4 Ways Commercial Advanced Term Loans Help Businesses

July 25, 2014

Banks offer a number of financial products that help smart business owners get ahead. Businesses only know to take advantage of those products once they learn what they are and how they work. An advancing term loan could be the answer to a problem your business faces. Here's what you need to know to find out.

What is an Advancing Term Loan?

An advancing term loan is similar to other types of term loans, but with an advancing period in which the business only makes interest payments. That advancing period gives the business some extra leeway in making use of the capital provided before full payments kick in.

Once the advancing period has passed, the loan becomes a typical term loan with pre-defined monthly principal and interest payments due through the life of the loan.

4 Examples of Ways Advancing Term Loans Help Businesses

Small businesses have to be able to play the long game when it comes to making business decisions. A large upfront investment is often the key to larger profits down the line. Advancing term loans are designed to help businesses reap those profits.

Example #1:

Your business has outgrown your current office space and it's time to move to a new one. A new business space means new office supplies and equipment are needed, but the process of moving everyone over takes time. You don't want to pay outright for equipment your employees won't be able to start using for a few weeks yet.

You want to go ahead and purchase all the equipment you'll need so it's ready for your team as soon as they're set up in their new offices without having to worry about big payments on top of all the other stresses of moving. An advancing term loan makes that possible. You can hold off on principal payments until after your business is settled into your new space, and keep your focus on helping everyone make a smooth transition.

Example #2:

You just got a huge order. It's bigger than your usual orders, which is exciting, but also means you'll need to make a sizeable investment in new parts in order to fill it. Those staggering upfront costs don't have to put a damper on the thrill of new business.

With an advancing term loan, you can buy all that new inventory and start paying it off after you've received payment on your big order.

Example #3:

Your business is expanding and you need all new vehicles for a delivery fleet. Those new vehicles won't be able to start making you money until after they go through a lengthy process of being retrofitted for industrial use. With limited resources, you hate spending that kind of money on something with such a delayed benefit.

Having an advancing period on your loan where payments are minimized helps tide your business over until you can get those vehicles on the road and start getting some return on investment from them.

Example #4:

Business is good, but you're ready to move up. You and your team have been taking on projects for small to medium sized businesses with regular success, and you know you're ready to tackle similar work at the enterprise level.

Pursuing business on a much larger scale is a risk that requires access to more resources. An advancing term loan makes taking that big step a little easier, so your small business can break into the work (and profits) usually reserved for the big guys.

The particulars of an advancing term loan have to be worked out between the bank and business based on the situation, so there's not a clear standard for the length of time available for the advancing period. Once the loan converts to a term loan the length of time should match or be shorter than the useful life of the asset you're taking out the loan to purchase.

Any type of business can qualify; you just need to check on the terms available from the bank. For more information on what to look for in an advancing term loan, talk to one of our experienced commercial loan officers.

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Topics: The Corner Office, Commercial Lending

Ed Lette

Business Bank of Texas

Ed Lette is a Founder of Business Bank of Texas. Serving as a licensed CPA since 1983, Ed’s extensive experience in the banking industry has led him to become the founding president of four national bank charters including Business Bank of Texas, N.A., and the chief financial officer of five national banks during his 45 year career. Ed serves as director of the Texas Bankers Association District 4, chairman of the Executive Advisory Council to the School of Business at Texas Lutheran University, and is a life member of the Texas Association of Business.
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