loan transparency
TRANSCRIPT
Loan Transparency
Confidential
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Our Story
“Small business owners struggle. We saw it in our
family… we see it in our
community.”
3Responsible Small Business Lending
Confidential
Camino Financial is the best alternative to a bank when seeking a business loan.
Online marketplace matching your business with
alternative lenders that meet your needs.
simple • Quick • SAFE
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What’s Loan Transparency?
Loan: a sum of money that is expected to be paid back with interest.
Transparency: lack of hidden agendas or conditions, accompanied by the availability of full information required for collaboration, cooperation, and collective decision making.
Loan + Transparency: Simple and clear communication of important terms and obligations related to a loan
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Why Should I Care About Loan Transparency?
Less Transparency = Higher Probability of Buying a Lemon
Less Transparency More Transparency
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Why Should I Care About Loan Transparency?
Reality Check: the lender is more knowledgeable about business credit and structuring a loan than you.
Importance: Ensure the lender properly discloses everything you need to know to make an informed financing decision.
7What Do I Need to Know?
• Loan amount• Cost• Annualized Interest Rate• Fees
• Repayment• Frequency• Payment Amounts• Maturity Date
• Required collateral• Limitations• Pre-payment• Covenants
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Benchmarks
• Interest Rate:– SBA 504: ~4.3% (variable)– SBA 7(a) Loans: 5.75% to 6.25% (variable)– Commercial Vehicle Loans: 8.5% - 12% (fixed)– Unsecured Long-Term Loans: 10% - 25% (fixed)– Daily Payment Loans: 25% - 50% (fixed)– Merchant Cash Advance: 40%+ (fixed)
• Fees– 3% - 5%– Note: the smaller the loan size, typically the larger the fee
• Tenor– SBA Programs:
• Real estate: 20-25 years• Equipment: 10 years• Working Capital: 7 years
– Unsecured Term Loans: 1 – 5 years– Daily Payment and MCAs: 3 – 24 months
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How to Evaluate a Loan Offer?
Business loans are different than consumer loans because you only borrow money to make money
Ability to Repay• How much cash does your business generate each payment period?• Can you cover at least 1.25x the required payment?• Are there payment periods in the year you can’t cover the payment?
Return on Investment (ROI)• What’s the cash benefit you’ll get from the loan?• When will you start making cash on the investment?
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Tips for Comparing Loan Terms
• Make sure you’re comparing apples with apples
– E.g. a real estate loan is not the same as an unsecured term loan for working capital
• Measuring the cost
– APR vs. Interest Rate vs. Factor Rate
– Fees
• Don’t only focus on interest rate!!
– Are you willing to pay a higher rate for more money?
– Are you willing to pay a higher rate for lower monthly payments?
• Compare repayment schedules
• Ask for advice if you need help
Thank You
Responsible Small Business Lending
Kenny [email protected]
(800) 852-0655
caminofinancial.com
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Appendix
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Measuring the Cost of Capital
Paid InterestMonthly Interest Rate (Interest Rate / 12 Months)X Ending Monthly Debt Balance = Paid Monthly Interest
You Should Know that …• Higher frequency = lower interest paid• Shorter term = lower interest paid BUT higher rate• Early repayment = lower interest paid
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Measuring the Cost of Capital
Factor RateTotal Debt Obligation / Total Loan Balance• Easy to calculate paid interest• Fixed debt obligation, early repayment doesn’t impact cost
Transaction FeesTypically calculated based on a % of outstanding debt.• Paid at originally (and occasionally annually)
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Annualized Percentage Rate (APR)
Describes the interest rate for a whole year rather than just a monthly fee/rate, as applied on a loan
Pros• Standardized measure• Includes fees• Represents the actual annual rate
Cons• Mislead from measuring the nominal cost of debt• Rate may seem inflated for short-term commercial loan
o Long-term low interest: $100,000 SBA Loan at a 6% variable interest rate, and repay monthly over 10 years, you will end up paying ~$133,224 to the bank (1.33x the original amount)
o Short-term high interest: $100,000 commercial loan at a 20% interest rate repaid weekly for 1.5 years, the total repayment is $115,939 (1.15x the original amount)