Frederick J. Sitzberger

In a previous article, we explained the reasoning behind the line-of credit. Let’s move one more step and discuss the intermediate term loan. This is a three to five year term with a fixed or variable interest rate.

The lesson of the term loan was taught to me by a client who always had payments to the banks of $685 a month. The loan was finally paid off and he went and got another loan for $35,000 with the same monthly payments of $685. I asked him why when you don’t need the money. His answer was “Fred, I always need the money, not today but tomorrow and I can always afford $685 per month.” The true wisdom of this was he did understand his capital needs.

Term loans provide the intermediate financing needs of equipment purchases, funding of expansion, payments for investments, new personnel and updating of computer software and hardware. The beauty of this is it matches the earning stream, that is, the income the investment makes provides the cash to pay the monthly payment. Income is sometimes elusive but over a quarter or year it does occur. In the meantime my client only has to come up with $685 a month, keeping the loan current and your banker happy. A happy banker is the best banker.