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COMMERCIAL LENDING. 8. 8.1 Commercial Loans 8.2 Commercial Credit Analysis 8.3 Small Business Loan Programs. Lesson 8.1 COMMERCIAL LOANS. GOALS. List purposes for commercial loans Identify types of commercial loans. THE NATURE OF COMMERCIAL LENDING.
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COMMERCIAL LENDING 8 8.1 Commercial Loans 8.2 Commercial Credit Analysis 8.3 Small Business Loan Programs
Lesson 8.1COMMERCIAL LOANS GOALS List purposes for commercial loans Identify types of commercial loans
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.
COMMERCIAL PURPOSES • Real estate • Construction • Equipment • Operations
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
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
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.
Debt ratio Debt Income Example Monthly debt: $1,500 Monthly income: $3,000 $3,000 $1,500 DEBT RATIO 50%
Loan-to-value ratio Principal Market value Example Principal: $45,000 Market value: $100,000 $45,000 $100,000 LOAN-TO-VALUE RATIO 45%
$650,000 $520,000 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
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
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.
Lesson 8.3SMALL BUSINESS LOAN PROGRAMS GOALS Describe the purpose of the SBA Explain SBA loan eligibility requirements Identify SBA loan options
THE SMALL BUSINESS ADMINISTRATION The Small Business Administration (SBA) offers a number of financial, technical, and management programs to help businesses.
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.
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)