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COMMERCIAL LENDING

8.18.1 Commercial Loans8.28.2 Commercial Credit Analysis8.38.3 Small Business Loan Programs

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Lesson 8.1

COMMERCIAL LOANS

List purposes for commercial loansIdentify types of commercial loans

GOALSGOALS

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THE NATURE OF COMMERCIAL LENDINGTHE NATURE OF COMMERCIAL LENDINGTHE NATURE OF COMMERCIAL LENDINGTHE 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 PURPOSESCOMMERCIAL PURPOSESCOMMERCIAL PURPOSESCOMMERCIAL PURPOSES

Real estateConstructionEquipmentOperations

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TYPES OF COMMERCIAL LOANSTYPES OF COMMERCIAL LOANSTYPES OF COMMERCIAL LOANSTYPES OF COMMERCIAL LOANS

Term loansShort-term loansLines of creditReal estate and equipment loansContract financingBridge loansLeasingAsset-based loans

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Lesson 8.2

COMMERCIAL CREDIT ANALYSIS

Identify basic ratios used in commercial underwritingList other items used to evaluate commercial loansExplain the importance of disclosure in commercial loans

GOALSGOALS

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COMMERCIAL CREDIT ANALYSIS TOOLSCOMMERCIAL CREDIT ANALYSIS TOOLSCOMMERCIAL CREDIT ANALYSIS TOOLSCOMMERCIAL 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 RATIODEBT RATIODEBT RATIODEBT RATIO

Debt ratio Debt ratio Debt Debt Income IncomeExampleMonthly debt: $1,500Monthly income: $3,000

$3,000 50%

$1,500

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LOAN-TO-VALUE RATIOLOAN-TO-VALUE RATIOLOAN-TO-VALUE RATIOLOAN-TO-VALUE RATIO

Loan-to-value ratio Loan-to-value ratio Principal Principal Market value Market valueExamplePrincipal: $45,000Market value: $100,000

$45,000 45%

$100,000

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DEBT SERVICE COVERAGE RATIODEBT SERVICE COVERAGE RATIODEBT SERVICE COVERAGE RATIODEBT SERVICE COVERAGE RATIO

Debt service coverage ratio Debt service coverage ratio Net operating income Net operating income Total debt service Total debt serviceExampleNet operating income: $650,000Total debt service: $520,000

$650,000 1.25

$520,000

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OTHER EVALUATIONOTHER EVALUATIONOTHER EVALUATIONOTHER 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 yearsCompany financial statements for three yearsYear-to-date profit and loss and balance statementsProjected cash flow estimates for at least the coming yearValuations and appraisals for collateral used to secure the loanWritten business planPersonal financial statements of owners

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DISCLOSURESDISCLOSURESDISCLOSURESDISCLOSURES

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 8.3

SMALL BUSINESS LOAN PROGRAMS

Describe the purpose of the SBAExplain SBA loan eligibility requirementsIdentify SBA loan options

GOALSGOALS

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THE SMALL BUSINESS ADMINISTRATIONTHE SMALL BUSINESS ADMINISTRATIONTHE SMALL BUSINESS ADMINISTRATIONTHE 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 ELIGIBILITYSBA ELIGIBILITYSBA ELIGIBILITYSBA ELIGIBILITY

Type of businessSize of businessUse of loan funds

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SBA LOAN TERMS AND CONDITIONSSBA LOAN TERMS AND CONDITIONSSBA LOAN TERMS AND CONDITIONSSBA LOAN TERMS AND CONDITIONS

7(a) Loan GuarantySBALowDoc and SBAExpressCAPLinesMicroloansSpecial-purpose programs

Community Adjustment and Investment Program (CAIP)DELTA programEconomic Injury Disaster loansSmall Business Investment Company (SBIC)