of a Term Loan
Types of Loan Security Agreements
Approaching Long Term Debt Lenders
Characteristics of a Term Loan
"Term" refers to the time for which
money (a secured loan) is required and the period over
which the loan repayment is scheduled. A long term loan
is arranged when the scheduled repayment of the loan
and the estimated useful life of the assets purchased
(e.g. building, land, machinery, computers, equipment,
shelving, etc.) is expected to exceed one year. Long
term loans are normally secured, first, by the new asset(s)
purchased (up to 65%) and then by other unencumbered
physical assets of the business (for the remaining 35%)
, or failing that, from additional funds from shareholders
or personal guarantees from the principals. On the balance
sheet, the equipment purchased shows up in the long
term assets section, while the counterpart loan information
is shown in the current and long term liabilities portions.
The useful life of the assets is directly reflected
in their depreciation schedules.
lenders (creditors) make loans to businesses that exhibit
strong management ability and steady growth potential.
A written business plan, including a cash flow demonstrating
the business' ability to repay the loan principal and
interest over the term of the repayment schedule, is
mandatory. The lender will expect you to have appropriate
insurance to protect the assets.
Principal repaid over a period of time directly related
to the useful life of the asset(s) (e.g. land and buildings
- up to 30 years, computers - 3 years).
loan carries both interest and principal repayment provisions
in a set repayment schedule. Early repayment may entail
a penalty because the lender had not planned an alternate
investment for that money.
percentage interest rate normally remains constant for
the term of the loan. Each payment of principal reduces
the balance of principal remaining and the subsequent
interest is calculated on this reducing balance.
lenders make different types of term loans. Term loans
often carry lower interest rates than operating loans
because the term is fixed and the loans are secured
by assets (asset-backed).
Types of Loan Security Agreements
Note: A promissory note is a written promise
to pay a specified sum of money to the lender either
on demand or on a specified date.
Mortgage: The realty mortgage is a loan (mortgage)
whose proceeds are applied to the purchase or re-finance
of land and buildings. A charge against the title is
registered with the Province.
Mortgage: The chattel mortgage is a mortgage
on specific assets other than land and buildings. A
lien charge against the title is registered with the
The pledge is an agreement similar to the chattel mortgage,
except in that possession is transferred to the lender
but title remains with the borrower, e.g., your stocks
and bonds held by the bank.
Charge: The floating charge is an agreement
which designates that all the remaining assets in the
business, not already mortgaged as security for other
debts, will be taken as the security for the new debt.
The title remains with you but a debenture is registered
with the Province.
Guarantee: This agreement says you will agree
that if the limited company is unable to repay the loan,
you will do so personally. If this is in addition to
other securities, you would be wise to try to negotiate
a limited guarantee to cover the shortfall in the security
for the loan. Try also to recover your personal guarantee
as soon as the business has paid off its obligation
or can carry the debt on its own security. That personal
guarantee places those things you and your family hold
dear at risk for the debts of the business.
of a Claim:The Postponement of a Claim allows
the lender to ask for assurance that the company will
not repay the shareholders until the secured lenders
have been repaid in full.
Approaching Long Term Debt Lenders
predictability of repayment and degree of control over
loan security makes the asset-based long term loan the
preferred investment of most lenders and lending institutions.
Provided that the equity requirement, leverage factors
and asset-based security is adequate, a variety of lenders
can be found to conclude these loan agreements.
long term debt financing sources can be divided again
into the sub-categories of:
people approach the subject of borrowing money with
some trepidation. You should never view borrowing money
from a commercial loan institution as begging for money.
Rather, consider that you are offering the financial
institution an opportunity to do business with you -to
make a sale.
will be renting money from people who, in turn, are
soliciting your business. Banks, credit unions, finance
companies and others need your business to make their
money work for them. Loans are just another commodity
on a retailer's shelves, and it becomes your challenge,
in conjunction with the loans officer, to find the one
that best fits your circumstances.
Loan Officer's job is to rent money at profitable rates
of interest with a minimum of risk. The loans officer
needs to feel comfortable that he/she has recommended
an astute investment, predicated on tested principles
of lending (business plan with financials from which
ratios can be developed), when your case is presented
by the officer to the bank's loan review board.
The institutional providers of first level
mortgage lending include the Insurance Companies, the
Banks, the Trust Companies and the Pension Funds. There
are also long term mortgage loan financiers to be found
in the private sector. The twenty-five year long term
mortgage though, has largely disappeared; a maximum
five year term reflects the character of today's long
term mortgages. Many of these smaller private mortgage
financiers advertise their services aggressively, especially
where those offerings relate to mortgage extensions
on property in strong real estate markets (such as the
Lower Mainland market).
first mortgage will earn the lender approximately 12%
interest, a second mortgage, 15%, and a third mortgage,
18% - 20%. These lenders can be easily located and your
approach to them assisted (or prepared for you for a
fee) through consultants known as mortgage brokers (provincially
licensed and bonded).
the Sources of Mortgage Financing:
Mortgage financiers must normally be approached
with a prepared proposal, which will be judged on the
basis of who the borrower is (i.e. personal financials);
the type of building and its use; the location of the
property; its condition of repair; its value established
by professional appraisal, comparative sales, cost and
income; the company balance sheet; and the projected
or actual cash flow. Again this approach can be prepared
for you by contacting a provincially licensed and bonded
Term Loan Lenders
The providers of basic long term loans include the Banks,
the Trust Companies, the Insurance Companies, the Pension
Funds and various Loan Specialists.
Sources of Long Term Loan Financing:
Term loan evaluation tends to be more rigorous and sophisticated
than mortgage loan evaluation. In summary, this lender
is evaluating the abilities of the management team,
the collateral available to support the loan and the
commercial viability of the situation, as indicated
in the projected financial submissions.
evaluation will normally require a detailed business
plan (in a bound presentation format) which provides
extensive information on the management of the company
or project; a detailed history of the business, its
products, its production methods, its operations, its
position in the marketplace; the purpose for which the
loan is intended (in intimate detail); any security
available to be pledged; and extensive financial information
to prepare this presentation can be accessed through
the Management Services arm of your local Business Development
Bank of Canada or the Start-Up Centre of the Canada
/ British Columbia Business Services Society.
The providers of term loans to finance equipment
include the Banks, the Trust Companies, the Insurance
Companies, the independent sales finance companies and,
on occasion, the equipment vendors themselves.
Equipment purchase is an eligible activity
under the terms of the Small Business Loans Act, a program
of the Government of Canada, which can be requested
to provide a guarantee to the financial institution
to allay a portion of the risk of the Small Business
Improvement Loan (SBIL). Information on this is available
from your local commercial bank, or the Canada/British
Columbia Business Services Society.
Sources of Equipment Financing/Leasing Lenders:
These financiers (the commercial banks, the trust companies,
the credit unions) look for many of the same proofs
of commercial viability that the Long Term Loan people
require. Again, a bound business plan is in order. Remember
to make the financial information in the plan easy to
locate. The role of the loans officer in the commercial
banks is to prepare a loan summary report from your
information, which will be submitted to his or her loan
supervisor with the officer's recommendation to support
or reject. These financiers are eligible under the SBIL
program loan guarantee.
the purpose of the business plan is primarily to procure
the capital financing to purchase an expensive new piece
of machinery or to upgrade an existing production line,
include a dual scenario financial argument. One full
set of financial projections should be provided utilizing
the existing numbers and the current equipment situation
(balance sheet, cash flow and income statement). A second
full set of financial projections should cover the same
period of time and show the situation as if the new
equipment were in place (balance sheet, cash flow and
an expectation of the useful economic life of the new
equipment and resale value over the course of its useful
Business Development Bank of Canada (ineligible for
the SBIL Loan Guarantee Program) is also a key lender
when it comes to equipment purchases and fixed asset
acquisitions in general. While the BDBC does not offer
discounted interest rates, it can choose to schedule
the repayment over a longer term than the commercial
finance companies, in cooperation with the equipment
suppliers (vendors) commonly offer sales finance programs
and lease-back options on their equipment. The onus
is upon you to ask your vendor if he/she has access
to any such finance programs, or if the vendor will
finance the purchase directly.