but not to exceed the useful life of the asset being financed
• Fluctuates with Bank’s Prime Rate
• Monthly payments are usually required
• Available in Canadian or U.S. funds

 Purpose: 
Usually term funds are borrowed for the purchase or refinancing of fixed assets such as land, buildings and equipment. Term loans can also be used to acquire other companies. However, financing the acquisition of one company by another are special transactions and are much more challenging to get financing for, especially if the company to be acquired is another service firm with perhaps much of its value, and the price of the acquisition, related to goodwill.

Term: 
The term will vary depending on the life of the asset to be financed and the individual policy of the financial institution doing the lending. Insurance companies, trust companies, and mortgage companies lend against mortgages on land and buildings, usually longer term -- fifteen years and more, up to 75 percent based on an up-to-date evaluation. Commercial term lenders, including banks, finance companies and Schedule II banks, may lend for a term of five to seven years and sometimes longer, with the amortization period going up to twenty or twenty-five years. Advances typically reach up to 75 percent of a recent evaluation against land and buildings, and in the neighborhood of 50 percent against equipment.

Rate: 
The rate is probably a little higher than the rate charged on an operating loan, to take into account the added risk associated with the long-term nature of the commitment.

Fees: 
In addition to a fee for opening the file, there would likely be a commitment fee of 1 to 2 percent, for agreeing to go long term.

Security: 
Obviously, the assets taken as security will be those which are the subject of the financing. However, depending on the value of those assets, the financial strength of the borrower, etc., the financial institution may also wish to have other security, such as personal guarantees, life insurance on the owner, a floating charge on other assets, etc. To the extent possible, we try and negotiate to limit the security to the assets being financed and try and keep other assets unencumbered so that you can use them for borrowing funds from other financial institutions, in the event you have other financial requirements.

Availability: 
One of the main differences between an operating loan and a term loan is that once an amount is paid down under a term loan, it cannot be re-borrowed. In lending under a term loan, a financial institution usually does not have the same concern that the borrower will be going "over line" or "under margin" as it would under an operating loan, because under a term loan, typically, as the loan amount decreases with regular repayments of principal, the related value of the security increases.

Pre-conditions:
Pre-conditions for real estate transactions are lengthy and complicated. They concern such items as compliance with all legal and zoning by-laws, property taxes, environmental checks, etc. You are best to speak to two or three lenders to ensure you get a good understanding for all the conditions that you will have to meet before being able to borrow.

Other conditions:
These will depend on each situation. Because the financial institution is committing itself to lend sometimes for as long as ten years, it will try and anticipate what might happen during that period. This may necessitate certain special conditions, such as automatic adjustments to rates related to changes in banking laws or tax laws.

Furthermore, the length of the commitment under a term loan brings with it the necessity to closely follow the financial progress of the borrower. This is typically done through three conditions: positive covenants; negative covenants; and reporting requirements. The failure to observe these conditions will enable the lender to declare a default under the loan and demand repayment.

Positive covenants: 
These refer to financial ratios that the company agrees to meet so long as it has any funds owing to the lender. Examples include:

• Maintain a minimum shareholder's equity of one hundred thousand dollars.
• Maintain a leverage ratio lower than 2: 1.
• Maintain a cash flow sufficient to cover interest and principal payments.
• Maintain a current ratio greater than 1.5: 1

Negative covenants: 
The company will not, without the prior written consent of the financial institution. Examples include:

• Incur annual total capital expenditures greater than $50,000.
• Sell, dispose or further encumber its assets.
• Change the character of its business in any material way.
• Pay dividends if, by doing so, it would breach its financial covenants.
• Enter into any additional long-term debt.
• Merge, make a major acquisition or modify substantially the ownership of the company.

Reporting requirements: 
So long as any advances remain outstanding, the company will submit to the financial institution the following information. Examples include:

• Within 20 days after the end of each month, an aged listing of accounts receivable.
• Within 45 days after the end of each fiscal quarter, unaudited financial statements of the company.
• Within 120 days of the fiscal year end, financial statements of the company.
• Annually, a certificate of no default from the company.
• Annually, the company's budget for the following year.
• Any other information which the financial institution may reasonably request.