1. © South-Western Publishing Slide 1 COMMERCIAL LENDING 8.1 8.1 Commercial Loans 8.2 8.2 Commercial Credit Analysis 8.3 8.3 Small Business Loan Programs 8

2. © South-Western Publishing Slide 2 Lesson 8.1 COMMERCIAL LOANS List purposes for commercial loans Identify types of commercial loans GOALS

3. © South-Western Publishing 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.

4. © South-Western Publishing Slide 4 COMMERCIAL PURPOSES Real estate Construction Equipment Operations

5. © South-Western Publishing Slide 5 TYPES OF COMMERCIAL LOANS Term loans Short-term loans Lines of credit Real estate and equipment loans Contract financing Bridge loans Leasing Asset-based loans

6. © South-Western Publishing 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

7. © South-Western Publishing 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.

8. © South-Western Publishing Slide 8 DEBT RATIO Debt ratio  Debt  Income Example Monthly debt: $1,500 Monthly income: $3,000 $3,000  50% $1,500

9. © South-Western Publishing 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

10. © South-Western Publishing 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

11. © South-Western Publishing 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

12. © South-Western Publishing 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.

13. © South-Western Publishing 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

14. © South-Western Publishing Slide 14 THE SMALL BUSINESS ADMINISTRATION The Small Business Administration (SBA) offers a number of financial, technical, and management programs to help businesses.

15. © South-Western Publishing Slide 15 SBA ELIGIBILITY Type of business Size of business Use of loan funds

16. © South-Western Publishing Slide 16 SBA LOAN TERMS AND CONDITIONS 7(a) Loan Guaranty SBALowDoc and SBAExpress CAPLines Microloans Special-purpose programs Community Adjustment and Investment Program (CAIP) DELTA program Economic Injury Disaster loans Small Business Investment Company (SBIC)