In the era of financial planning for the business and personal needs, it is crucial to get the insight of the available financing methods. There are two types of credit products – the term loan and the line of credit. 

Although both offer funds, how they work is pretty different, and for what circumstances, different passes the need. In this blog, the authors will explain what term loans and lines of credit are, the pros and cons of each, and which option may be better suited to each business.

What is a Term Loan?

A term loan can be defined as a type of credit provided by a financial institution to a borrower for a specific amount of money in order to finance an investment that is expected to generate substantial returns within a particular year.

Term loan is a loan that a borrower receives from a financial institution in one go whether secured or unsecured and the same is repaid in a fixed amount with an interest rate, either fixed or floating as agreed with the lender. 

These loans are usually taken with a definite plan in mind such as acquiring equipment, building or any other fixed assets.

Characteristics of Term Loans

• Fixed Amount: Borrowers get their loan amount in full at the initial instance of the loan trapping time.
• Repayment Schedule: The payment is made in equal or unequal instalments over the period which may last from 1 to 10 years.
• Interest Rates: May be of a fixed nature or variable; the former may affect the overall repayment amount.
• Purpose-Specific: Typically associated with activities such as capital expenditures or other works that more than a certain amount of money costs.

Advantages of Term Loans

• Predictability: Housing that involves paying a fixed amount of money every month makes for easy planning.
• Large Sums: Applicable for big tickets that need a significant amount of money to fund the investment.
• Interest Rates: Sometimes lower than on lines of credit, but this is more commonly seen in secured forms of loan.
• Builds Credit: Effort in paying back loans on time boosts credit scores.

Disadvantages of Term Loans

• Rigid Structure: This is arising from the fact that mortgages have a repayment plan that is not very flexible as compared to lines of credit.
• Collateral Requirement: Some of the term loans have conditions whereby borrowers have to provide security to access funds, thus exposing their property to the lender.
• Qualification Criteria: May involve other conditions such as having a good credit profile and producing financial statements.

What is a Line of Credit?

A line of credit is a type of credit where the credit limit is not fixed, but is varied according to the financial requirement of the borrower. It can be compared to a credit card in terms of its features, as it has a revolving credit, which can be spent, paid off and spent again.

In its simplest form, a line of credit is a credit card, although the terminology utilized may be different and some lines of credit are more complicated than credit cards.

Characteristics of Line of Credit

• Flexibility: The credit extended to the borrowers can be availed by the borrowers at their convenience up to the extent of the credit limit agreed with the provider.
• Revolving Balance: Moneys can be borrowed, repaid and borrowed again depending on the prospect of the investment.
• Variable Interest Rates: Interest is always charged progressively on the cash that has been borrowed and not on the total credit limit.
• General Use: Supplemental working capital financing can be employed for working capital, for emergencies, and for short-term requirements.

Advantages of Line of Credit

• Flexibility: Moreover, that provides a possibility for borrowers to use the funds whenever they need it – it is more convenient for cash flow.
• Interest Savings: They only pay a certain amount of interest on the borrowed amount and not on the total credit facility limit granted.
• No Collateral Needed: It is usually a form of credit without collateral, meaning that the risk of the borrower would be more minimized.
• Quick Access: Fast accesses to funds are possible for immediate requirements.

Disadvantages of Line of Credit 

• Unaffordable and Unsustainable: It is expensive to service and unmanageable in the long run.
• Variable Interest Rates: This is because rates vary from one period to another and this makes predicting the costs of interests quite challenging.
• Temptation to Overuse: This paper aims to discuss the implication of strengthening of the financial structure and easy access to funds that consequently leads to over borrowing and financial pressures.
• Renewal and Fees: Lines of credit may come with annual renewal fees and require periodic credit reviews.
• Higher Interest Rates: Usually above the term loans but occasionally it is lower if the line of credit is only unsecured .

Comparing Term Loan With Line Of Credit

Some of the factors that one needs to consider are the nature of the expenses and income, the ability to repay the term loan or the total amount from the line of credit, and the financial standing of the business.

Consider Your Purpose

• One-Time Expenses: If you require a lump sum of money for a large, essential business expense like buying equipment or properties, term loan would typically be useful. 
• As this type of financing offers a lump sum, this type of financing can be repaid over a set period with fixed payment terms.
• Short-Term Needs: A line of credit is perfect for achieving those goals because, in contrast with a term loan that provides a lump sum, you can access cash as you need it, pay it back to later draw more if needed, and pay interest only on the amount you’ve borrowed.

Evaluate Your Financial Situation

• Creditworthiness: Term loans and lines of credit are both accessible for individuals with a good credit rating and indeed strong credit history is likely to increase the chances of being approved for both types of loans although the requirements for obtaining term loans tend to be slightly more rigorous. There is a chance that lines of credit can be easier to obtain if your credit is just average .
• Repayment Ability: Think of taking periodic fixed installments as compared to the choices available to pay the money back as and when the money is exhausted or not. Term loans cases require close monitoring of the budget and lines of credit contain flexible options for repayments.

Assess Interest Rates and Fees

• Interest Rates: Since it is usually optional where one can draw his/her financial slot, one needs to compare the interest rates given to either option. Term loans are usually cheaper in terms of interest, but for a business that only requires credit items occasionally it may be cheaper to use the line of credit.
• Fees and Charges: Also consider other costs related to the type of the financing, – origination costs for the term loans or recurring costs for the lines of credit.

Risk Tolerance

• Collateral Requirements: The funds are secured by taking the assets of the borrower at risk and term loans may entail taking the collateral. If this is not ok with you, an unsecured line of credit might be desirable to you.
• Interest Rate Fluctuations: Fixed payment of all the money in a term loan is preferable over the other since they offer stability in their payment structure. Nevertheless, if a person is comfortable working with the variable rates and likes the ability to borrow more than they-probably a line of credit is beneficial.

Term loans are a specific amount of money borrowed for a specified purpose with an agreed-upon rate of interest which have to be paid back over an agreed period with or without a collateral while lines of credit on the other hand is a more flexible type of loan where and when need arises one can borrow the funds without further permission although the interest rate may be slightly higher. 

Direct loans offer a large sum of money for which the payments are constant, thus suitable for purposes of making large, set expenditures. Other types of credit, such as a line of credit, are good and more flexible as they are suitable for dealing with short-term or recurring costs.

All in all, to make an informed decision between extending for a term loan or a line of credit, the borrower should weigh factors like his or her financial status, intended use of the funds and his ability to meet payments on the borrowed money. 

It is thus possible to determine which of the financing sources you wish to go for that best suits your objectives and the requirements of your business.

Blackstone Funding can provide various financing options tailored to your business needs, so evaluate which option best suits your objectives and requirements.

Real estate investment specifically in commercial building involves substantial profits depending on the type of building needed such as office, retail, and industrial building. However, most of the cost used in financing a commercial property is relatively huge as compared to that of residential property hence most investors who wish to invest in commercial properties will have to borrow by engaging in commercial real estate loans. 

This applies to any credit facility you would like to apply for and, as such, this guide aims at providing a step by step guide to the application of commercial real estate loans to make the understanding process easier.

Understanding Commercial Real Estate Loans

Commercial real estate loan refers to a loan that is secured by a legal claim against the commercial property in question, similar to a home mortgage. Housing loans, for example, have a longer maturity, fixed interest rates, and structures of financing than commercial real estate loans which may have different terms, rates, and structures. They are used to acquire, remodel, or construct income-producing brick-and-mortar structures that include office spaces, shopping malls, industrial spaces, and apartment buildings.

Types of Commercial Real Estate Loans

• Traditional Bank Loans: These are flexible finance solutions available from commercial banks that often come with affordable interest rates and tenures that range from five to twenty years. They have several conditions to meet; credit records have to be good and down payments are usually high depending on the size of the home acquired, being within the range of 20-30 %.
• Small Business Administration (SBA) Loans: Currently, the SBA provides six loan programs for commercial real estate, from which two programs are primary: the Seven (7)a and the Fifty-four (504) program. These loans offer substantial benefits with relatively small down payments which range from 10% to 20%. However, the user journey to obtain the loans may be time-consuming and intensive.
• Commercial Mortgage-Backed Securities (CMBS) Loans: It is then grouped together with other commercial mortgages where they are sold to investors. While they charge relatively affordable interest rates, the structures of arraigning them are somewhat cumbersome.
• Bridge Loans: Traditional small business financing which is planned for its quick term use until the long-term funds are obtained. These are suited for properties under upgrade or rehabilitation or waiting for the lease-up stage to start.
• Hard Money Loans: Prevalent among private individuals, this type comes with expensive charges and comparatively a shorter span. They rely on a more quantitative approach such as the value of the property and not much on credit worthiness of the borrower.

How to get a commercial real estate loan?

1. Check Your Status

When you are considering applying for a loan, it is crucial to analyze your financial position. Lenders will review your credit history and score, income, and ability to pay off the loan. Check your financial situation and make sure that your credit history is good and complete. One is encouraged to get a copy of their credit report and clear any doubts before the meeting.

2. Be sure to have a clear business plan

They always want to be sure that you have a feasible strategy for your business location.

• Property Description: Information about the house or any other property that you want to buy.
• Market Analysis: An assessment of the local environment and how your property fits into this kind of environment.
• Financial Projections: The revenue and expenses estimates for the property.
• Management Experience: Some of your experience includes managing commercial properties.

3. Gather Required Documentation

A borrower should gather all relevant papers before approaching the lenders. This typically includes:

• Corporate and personal tax returns of the last three years.
• Balance sheet and income statement.
• Rent roll (for existing properties)
• Particulars of any existing loans
• Purchase agreement or offer to purchase
• Property appraisal (if available)

4. Select the Best Lender

Lender selection is critical. The requirements and the types of loans banks, credit unions, SBA lenders and private lenders offer are different. Consult lenders and compare the various lenders so that one can come up with the best lender. These include the interest rate, the cost of borrowing in terms of percentage age, charges, and the quality of services offered to customers.

5. Make an Application for Your Loan

When you have settled on a specific lender, complete the loan application and include all the necessary papers. Expect that the review process will be rigorous and comprehensive. It is expected that the lender will perform their own appraisal of the business and may request further details or propositions.

6. Underwriting Process

This is the stage at which the lender evaluates the risk that is inherent with the loan application that you have made. They will look at your balance statements, credit records and property evaluation. This process may take as long as from several weeks up to several months.

7. Loan Approval and Terms Negotiation

If your application is approved, the lender will present you with a loan commitment letter outlining the terms and conditions. Review these terms carefully and negotiate if necessary. Pay close attention to the interest rate, loan term, prepayment penalties, and any other fees.

8. Closing the Loan

Once you agree to the loan terms, you will proceed to closing. This involves signing the loan agreement and other related documents. At closing, you will also need to pay any closing costs, which can include origination fees, appraisal fees, and legal fees. After the closing, the funds will be disbursed, and you can proceed with your commercial real estate transaction.

Tips for a successful loan application

• Maintain Strong Credit: This implies that credit score will determine the amount of loan appropriated for the applicant, to a larger extent, the credit score determines the loan terms offered to the loan applicant.
• Provide Comprehensive Documentation: Thoroughness when filling this particular paperwork shortens the underwriting time.
• Show Sufficient Cash Reserves: Lenders, for example, like you to have adequate walking-around money to pay for things like a flat tire or a broken fridge.
• Demonstrate Experience: You may also become of a similar type of property thus making lenders confident you have the capacity to manage such an investment.

There are several crucial factors that one needs to consider while approaching a commercial real estate loan such as preplanning, preparation, and being well-aware of the finance products. 

Therefore, it becomes important to evaluate personal finances, create a proper business plan, gather files, and select the suitable creditor to successfully go through the stages of the commercial real estate loan. 

If you are determined and have the tenacity of waiting, you can easily secure the fund that you would need to invest in the commercial property business where you could be getting huge rewards in the long run.

Real estate investment is therefore a very profitable investment since revenue can be generated through rent, taxes and increase in property value. Nevertheless, such investments may well entail a large amount of money, especially if the business needs to source the funds it requires from external sources such as through an issue of shares or bond sales.

 Among the sources of financing for real estate investors, term loan funding has become popular across the globe. This piece will attempt to define what a term loan is, assess it for its unique features, strengths, and generally highlight why it would be invaluable to any real estate investor.

Understanding Term Loans

Term loan can be defined as a financing deal which has been structured to enable a borrower to receive a one time lump sum payment with the undertaking of its repayment over a given number of years with-flexible or fixed interest rates.

 These loans are usually given for purchasing of real estate, for the purposes of developing properties or for the purpose of consolidating some debts.

Out of all these types of loans, it is important to note that term loans come with several significant characteristics including:

• Fixed Loan Amount: Credit is approved upfront and granted in full and the amount under this type of credit is fixed from the start. This means that investors are in a position to have a clear view of the amount of capital they have available in their real estates.
• Repayment Schedule: Term loans are always structured with a payment period —compensation maybe monthly, quarterly, or annually. Repayment period varies from a few years to several decades depending on what has been agreed between the two parties offering and taking the loan and the kind of investment proposal being made.
• Interest Rates: The interest rates of term loans can be of two types: floating or flexible, and fixed. Nonetheless there are loans with fixed interest rates meaning the interest rates do not change walking the period of the loan. Variable rates depend on the particular situation in the market; most likely they will be less at first but they can become more over time.
• Collateral: Term loans for real estate are most often secured loans, where the property to be purchased or another Shari’ah compliant asset serves as guarantee. It minimizes the possibility of the lender taking a loss and this usually leads to the borrower being granted better loan packages.

Advantages of a Term Loan 

• Predictability and Stability: As a result of its form of repayment and interest, fixed repayment terms provide investors with predictability needed for planning in terms of the future expenditure. These factors are critical for the long-term investment activities especially in the real estate companies.
• Access to Large Sums of Capital: Term loans offer a large sum of money which allows acquiring properties that might not be afforded otherwise. This appears more helpful in the procurement of business ventures or buildings with multiple dwelling units.
• Leverage: Through the help of the borrowing powers in the acquisition of the real estates, investors are able to utilize their capital power. It means that they can manage bigger values of assets traced with a minor sum at the beginning, which may lead to a higher ROI.
• Tax Benefits: Another advantage of interest on term loans is that many of them appeal to be tax-deductible in order to increase the attractiveness of credits all around. This may reduce the cost of borrowings and increase the returns of the investment hence increasing the likelihood of its success as per the model.

Types of Term Loans for Real Estate 

• Short-Term Loans: The loans are usually repaid within one to five years; they are employed in property flipping, or temporary refurbishing projects. They attract higher interest charges than the conventional loans and their feature is the provision of the quick money. They come with higher interest rates but offer the flexibility of quick capital access.
• Intermediate-Term Loans: It’s a short term loan that takes approximately five to ten years to be repaid, such loans are appropriate for investors with intentions of fixing and selling or remodelling and realizing the cash through a new loan.
• Long-Term Loans: These loans have a repaying tenure of more than ten years, and are useful for the individuals who need to invest in the property and plan to hold the property for a long term basis be it residential property for rent or commercial complexes. Long-term financial products are cheaper with low interest rates compared to short-term ones.

How to obtain a Term Loan?

Term loan is defined as a credit facility extended for a medium or long-term period for the financing of more extensive and major projects by a borrower from a lending institution that is repaid within a term spanning from one year to several years.

Obtaining a term loan involves several steps:

• Creditworthiness: In reaching the credit decision, lenders have to rely on credit reports, the borrower’s ability to repay the loan, and the likelihood of the loan being profitable for the lender. Credit score and history affect approval and rates for loans more positively if the former is good and the latter is clean.
• Property Appraisal: An appraisal of the security property will be done by the lender, to ascertain its current market value. This assists in achieving the best standard of the amount of the loan in the relation to the property value worth.
• Down Payment: Purchasers are normally expected to hammer down an initial cash payment on the property, which may be as low as $10000 or $50000, or as high as 10% to 30% of the price of the property. People with higher down payments often get good terms of their loans with lower interest rates.
• Loan Application and Documentation: Part of the requirements for obtaining a loan consist of submitting of tax returns, financial statements, property information, and investment plan/business plan. Due to this, extensive documentation that is accurate will enhance the approval process.
• Approval and Disbursement: After the loan is booked and after all the necessary legalities are met, the money is released to the borrower to help him buy the property or renovate the existing one. The drawing shall be repaid according to a schedule to be established when the loan is provided.

Risks and Considerations

While term loans offer numerous benefits, there are also risks and considerations:

• Repayment Obligations: This is because if one is unable to continue making remittance on the loan, he faces the risk of making default on the loan thus facing the possibility of losing the house through foreclosure. These aspects can be concluded with the statement that a solid financial plan is crucial to meet the required payments on time.
• Interest Rate Fluctuations: In variable-rate loans, this means that operations of both interest rates, changes, affecting cash flow and profitability can cause a higher repayment amount than initially agreed.
• Market Conditions: By nature, it can be influenced by market trends and other factors that affect the price of the properties and rental yields that contribute to the return on investment. When seeking a term loan, it is also important to gather as much information about the market as you can and to ensure that you make the right decisions.
• Opportunity Cost: The drawback of investing in a term loan is that the capital is tied up for a long time and the longer the intermediary fixed income or other attractive opportunities might not be identified. This poses a concern in relation to the proportionate investment and probable earnings.

A term loan is a powerful tool for real estate investors, providing the capital needed to acquire, renovate, and hold properties. With predictable repayment schedules, the potential for favorable tax benefits, and the ability to leverage investments, term loans can significantly enhance an investor’s portfolio.

 However, it’s essential to carefully assess the risks, ensure financial stability, and have a clear investment plan to maximize the benefits of a term loan. By doing so, real estate investors can effectively grow their wealth and achieve their investment goals.