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Term Loans

Term Loans. CENTS. WHAT is a term loan?. Most commonly used by businesses Stafford Student loans are also considered term loans Can have “floating” or fixed interest rates Floating: variable interest rate 2.5-3 points over prime Prime Rate: index of bank rates

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Term Loans

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  1. Term Loans CENTS

  2. WHAT is a term loan? • Most commonly used by businesses • Stafford Student loans are also considered term loans • Can have “floating” or fixed interest rates • Floating: variable interest rate • 2.5-3 points over prime • Prime Rate: index of bank rates • Wall Street Journal’s Prime Rate Index (industry standard) • Monthly or quarterly repayments • Two types • Short-term loans • Long-term loans

  3. INTEREST RATES & FEES • Interest rates very greatly and are dependent on: • Risk • Length of the loan • Loan use • Rates & fees tend to be lower than other types of loans • Interest rates: • Fixed • Floating • Fees • Typically 1%

  4. Short & long-term loans • Term: typically 1-3 years • May be a line of credit or may be tied to a specific purchase • Line of credit: usually a fixed interest rate at 2.5 points over prime • New businesses typically use these loans: • Working capital • Equipment purchases • Application process: very thorough review of applicant’s personal and/or business credit history and any business plans • Payment schedule: typically monthly, but may be quarterly • Term: typically 1-7 years, but may be longer • Interest rates may be floating or fixed • Generally about 3 points over prime • Typically used by businesses to make larger capital purchases, equipment, or projects • Lender may require collateral • Application process: very thorough review of business credit history and business plan • Payment schedule: may be monthly or quarterly

  5. PENALTIES • Prepayment (Defeasance fee): • A fee assessed for full payment before the date of maturity • Some states prohibit this practice • Acceleration: • Loan becomes due immediately upon violation of a loan term or condition

  6. TERMS & CONDITIONS • May place limitations on financial liabilities that may be assumed • Debts • Dividends • Salaries • May require a percentage of profits are earmarked for repayment • May require a personal guarantee on the loan • May include a “balloon” payment when the loan matures

  7. SUGGESTIONS • Start with lenders you have a history with • Do your homework • Shop around for the loan that suits your needs and has the best rates and fees • Consult your resources: friends, family, colleagues, newspaper, internet, Small Business Administration www.sba.gov • Mind your C’s: • Character • Capacity • Capital • Collateral • Confidence

  8. QUESTIONS?

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