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COMMERCIAL LENDING

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

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  1. COMMERCIAL LENDING 8 8.1 Commercial Loans 8.2 Commercial Credit Analysis 8.3 Small Business Loan Programs

  2. Lesson 8.1COMMERCIAL LOANS GOALS List purposes for commercial loans Identify types of commercial loans

  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. COMMERCIAL PURPOSES • Real estate • Construction • Equipment • Operations

  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. 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

  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. Debt ratio  Debt  Income Example Monthly debt: $1,500 Monthly income: $3,000 $3,000 $1,500 DEBT RATIO  50%

  9. Loan-to-value ratio  Principal  Market value Example Principal: $45,000 Market value: $100,000 $45,000 $100,000 LOAN-TO-VALUE RATIO  45%

  10. $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 

  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. 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.

  13. Lesson 8.3SMALL BUSINESS LOAN PROGRAMS GOALS Describe the purpose of the SBA Explain SBA loan eligibility requirements Identify SBA loan options

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

  15. SBA ELIGIBILITY • Type of business • Size of business • Use of loan funds

  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)

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