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October 18, 2019 / By Jared Cohen

What is a Stretch Loan

Stretch loans refer to the type of business funding that can be used to manage the financial needs of the company for a short-term gap. Simply put, the loan allows the borrower to meet with the financial obligations of the business for some time until the projected revenue comes in to manage the regular costs. Generally, stretch loans are offered to a borrower by lending parties only if they have a good relationship with them. This means that acquiring the loan would be much simpler if you have a good standing with your current lender from where you might have secured any other type of business funding.

A stretch loan is different from a senior stretch loan, where the business loan combines senior debt with junior or subordinated debt in one package, which is usually sourced to fund leveraged buyouts. Stretch loans, on the contrary, are typically acquired by businesses as working capital in order to manage the daily operational costs of their company. This way, the borrower can ensure that the loan amount would be smaller and it would accumulate less interest. The only thing to note here is that the loan amount would have to be repaid within a short period, and that could involve big monthly repayment schedules depending upon the principal amount acquired. Regardless, such a stretch loan can be used for a wide range of purposes and in turn bring more revenue for the business.

Take for instance that you want to buy new inventory to restock your warehouse, but have not collected the accounts receivable balance from your retail customers yet. In such a case, you can get in touch with your lending institution, and ask for a stretch loan to finance the inventory purchase. As soon as you collect the outstanding accounts receivable amount, you can repay the stretch loan without any hassles.

Note that the maximum amount for stretch loans is determined by the lender, and the interest rates involved would be a bit higher than that seen in a normal working capital loan. Not only that, but it can also have other fees involved that can make it more expensive than traditional business loans. Still, a stretch loan can be a great option to ease the financial burdens on your shoulders to run the business. With this business funding option, you are not required to take a huge loan amount to meet with day-to-day operational costs, which can incur more accumulated interest.

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