When a company secures a business loan or finances an equipment purchase, the repayment schedule can be as important as any other factor.
If the business is onboarding new equipment and processes, or experiencing a seasonal dip in cash flow, that’s a bad time to be hit with payments.
Conversely, when the business is humming at full capacity and flush with customer receipts, payments are much easier to make.
A custom payment structure aligns loan payments with expected cash flow. This makes it easier for the borrower to make payments, while income is flowing in and cash on hand.
Business Cycles & Cash Flow Challenges
Stearns Bank has worked with companies across many industries to develop custom payment solutions.
Some borrowers request a delay in payments until equipment is installed, employees trained and new revenue generated. Others operate seasonal businesses, with predictable waves of slack times and surges in orders. Still other businesses have established patterns of equipment trade-in and replacement.
These companies have different business cycles and financing needs. Therefore, they benefit from custom financing and payment structures.
Stearns Bank strives to understand each customer’s business cycle and cash flow challenges. This detailed and personal analysis often results in a custom payment structure that meets the needs of the business.
Industry Experience and Insight
Companies should seek a lender with industry experience and expertise. This lender will bring an understanding of a firm’s business cycles and cash flow challenges.
Stearns Bank has deep experience in several industries, including agriculture, manufacturing, rental, health care, veterinary medicine and construction. This expertise enables Stearns Bank to work effectively with the borrower and develop creative financing and repayment options.
Stearns Bank has developed a one-page overview of custom payment solutions. Download this document, review the types of payment structures and confer with your lender about financing and payment solutions that are best suited to your business.
Custom Payment Solutions
Payments begin after a defined “no payments” period. This approach allows time for equipment to be installed, staff trained and processes ramped up to full production.
For example: An optometrist office purchases advanced diagnostic equipment that requires lead time to install, train staff and schedule patients. Payments start once the new equipment is in use and generating revenue.
Step Up / Step Down
Stepping up is similar to delayed payment, but with payments increasing by increments. Payments are reduced during early payment cycles and “step up” to normal payments.
This payment structure enables borrowers to train staff, ramp up productivity and build market share. Woodworking and manufacturing firms benefit from this approach when financing new equipment and steadily increasing their volume of customer orders.
Stepping down has increased payments during the first year, dropping to fixed payments for the rest of the term.
Beginning with higher payments makes sense if the business has lots of cash today, but wants to decrease future payments to account for unexpected repairs or decreased cash flow. For example, a construction company may purchase equipment for a particular job and make payments from the cash flow generated by this equipment.
Payments, typically in larger amounts, are due at six months or quarterly.
Farmers often benefit from this payment structure. They may have dramatic swings in cash flow reflecting spring planting costs, fall harvest, grain sales or cattle shipments.
When payments are due at the same time that income is streaming in, farmers can better manage their finances and maintain a strong cash position.
This approach is closely associated with construction, a notably seasonal business. Payments are structured to reflect seasonal variation in business activity and income.
A firm doing road construction may be exceptionally busy during the summer months and slow down during the winter. Accordingly, loan payments can be reduced during slack months and adjusted to normal levels during the busy season when cash flow is strong.
Follow Current Financing
New equipment is financed while current financing is still in place.
This payment option allows current financing to be paid off and completed before payments start on the new round of financing. Business owners appreciate that this approach avoids overlapping loans and doubling up on payments.
It also enables the business to invest in new equipment while old financing is in place, keeping financing costs consistent and predictable.
Some industries have predictable equipment trade-in and replacement cycles. For these borrowers, the financing period can match the equipment’s expected service life.
Financing is paid off at the same time the equipment is traded in. Although the finance term is shorter and payments higher, companies benefit from lower maintenance costs and access to the most technically advanced, efficient equipment.
Increased efficiency leads to competitive advantage. Financing costs are included in product pricing, resulting in consistent and predictable finance costs throughout the equipment replacement cycle.