COMMERCIAL LENDING

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COMMERCIAL LENDING
8

• 8.1 Commercial Loans
• 8.2 Commercial Credit Analysis
• 8.3 Small Business Loan Programs

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Lesson 8.1COMMERCIAL LOANS
GOALS

• List purposes for commercial loans
• Identify types of commercial loans

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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.

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COMMERCIAL PURPOSES

• Real estate
• Construction
• Equipment
• Operations

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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

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Lesson 8.2COMMERCIAL CREDIT ANALYSIS
GOALS

• Identify basic ratios used in commercial
  underwriting
• List other items used to evaluate commercial
  loans
• Explain the importance of disclosure in
  commercial loans

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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.

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DEBT RATIO

• Debt ratio ? Debt ? Income
• Example
• Monthly debt 1,500
• Monthly income 3,000

?
50
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LOAN-TO-VALUE RATIO

• Loan-to-value ratio ? Principal ? Market value
• Example
• Principal 45,000
• Market value 100,000

?
45
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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
?
1.25
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OTHER EVALUATION

• In order to perform ratio and other analyses of a
  companys 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

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DISCLOSURES

• 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.

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Lesson 8.3SMALL BUSINESS LOAN PROGRAMS
GOALS

• Describe the purpose of the SBA
• Explain SBA loan eligibility requirements
• Identify SBA loan options

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THE SMALL BUSINESS ADMINISTRATION

• The Small Business Administration (SBA) offers a
  number of financial, technical, and management
  programs to help businesses.

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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.

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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)