Slide 2 Lesson 8.1 COMMERCIAL LOANS List purposes for commercial loans Identify types of commercial loans GOALS
Slide 3 THE NATURE OF COMMERCIAL LENDING Commercial lending is lending to business enterprises. Commercial lending practices may apply to individuals, such as a person who is buying rental property.
Slide 4 COMMERCIAL PURPOSES Real estate Construction Equipment Operations
Slide 5 TYPES OF COMMERCIAL LOANS Term loans: Short-term loans: for a year or less Lines of credit: Money can be borrowed using collateral to back it up. Real estate and equipment loans Contract financing: secured by the value of specific contract. Paid as work is performed Bridge loans: Very short term used to cover expenses Leasing: Same as renting. At end of lease property and equipment is returned Asset-based loans
Slide 6 Lesson 8.2 COMMERCIAL CREDIT ANALYSIS Identify basic ratios used in commercial underwriting List other items used to evaluate commercial loans Explain the importance of disclosure in commercial loans GOALS
Slide 7 COMMERCIAL CREDIT ANALYSIS TOOLS Debt ratio is the total obligations compared to the total income. Loan-to-value ratio is the principal amount of the loan divided by the value of the securing property. Debt service coverage ratio (DSCR) compares net operating income to the total cost of debt.
Slide 8 DEBT RATIO Debt ratio Debt Income Example Monthly debt: $1,500 Monthly income: $3,000 $3,000 50% $1,500
Slide 9 LOAN-TO-VALUE RATIO Loan-to-value ratio Principal Market value Example Principal: $45,000 Market value: $100,000 $45,000 45% $100,000
Slide 10 DEBT SERVICE COVERAGE RATIO Debt service coverage ratio Net operating income Total debt service Example Net operating income: $650,000 Total debt service: $520,000 $650,000 1.25 $520,000
Slide 11 OTHER EVALUATION In order to perform ratio and other analyses of a company’s finances, lenders want full access to company financial records. Typically, lenders want to examine the following. Federal and state income tax returns for three years Company financial statements for three years Year-to-date profit and loss and balance statements Projected cash flow estimates for at least the coming year Valuations and appraisals for collateral used to secure the loan Written business plan Personal financial statements of owners
Slide 12 DISCLOSURESDISCLOSURES Most commercial lending is regulated only by the terms of the loan agreement and some state laws. It is the ethical and professional responsibility of all parties to commercial lending to see that loans are honestly and soundly underwritten.
Slide 13 Lesson 8.3 SMALL BUSINESS LOAN PROGRAMS Describe the purpose of the SBA Explain SBA loan eligibility requirements Identify SBA loan options GOALS
Slide 14 THE SMALL BUSINESS ADMINISTRATION The Small Business Administration (SBA) offers a number of financial, technical, and management programs to help businesses.
Slide 15 SBA ELIGIBILITY Type of business: Must be for profit in the US, or possessions have reasonable owner equity. Size of business: independently owned and not dominant in its field. Use of loan funds: Must not be used for finance of floor plan needs, purchase real estate, pay delinquent taxes, etc.
Slide 16 SBA LOAN TERMS AND CONDITIONS 7(a) Loan Guaranty (usually up to 1 million dollars but can go as high as 2) SBALowDoc and SBAExpress (quick turn around up to 150,000 dollars) CAPLines (Short term for seasonal, contracts or revolving credit) Microloans (non profit max amount 35,000 dollars) Special-purpose programs Community Adjustment and Investment Program (CAIP) DELTA program Economic Injury Disaster loans Small Business Investment Company (SBIC)