Getting Financed
in
Today’s Economy
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Understanding the Loan Process
When you submit your business loan application, it may seem like it disappears into a black
hole. But understanding how the commercial loan processing system works can help
reduce your anxiety while you wait for approval.
The lender will gather basic information, such as your income and existing debts. To
initiate the loan process, you must then complete and submit a loan application.
Once your application is received, a loan officer or processor will review your credit
reports, the amount of available collateral, and your income. Your loan officer will
determine if any additional documentation is required, such as personal financial
statements. If you are purchasing real estate, you may also need to submit preliminary
environmental reports, area maps, title reports, property appraisals, and lease summaries. If
you are going through a broker, he or she will package your loan request and submit it to
several lenders for approval.
The problem with that approach is that you now are limited to just that Lender.
Tip 1: Be Prepared
Use Standard Application
Documents and prepare your
request before meeting with the
Lender
By preparing in advance for your loan request, you can save
time and money and make sure you get the best rates and terms
available. You should prepare a standard application package
(see Appendix ) and gather the last 3 years of business tax
returns and personal tax returns on all owners. Lenders typically
will not return these documents to you so make sure you either
scan and save make complete copies of the loan request
package.
Now the loan request can be sent to multiple lenders for consideration. The successful Lender
will ultimately require their forms to be completed but using this approach will get you the best
rate and terms. Remember, Lenders are in business to make money not just to provide
financing. Most people when buying a car go to more than one dealer and the premise is the
same with going for a commercial loan.
After your commercial loan package is submitted to the
decision makers — either a loan committee or underwriter
— the loan officer will present you with a letter of intent or
term sheet. This is a formal document intended to ensure
that all parties involved (the lender and your company) are
on the same page. The letter of intent may include the
names of involved parties, amount of financing, type of
security (collateral), and other key terms. Decisions are
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Tip 2:
Be Sure___
Make sure you are credit approved
prior to signing a Term Sheet and
parting with a good faith deposit
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usually made in one to five days. During the underwriting process, you may need to furnish
additional documentation.
Keep in mind, this is not a commitment to lend, just preliminary terms for discussion purposes
only. Once you accept a term sheet from a lender you are required to give them a good faith
deposit. This is essentially ensuring that Lender that they have first rights to consider you for a
loan. The deposit generally ranges between $3,500 and $5,000 and is ultimately used to pay for
due diligence reports (collateral appraisal and environmental
site assessment). Since the deposit is non-refundable once
Tip 3: Be Aware__
these expenses are incurred you should carefully review all
Lenders are in business to make
term sheets with you accountant and/or attorney. This is why
money, not friends. They will not
always tell you which loan product is
sending your request to multiple lenders will give you leverage
best for you, it is their job to sell
and where using a commercial mortgage broker can pay off
what’s best for them.
for you.
If you are using a commercial advisor, he or she should be helping you negotiate the best
terms, fees, and conditions from various lenders. The next step is choosing the most
attractive offer, and signing and returning the final letter of intent along with a check, if
required, for a deposit, and to pay for third-party reports, such as appraisals.
After all third-party reports are successfully completed and underwriting conditions are satisfied,
the final loan package is resubmitted to the loan committee or Senior Lender for final approval.
Assuming the due diligence reports meet the terms offered for discussion, the loan a Formal
Commitment Letter is issued. This doesn’t occur until you are well vested in the process so you
need to plan your strategy accordingly. Commercial appraisals cost between $1,500 - $3,000
depending on property type and environmental assessments can range from $400 - $2,500
depending on same.
By using a commercial advisor, you can ensure that your loan request is credit approved and that
your collateral has been vetted to determine the value and condition prior to parting with any
good faith deposit. At this point the lender will issue a final full loan commitment.
The commitment letter is the document that binds you to the loan and outlines the terms and
conditions you will be required to abide by for the life of the loan. The terms and loan
covenants should mimic what was disclosed on the term sheet but it is strongly recommended
that you engage counsel to represent you in closing the transaction.
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Documenting Your Loan Request for Success
To get commercial financing in today’s economy you need to provide full documentation of
your business, its owners and any other affiliates or real estate holding companies the owners
may have. The reason for this is simple, lenders have to demonstrate [in their loan file] that they
have analyzed a borrower’s historical and global repayment ability of the loan. Now, not only
does the subject business have to demonstrate it has historically generated sufficient cash flow to
repay its debts but the lender also has to show the
business’ principals have sufficient personal capacity to
D O C U M E N T S R E Q U I R E D
repay all of their obligations including the new loan.
 3 Years Tax Returns for the Business
Hence the lender will require you provide 3 years of tax
 3 Years Tax Returns for the Owners
returns for your business, personal returns for all
 Interim Financial Statement
principals with a 20% or greater ownership, 3 years of
returns for any affiliated entities the principals may have
 Bank Application
as well as a management prepared interim financial
 Business Debt Schedule
statement (balance sheet and profit and loss statement)
 Personal Financial Statements
for the business dated within 90 days of the application.
In addition to this, each Bank has their own form of
application and each 20% or greater owner of the business will have to submit a personal
financial statement.
In addition to this, the borrower may also have to provide receivable and payable aging’s, bank
statements, purchase agreements, and other documentation relevant to the purpose of the loan.
Also, expect the Lender to verify the tax returns you submit with the IRS.
Remember, without supplying the correct documentation for your loan request you will not get
approved.
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Top 5 Mistakes Made When Applying for a Financing
Whether you're applying for a business loan or a personal loan, there are common mistakes
that can hinder the process. Below are 10 of the most common mistakes made when
applying for a loan.
Applying only to one lender. Although there are various lenders available,
many people still head to their local bank first without shopping around. Credit
unions and other sources are worth investigating. For example, if you are a small
business owner, you should consider what the Small Business Administration can
do through.
Not knowing if you demonstrate repayment ability. Not understanding what
type of debt service coverage is needed to qualify for a loan can cost you time
and money. If you historically have under-reported income or over reported
expenses you need to sit down with a commercial advisor to see what
adjustments can be made to qualify you for a loan.
Not knowing your credit rating. Before you apply for a loan, you need to
know where you stand. Get copies of your credit scores from the three major
credit bureaus so you will know if you're likely to get the loan approved.
Not having your finances up-to-date. Whether you are seeking a personal or
business loan, you shouldn't apply without having the proper financial
documentation. This is an area where many people put the cart before the horse,
and try to get a loan without making sure their financials are up-to-date
Having inadequate collateral. You need to provide some collateral, should
there be a default in payment. Generally, for real estate loans it is the subject real
estate but for business and equipment loans you may need to provide real estate
as well to secure the loan as Lenders no that business assets have very little value
in events of default.
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General Eligibility Guidelines for Lending
Commercial Loan and Commercial Real Estate decisions will be based on an analysis of
the five Cs of credit: (1) Capacity, (2) Character, (3) Capital, (4) Collateral, and (5)
Conditions.
1. Capacity to Repay/Income. The borrower must have sufficient income to
service this and other debts. As a general rule, the ratio of cash flow available
to service debt-to-debt service should be greater than 1.2:1. Additionally, this
ratio should be traced for at least the three years prior to the loan request to
ascertain any declining trends. If projections are used to determine the capacity
to repay, analysis of the financial history must indicate that the projections are
achievable.
2. Character/Credit Record. A borrower's general character, integrity, and likely
sense of responsibility to repay debt are indicated by the credit record. Credit
experience alone can be sufficient reason for a declination.
3. Capital/Net Worth. A borrower's equity in his assets is a secondary source of
repayment that can be considered for collateralizing loans. Capital may also
indicate the borrower's attitude toward financial responsibility and debt
management. As a general rule, a borrower should have a debt to net worth
ratio less than 4:1 (may vary by industry).
4. Collateral/Down Payment. The borrower's financial condition and ability to
service the debt from cash flow and profits is the primary source of repayment.
Collateral is secondary and merely provides support in the event the primary
sources of repayment do not materialize. In workout situations, collateral
liquidation rarely generates the cash proceeds that were expected. For a
detailed discussion of various types of collateral see the section, "Collateral."
5. Conditions/Economic Status. The condition of the local economy and that of
the applicable industry help to determine the stability of the source of
repayment. Market conditions, such as price fluctuations, rental market, and
the stability of industry, must be considered.
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What’s in your FICO® score
FICO Scores are calculated from a lot of different credit data in your credit report. This
data can be grouped into five categories as outlined below. The percentages in the chart
reflect how important each of the categories is in determining your FICO score.
These percentages are based on the importance of the five categories for the general
population. For particular groups - for example, people who have not been using credit
long - the importance of these categories may be somewhat different.
Payment History

Account payment information on specific types of accounts (credit cards, retail
accounts, installment loans, finance company accounts, mortgage, etc.)

Presence of adverse public records (bankruptcy, judgements, suits, liens, wage
attachments, etc.), collection items, and/or delinquency (past due items)

Severity of delinquency (how long past due)

Amount past due on delinquent accounts or collection items

Time since (recency of) past due items (delinquency), adverse public records (if
any), or collection items (if any)

Number of past due items on file

Number of accounts paid as agreed
Amounts Owed

Amount owing on accounts

Amount owing on specific types of accounts

Lack of a specific type of balance, in some cases

Number of accounts with balances

Proportion of credit lines used (proportion of balances to total credit limits on
certain types of revolving accounts)
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
Proportion of installment loan amounts still owing (proportion of balance to
original loan amount on certain types of installment loans)
Length of Credit History

Time since accounts opened

Time since accounts opened, by specific type of account

Time since account activity
New Credit

Number of recently opened accounts, and proportion of accounts that are
recently opened, by type of account

Number of recent credit inquiries

Time since recent account opening(s), by type of account

Time since credit inquiry(s)

Re-establishment of positive credit history following past payment problems
Types of Credit Used

Number of (presence, prevalence, and recent information on) various types of
accounts (credit cards, retail accounts, installment loans, mortgage, consumer
finance accounts, etc.)
Please note that:

A FICO score takes into consideration all these categories of information,
not just one or two.
No one piece of information or factor alone will determine your score.

The importance of any factor depends on the overall information in your
credit report.
For some people, a given factor may be more important than for someone else
with a different credit history. In addition, as the information in your credit
report changes, so does the importance of any factor in determining your FICO
score. Thus, it's impossible to say exactly how important any single factor is in
determining your score - even the levels of importance shown here are for the
general population, and will be different for different credit profiles. What's
important is the mix of information, which varies from person to person, and
for any one person over time.

Your FICO score only looks at information in your credit report.
However, lenders look at many things when making a credit decision including
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your income, how long you have worked at your present job and the kind of
credit you are requesting.
Understanding a Term Sheet vs. a Commitment
Once a Lender has done a preliminary review of your request and decided to make
an offer, they will issue a term sheet. This will outline the basic terms and conditions
under which the Lender might consider offering you financing. It will clearly have a
disclaimer in the content stating that it is only a for discussion purposes and is not a
commitment to extend financing.
The reason Lenders issue terms sheets is because they do
not want to spend a great deal of time looking at loan
requests if they are not sure the borrower will ultimately
accept there terms. Hence, part of the last part of a term
sheet is a request for a good faith deposit. Once you sign
a terms sheet and return it with a deposit is the Lender
considers your loan taken off the street so they do not
have any competition. Hence, it is always important to try to solicit more than one
offer from multiple lenders so you can ensure you get the best terms and conditions
available. In order to do this you need to ensure you prepare a generic application
package (sample loan documents included in the Appendix).
Once you have settled on a Lender, you want to make sure the loan has been “credit
approved” and subject only to due diligence reports (collateral appraisals and
environmental report on property). A term sheet that is issued subject to
underwriting could result in costing you money unnecessarily. Once a good faith
deposit is given to the lender, they order the due diligence reports. If the loan does
not get credit approved you, they will refund the deposit less the cost of those
reports which generally cost between $3,000 -$5,000.
A term sheet can be broken down into 5 sections:
1. Sources and Uses of Funds
2. Repayment Terms
3. Collateral Requirements
4. Loan Covenants
5 Acceptance of terms
Sources and Uses of Funds
The Sources and uses section outlines the amount of money the lender is willing to
loan and the purpose(s) for which it will be used. Many borrowers make the mistake
when completing the Loan Application of leaving the amount requested blank. This
is an indication to the Lender that the Borrower is unaware of its financing needs
and often times results in the request getting declined. If you are unsure how much
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money you can qualify for, you should consult your accountant or a commercial loan
specialist.
Repayment Terms
The repayment section of a term sheet outlines the payment schedule and interest
rate the lender is willing to charge. Lenders use various terms and base indexes in
setting interest rates for loans based on the type of loan being made. They also
impose various pre-payment penalty fees for repaying the loan before its scheduled
maturity.
Business loans for equipment and working capital
generally have a 3-10 year re-payment schedule and the
base rate used is the Wall Street Journal Prime Rate.
Added to this base rate is an interest spread typically
between 1% - 3%. Pre-payment penalties on business
loans are rare as they are short term products. Interest
rates for business loans usually adjust on a calendar
quarterly basis when the base rate changes.
Commercial Mortgages typically have a 5-20 year term but
a 25 year amortization of payments with the balance due at
maturity. The base index for commercial mortgages is usually the Federal Home
Loan Bank Rate or the 5 Year US Treasury rate. The interest rate spread added is
typically 2.25%-3.25%. Prepayment penalties generally are either a declining 5 year
(5% in year on, 4% in year 2 etc.) or yield spread maintenance. Yield spread
maintenance runs for the life of the loan and only creates a penalty if the new
interest rate you are getting with another lender is less than the interest rate you
currently have. Interest rates are typically fixed for a 5 year term and than reset on
6th,, 11th, and 16th anniversary date of the note. Longer fixed rates
are sometimes available but are typically priced with a
significantly higher interest spread (4%-7%).
Collateral Requirements
The collateral requirements for a loan depend on the type of
loan being requested and the overall strength of the applicant.
Banks and Credit Unions are federally insured and therefore are
regulated by the Federal Government. Hence, Lenders are
required to have a commercial loan policy in place outlining the
terms and conditions under which they will provide financing to
their market base. Part of this policy defines the collateral they
will use to secure a loan.
Business loans are typically secured by the assets of the business
along with the personal guaranty of its owners. Depending on the amount of
financing requested and the value of the underlying business assets, other collateral
may also be required in the form of liens on personal residences or investment
properties as well as an SBA guaranty.
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Commercial mortgages are secured by the underlying real estate and most lenders
will lend no more than 80% of the value of the property as determined by their
approved appraiser. Only the Lender making the loan can order the appraisal. The
typical cost for a commercial appraisal varies between $1,500 -$4,500 depending on
the property type. The appraisal process typically takes 3-4 weeks once the order has
been approved. Environmental reports are also required on all commercial real
estate. The type of report and cost also varies based on the type of property. The
most basic form of environmental due diligence is a transaction screen which costs
$900. If the property was ever used for a nature deemed environmentally risky, a
phase I will be required. The cost of a phase I report is between $2,200 - $2,500.
Loan Covenants
The loan covenant section of a term sheet provides all the other requirements necessary
to be approved for financing. The basic loan covenants include
Environmental Indemnity: The Borrower will indemnify and hold the Lender harmless
from and against any and all cost, loss, damage, liability and expense, including
attorney’s fees, suffered or incurred by the Lender in connection with the Loan, at any
time, whether before, during or after enforcement of
its rights and remedies upon default, on account of
any release of hazardous materials at, upon, under,
Tip 4: Old Reports_
or within the Real Property, or resulting from the
Having a prior environmental report
presence of asbestos or asbestos-containing
available to submit with you application
materials, PCB’s, radon gas, lead paint, or UREA
can reduce the cost of due diligence
formaldehyde foam insulation and the like at the
substantially .
Real Property, including with respect to (i) the
imposition by any governmental authority of any lien
or so-called “super priority lien” upon the Real Property, (ii) clean up costs, (iii) liability
for personal injury or property damage to the environment, and (iv) fines, penalties and
punitive damages.
Hazard Insurance: The Borrower will maintain appropriate hazard insurance policies
on the Collateral satisfactory to the Lender. The Borrower must submit evidence of all
risks hazard insurance on the Collateral from a company and in a form acceptable to the
Lender, with extended coverage in amounts at all times sufficient to prevent it from
becoming a co-insurer within the terms of the applicable policy, but in any event such
insurance shall be maintained in an amount equal to the full insurable value of the
Collateral and with deductibles acceptable to the Lender.
Liability Insurance: Borrower shall maintain comprehensive general liability insurance,
including bodily injury, death and property damage liability, dram shop coverage (if
applicable) and umbrella liability insurance against any and all claims, including all legal
liability to the extent insurable imposed upon Lender and all court costs and attorneys’
fees and expenses, arising out of or connected with the possession, use, leasing,
operation, maintenance or condition of the Real Property in such amounts as the
Lender may reasonably require. In addition, Borrower shall maintain statutory workers’
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compensation insurance (to the extent the risks to be covered thereby are not already
covered by other policies of insurance maintained by it), for any employees with respect
to any work on, about or regarding the Real Property. Such policies shall cont a noncancellation provision without twenty (20) days prior written notice to the Lender.
Borrower will evidence the insurance through a certificate of insurance (ACORD 25)
from the appropriate insurance company fifteen (15) days prior to Loan closing.
Flood Insurance: If any of the Collateral is located in an area defined by the
Department of Housing and Urban Development as having specific flood hazards, the
Borrower must obtain, and maintain for the life of the Loan, flood insurance in an
amount equal to the lesser of the amount of the Loan or the maximum amount of
coverage available under the Flood Disaster Protection Act of 1973. The Lender
typically orders a Flood Plain search as part of its due diligence.
Title and Title Insurance: The title to all
Collateral for the subject Loan must be in a form
Tip 5: Save Money _
satisfactory to the Lender. With regard to real
estate secured loans, the Lender will require a
Using your attorney to do title searches
specimen lender’s title insurance policy on a
and title policies will usually save you on
standard American Land Title Association (ALTA)
title process .
form insuring them in an amount not less than the
amount of the Loan and in form and substance
acceptable to the Lender. Your Attorney can provide this service.
Title to Collateral: Borrower may not sell, assign, encumber, or otherwise transfer title
to the Collateral during the term of the Loan. Borrower represents that it owns, or will
at the time of closing, own the Collateral in fee simple, free and clear of liens,
restrictions and encumbrances, except as approved by the Lender prior to closing.
Survey/Plot Plan: With regard to real estate secured loans, prior to closing, the
Borrower shall provide Lender with a certified plot plan or engineers survey on the Real
Property.
Certification of Leases:
If the Lender and/or Borrower anticipate that the source
for repayment of the Loan shall in whole or in part be generated from rental payments
made to the Borrower from third-party tenants at the Real Property, then the Lender, as
a condition to closing the Loan, may require lease estoppel certificates or lease
certification agreements, in form and substance satisfactory to them, to be signed by all
such third-party tenants at the Real Property.
Landlord’s Consent and Waiver: If any Collateral for the Loan consisting of tangible
or intangible personal property is located on leased premises, the landlord, as a
condition to closing the Loan, will be required to waive any claim against or lien upon
the Collateral in which the Lender holds a security interest, and also agree to the entry
of the Lender for purposes of removing and/or liquidating its Collateral in the event of
default by the Borrower and/or Guarantor in its obligations.
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Financial Reporting: Each year, within 120 days of calendar year end, signed copies of
the Borrowers’ annual tax returns, with all supporting schedules must be submitted to
the Lender.
Each year, within 120 days of calendar year end, signed copies of Guarantors’ annual tax
returns, together with all supporting schedules, along with a new personal financial
statement in form and substance satisfactory to the Lender must be submitted.
When Borrower is not the sole-tenant of the Real Property, a current Rent Roll
(Lease/Rental Summary) is to be provided as part of the annual financial statement.
The Borrower and Guarantor must also provide additional financial information when
requested by the Lender.
Financial Covenant(s):
Most lenders require annual debt service coverage of 1.20x. This basically is determined
by dividing the businesses or property’s available cash flow by the total annual debt
payments. If you do not meet the covenant ratio you could be in default of your loan. If
you know that you are not going to be in compliance you should be pro-active at
meeting with you Lender to get a waiver of the requirement.
Compliance:
Prior to closing, the Borrower must provide the Lender with
evidence satisfactory in form and substance that the Real Property and the use thereof
comply with all applicable zoning, building, subdivision, wetlands, state and local fire
codes, and other laws, ordinances, rules, regulations, and other covenants and
restrictions and that there is no action or proceeding pending before any court, quasijudicial body or administrative agency relating thereto, together with permanent and
unconditional certificates of occupancy and other certificates, permits, licenses and
other items relating to such compliance which are required by or are to be obtained
from any board, agency or department, whether governmental or otherwise.
Disclosure: Borrower and Guarantor represent that they have disclosed all facts
material to the Collateral, their business operations, and/or personal finances to the
Lender.
Deposit Accounts: The Borrower shall maintain primary deposit accounts with the
Lender.
Closing the Transaction
Once all due diligence reports have been satisfactorily reviewed, a loan commitment
resembling the term sheet is issues. The difference between the term sheet and
commitment is now the lender has formally committed to providing financing and
terms and conditions are final. The commitment is sent to the Lender’s counsel to
prepare loan documents based on the terms detailed therein.
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Understanding the SBA 504 Program
Program Basics
The SBA 504 commercial loan program provides 90% financing of a business owners’ total
cost for the purchase of real estate or large ticket fixed assets, as opposed to the 70 percent
to 80 percent offered with most conventional commercial loans. The typical breakdown of
the funds in a 504 loan is 50 percent from a bank or other private lender, 40 percent from
the SBA, and 10 percent from the borrower. Business owners can
reduce their initial capital outlays by as much as $1 million in some
circumstances by leveraging the 504 program’s 90 percent loan-tocost financing. In many cases, this lower down payment
requirement is what makes it possible for business owners to
afford the initial capital outlay for their acquisitions or
construction projects without disrupting their operations, In
addition, the 504 program enables borrowers to include
renovation, closing, and other soft costs along with furniture,
fixtures, and equipment into the financing package.
Using 504 Funds
Proceeds from Small Business Administration 504 loans must be used for fix asset projects
such as purchasing land and improvements including existing buildings, grading, street
improvements, utilities, parking lots, and landscaping; construction of new facilities;
modernizing, renovating, or converting existing facilities; or purchasing long-term
machinery and equipment. Fore more information on SBA 504 loans, visit www.sba.gov.
The portion of the 504 loan that is funded by the SBA represents
the least expensive financing available in the commercial mortgage
industry for small business — 6.03 percent fixed for 20 years as of
December 2007. The blended rates for the entire loan are often
significantly lower than those of conventional loans and can be
fixed for the duration of the 20-year to 25-year amortizations. In
addition, borrowing from the SBA 504 program does not prelude
business owners from also applying for funding from the SBA 7(a)
program for working capital, inventory, and other needs.
By forgoing the 504 loan program and real estate ownership, business owners would be
disregarding one of their best options for preserving capital, improving cash flow, and
maximizing profits. Initially they benefit from the lower down payment requirement, but as
business owners reach retirement age, they can sell their business while retaining and
leasing the real estate as a continuing income source.
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Who is Eligible
SBA 504 loans are almost available to any type of for-profit small to midsize businesses in
the U.S. with the exception of financial services providers, passive real estate investors,
companies having a tangible business net worth greater than $7 million, or companies with
net profits after taxes that averaged more than $2.5 million during the past two years.
As an SBA lending program, 504 loans require applicants to demonstrate job creation,
export potential, or other economic development or public policy goals, which are met
easily for the majority of applicants. The funds must be used for capital expenses, including
land, buildings, construction, and equipment. Owner occupancy requirements are 51
percent of the total square footage for acquisition loans and 60 percent for newconstruction financing.
In addition, multiple businesses may be able to jointly pool 504
financing if they meet occupancy requirements together. The
loans require the same amount of documentation and due
diligence as ordinary loans commercial loans, and approval
processes also are comparable to conventional loan processing.
For commercial brokers who represent clients who wish to own
rather than lease space and equipment, the SBA 504 loan program
is an effective tool for closing deals. These brokers also are
providing added value to their clients by informing them of one
of least-known programs for property financing.
PROGRAM ATTRIBUTES
Eligible Borrowers

Less than 500 employees.

Net Worth must not exceed $6 million

Net income after taxes for the preceding 2 years must not exceed $2 million.

The business must be a for-profit entity with a "sound business" purpose.
Borrower Cash Injection

10% of total project

15% of total project for start-ups
504 Debenture Terms

2o Years for real estate-including new construction.

10 Years for fixed assets.
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Benefits: Top 10 Reasons for Using the SBA 504 Program:
I. Ninety percent (90%) financing of the total project costs for commercial real
estate purchases. Utilizing our 504 loan program allows business owners to
preserve more capital for other uses and gain the highest cash-on-cash
return for their capital.
II. Businesses can save on interest expenses by not accepting market interest
rates when below market, fixed interest rates are available with our 504 loan
program.
III. Longer loan amortizations allow for smaller monthly payments, which have
less impact on business cash flow. Furthermore, since prepayments are
always allowed (generally up to 20% of the principal balance during the first ten
years), business owners can have the best of both worlds — smaller monthly
payments for when times are tight, but able to prepay when excess cash is on
hand.
IV. When putting in ten percent (10%) equity, getting below market interest rates
and having the benefits of longer loan amortizations versus traditional lending,
business owners' cash flow is less impacted and they can still realize all the
advantages of purchasing or constructing commercial real estate.
V. Owning commercial real estate instead of leasing typically has an immediate
reduction of up to forty percent (40%) on real estate expenses, plus the
added benefit of converting the third largest expense facing businesses into a
fixed cost that does not increase by an average of three and a half percent
(3.5%) each year like with renting.
VI. Financing closing and other soft costs with our 504 loan helps keep out-ofpocket expenses to a true ten percent (10%) minimum when business
owners make the decision to purchase commercial property and only want to
spend the minimum amount of cash necessary in order to preserve more capital
for other uses.
VII. No balloon payments, calls or negative loan covenants enable borrowers to
have more control, more peace of mind and less lender micro-management.
VIII. Closing in as little as 45 days allows business owners to take possession of
their new asset and start reaping the advantages as soon as possible.
IX. Dealing with a specialist in 504 loan financing makes the experience of buying
commercial property simple and hassle-free. Twenty-four hour preapprovals and four day commitments are another example of this.
X. Future sales of properties financed by our 504 loans are benefited by having
assumable mortgages at today's historically low interest rates.
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Why Some Lenders Avoid Using the 504 Loan Program
Many loan applicants are unaware of the SBA 504 loan program. Lenders tend to avoid
using it or even recommending it to prospects as they would rather make a larger loan
under conventional loan standards. Using the 50 program enable a prospective applicant
to borrow up to 90% of the cost of an owner/user
business property as opposed to a conventional loan where
you can only finance up to 80%. What’s more, 40% of the
loan amount is fixed for the life of the loan where with a
conventional loan, it re-prices every 5 years.
Using the 504 program a borrower would get 3 loans. A
permanent first mortgage equal to 50% of the appraised value
of the asset being financed. The second loan would be a
second mortgage funded by government issued debentures
equal to 40% of the asset being financed. The Lender would
also provide an interim loan (usually 60 days) to finance the
SBA Debenture portion until it is funded. Most lenders simply
would rather make a bigger loan and have the applicant inject
the 20% - 25% equity their loan policies require to avoid the additional paperwork at the
cost of their loan applicant.
The SBA 504 Loan program provides 20 year fixed rate loans to small businesses to
purchase property, buildings, and/or equipment. This loan program can provide up to $4
million in some cases, and can be very helpful, but is simply more work for a lender to
process.
The loan program requires a very detailed application, which will very between
commercial lenders at times. Standards have been created by the SBA, which are used
with some modifications by lenders. The SBA requires a partnership for the 504 loan
between a lender and a CDC organization. The private lender is responsible for 50% of
the loan, the CDC provides 40%, with the business owner putting down 10% .The
immense detailed requirements that are needed for an SBA 504 loan are sometimes
more than a traditional loan. As a result Lenders shy loan applicants away from the
program because they do not want the additional work. Using a commercial loan
specialist skilled in the 504 program can streamline the application process.
Depending on the lender, it can take significantly longer for the process to determine if you
are approved. While some lenders promote decisions in 45-60 days, some can take 6 to 12
months to decide. Generally these are Lenders that do not use the program frequently.
Using a Commercial Loan Specialist that understands the 504 loan program can help
expedite your request and target the appropriate lender for your loan.
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Typical 504 Loan Structure
Borrower:
Estimated Purchase Price:
Closing Costs
TBD
$625,000 business and real estate
$ 15,000 (Appraisal, Environmental, Title Etc.)
Total Project
$640,000
Cash Injection
$ 64,000
Permanent First Mortgage Loan:
Loan Amount
Term:
Amortization
Program:
Initial Rate
Initial Payment
Adjustment Period
Reset Rate
Prepayment Fee
$320,0000
20 Years
25 Years
FHLB 5/5
6.25%
$2,110.94
Every 5 Years from Note date
FHLB 5 Year advance rate plus 2.75%
Yield Maintenance
Interim Loan: (pending issuance of SBA Debentures)
Loan:
Term:
Amortization
Program:
Base Rate
Index
Loan:
Term:
Amortization
Program:
Base Rate
Index
$256,000
60 Days
Interest Only
Prime +1%
Wall Street Prime
1%
SBA Debentures
$256,000
20 years
20 years
20 years Fixed
Wall Street Debenture
6.50%
Estimated Mortgage Expense
First Mortgage
$320,000
Debenture (including financed expenses) $256,000
Estimated Monthly Mortgage Payment
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@ 6.45%;25 years = 2,110.94
@ 6.50%;20 years = 1,908.67
$4,019.61
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Understanding the SBA 7(a) Program
Loan Program Basics
The 7(a) Program is the SBA's primary loan program.
There are three principal parties to an SBA 7(a) guaranty loan: SBA,
the small business applicant, and the private lender. The lender plays
the central role in delivering the loan. It is the lender that performs the
initial review of the small business loan application and determines
whether to submit the loan to the SBA for approval. The SBA reviews
the application and the lender's analysis and determines whether to provide the loan
guarantee.
A typical loan package to a lender will include a Business Plan, financial projections for
three years including Cash Flow Statements, Income (Profit and Loss) Statements, and
Balance Sheets, current business financial statements, and business financial statements
and income tax returns for the past three years or for how ever long the business has
existed, whichever is less. If the business is a start-up and unless the business has a
substantial banking history and unencumbered assets, the lending institution will require
all owners with more than a 20% ownership position to personally guarantee the loan.
Therefore, a current personal financial statement and personal income tax returns for
the past three years from each such owner will also be required. If the loan request is
submitted to the SBA, a 7(a) Loan Application will need to be completed as well.
Eligibility Requirements
To be eligible for a 7(a) Loan, the business must be operated for profit and qualify as a
small business under the SBA size standard. The size standard is based on the average
number of employees for the proceeding 12 months or on sales volume averaged over
the last three years. The Standard Industrial Classification (SIC) Code
for the industry in which the small business is engaged is used to
determine the applicable size standard. The business may NOT be
involved in speculation or investment in rental real estate.
Loan funds can be used for expansion or renovation, construction of a
new facility, purchase of land or buildings, purchase of equipment,
fixtures, or leasehold improvements, working capital, refinancing debt
for compelling reasons, a seasonal line of credit, acquiring inventory or
any legal business expense. Loan terms depend on the ability to repay
the loan. Generally, working capital is 5 to 10 years and construction,
real estate, and capital equipment or machinery is up to 25 years, not to exceed the life of
the equipment or machinery. The maximum amount of a 7(a) guarantee is $750,000 or
75% of the total loan which ever is less. On loans under $100,000, the guarantee is 80%.
The guarantee is to the LENDER to encourage the lender to make the loan.
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What SBA Looks For:
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Operate as a for-profit company.
Do business (or propose to) in the United States or its possessions.
Meet SBA Size Standards.
Be an eligible type of business. While the vast majority of businesses are eligible
for financial assistance from the SBA, some are not. Check this list of Eligible and
Ineligible Types of Businesses to see if your company qualifies.
Plan to use proceeds for an approved purpose. 7(a) loan proceeds may be used to
establish a new business or to assist in the operation, acquisition or expansion of
an existing business. This list explains Eligible and Ineligible Use of Proceeds.
Not have funds available from other sources. SBA does not extend financial
assistance to businesses when the financial strength of the individual owners or the
company itself is sufficient to provide all or part of the financing. Both business
and personal financial resources are reviewed as part of the eligibility criteria. If
these resources are found to be excessive, the business will be required to use
those resources in lieu of part or all of the requested loan proceeds.
Ability to repay the loan on time from the projected operating cash flow of the
business.
Good character. SBA obtains a "Statement of Personal History" from the
principals of each applicant firm to determine if they have historically shown the
willingness and ability to pay their debts and whether they have abided by the laws
of their community.
Management expertise and commitment necessary for success.
Feasible business plan
While "a maze of red tape" comes readily to mind at the thought of government
involvement, SBA loans are relatively easy to complete, if the borrower has thoroughly
prepared himself and has the requisite information readily available. The mechanics of
the transaction are usually as follows:
1. The business applies to the bank for a loan.
2. The bank decides it needs a government guarantee from the Small Business
Administration in order to extend credit to the potential borrower.
3. The bank approves the term loan, subject to SBA guarantee.
4. The bank applies to the district SBA office for the guarantee.
5. The SBA approves or disapproves the guarantee, notifying the bank by letter.
6. The bank notifies the owner. If the credit is approved the bank may be able to
disburse some funds against the guarantee as soon as it has the letter.
7. The SBA lawyers prepare the loan documents and send them to the bank.
8. The bank disburses the funds and administers the loan until it has been paid in full.
The bank will apply to the SBA for any changes in the loan agreement during
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subsequent years. The SBA would become directly involved only in the case of
default where the company's assets must be liquidated to pay off the loan.
How the Program Works
Since a key concept of the 7(a) loan program is that the loan comes from a commercial
lender, not the Government, a small business applies directly to a lender for financing. The
lender reviews the application and decides if it merits a loan on its
own or if it requires additional support in the form of an SBA
guaranty. The SBA guaranty assures the lender that if the borrower
does not repay the loan, the Government will reimburse the lender
for its loss, up to the percentage of SBA's guaranty. However, the
small business borrowing the money remains obligated for the full
amount due.
If the lender is not willing to provide the loan, even with an SBA
guaranty, SBA cannot force the lender to do so. So it is important
for applicants to be prepared when they approach a lender; they
should know and meet the lender’s criteria and requirements as well
as those of the SBA. To be considered for an SBA–backed loan, the
applicant must be both eligible and creditworthy.
Terms and Conditions
The specific terms of SBA loans are negotiated between an applicant and the participating
financial institution, subject to the requirements of SBA. In general, the following
provisions apply to all SBA 7(a) loans.
Loan Amounts
SBA can guarantee as much as 85 percent on loans of up to
$150,000 and 75 percent on loans of more than $150,000.
7(a) loans have a maximum loan amount of $2 million.
SBA's maximum exposure is $1.5 million. Thus, if a
business receives an SBA-guaranteed loan for $2 million,
the maximum guaranty to the lender will be $1.5 million or
75 percent. SBAExpress loans have a maximum guaranty
set at 50 percent. The American Recoery and Reinvestment
Act signed into law February 17, 2009, authorized a
temporary increase in SBA’s guaranty percentage to up to
90% on guaranty loans, except those processed under SBAExpress, through the end of
calendar year 2009, or until the funds appropriated for this provision are exhausted,
whichever comes first.
Maturity Terms
SBA loan programs are generally intended to encourage longer-term small business
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financing. Loan maturities are based on the ability to repay, the purpose of the loan
proceeds, and the useful life of the assets financed. However, maximum loan maturities
have been established: 25 years for real estate and equipment, and terms for a working
capital or inventory loan should be appropriate to the borrower’s
ability to repay up to 10 years.
The maximum maturity of loans used to finance fixed assets other
than real estate will be limited to the economic life of those assets,
in no instance to exceed 25 years. The 25-year maximum will
generally apply to the acquisition of land andbuildings or the
refinancing of debt incurred in their acquisition. Where business
premises are to be constructed or significantly renovated, the 25year maximum would be in addition to the time needed to
complete construction. (Significant renovation means construction
of at least one-third of the current value of the property.)
When loan proceeds will be used for a combination of purposes,
the maximum maturity can be a blended maturity based on the use
of proceeds or up to the maximum for the asset class comprising the largest percentage of
the use of proceeds.
Interest Rates
Interest rates are negotiated between the borrower and the lender but are subject to SBA
maximums, which are pegged to the prime rate, the LIBOR rate, or an optional peg rate.
Interest rates may be fixed or variable. These are the interest rates for fixed rate loans:
 Fixed rate loans of $50,000 or more must not exceed the base rate plus 2.25
percent if the maturity is less than seven years, and the base rate plus 2.75 percent if
the maturity is seven years or more.
 For loans between $25,000 and $50,000, maximum rates must not exceed the base
rate plus 3.25 percent if the maturity is less than seven years, and the base rate plus
3.75 percent if the maturity is seven years or more. must not exceed the base rate
plus 4.25 percent if the maturity is less than seven years, and
the base rate plus 4.75 percent, if the maturity is seven years
or more.
 Variable rate loans may be pegged to the lowest prime rate,
the LIBOR
For loans of $25,000 or less, the maximum interest rate Rate, or the
SBA optional peg rate. The optional peg rate is a weighted average of
rates the federal government pays for loans with maturities similar to
the average SBA loan. It is calculated quarterly and published in the
Federal Register. The lender and the borrower negotiate the amount
of the spread, which will be added to the base rate. An adjustment
period is selected which will identify the frequency at which the note
rate will change. It must not be more often than monthly and it must
be consistent (e.g., monthly, quarterly, semiannually, annually, or any
other defined period).
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Percentage of Guaranty
SBA can guarantee up to 85 percent of loans of $150,000 and less, and up to 75 percent of
loans above $150,000. This standard applies to most variations
of the 7(a) Loan Program. However, SBAExpress loans carry a
maximum of 50 percent guaranty. The Export Working
Capital Loan Program carries a maximum of 90 percent
guaranty, up to a guaranteed amount of $1,000,000.
The American Recovery and Reinvestment Act signed into law
February 17, 2009, authorized a temporary increase in SBA’s
guaranty percentage to up to 90 percent on guaranty loans,
except those processed under SBAExpress, through the end of
calendar year 2009, or until the funds appropriated for this
provision are exhausted, whichever comes first. The
maximum outstanding guaranteed amount remains at
$1,500,000.
Fees
To offset the costs of its loan programs to the taxpayer, SBA charges lenders a guaranty fee
and a servicing fee for each loan approved and disbursed. The amount of the fees is based
on the guaranty portion of the loans. The lender may charge the upfront guaranty fee to
the borrower after the lender has paid the fee to SBA and has made the first disbursement
of the loan. The lender's annual service fee to SBA cannot be
charged to the borrower.
For loans approved on or after December 8, 2004, the following
fee structure applies:
 For loans of $150,000 or less, a 2 percent guaranty fee will be
charged. Lenders are again permitted to retain 0.25 percent of
the up-front guaranty fee on loans with a gross amount of
$150,000 or less.
 For loans more than $150,000 but up to and including
$700,000, a 3 percent guaranty fee will be charged.
 For loans greater than $700,000, a 3.5 percent guaranty fee
will be charged.
 For loans greater than $1,000,000, an additional 0.25 percent
guaranty fee will be charged for that portion greater than
$1,000,000. The portion of $1,000,000 or less would be charged a 3.5 percent guaranty
fee; the portion greater than $1,000,000 would be charged at 3.75 percent.
The American Recovery and Reinvestment Act signed into law February 17, 2009,
authorized a temporary elimination of the borrower upfront guaranty fee on 7(a) loans
having a maturity of longer than 12 months, through the end of calendar year 2009, or until
the funds appropriated for this provision are exhausted, whichever comes first.
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The annual on-going servicing fee for all 7(a) loans approved on or after October 1, 2007,
shall be 0.550 percent of the outstanding balance of the guaranteed portion of the loan.
The legislation provides for this fee to remain in effect for the term of the loan.
Prohibited Fees
Processing fees, origination fees, application fees, points, brokerage fees, bonus points, and
other fees that could be charged to an SBA loan applicant are prohibited. The only time a
commitment fee may be charged is for a loan made under the Export Working Capital
Loan Program.
Prepayment Penalties
Prepayment penalties apply when a loan:
 Has a maturity of 15 years or more and the borrower is prepaying voluntarily;
 The prepayment amount exceeds 25 percent of the outstanding balance of the
loan;
 The prepayment is made within the first three years after the date of the first
disbursement (not approval) of the loan proceeds.
The prepayment fee is:
 5 percent in Year 1, 3% in Year 2 , 1% in Year 3 and none thereafter
Web Sites for more Assistance:
www.anchorbanc.com
www.sba.gov
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Appendix I
Glossary of Terms
ADJUSTABLE RATE MORTGAGE (ARM)
Is a mortgage in which the interest rate is adjusted periodically based on a preselected
index.
.
AMORTIZATION
The periodic principal pay down of a loan.
BALLOON (payment) MORTGAGE
Usually a short-term fixed-rate loan which involves small payments for a certain period of
time and one large payment for the remaining amount of the principal at a time specified in
the
contract.
COMMERCIAL LOAN SPECIALIST
An individual in the business of assisting in arranging funding or negotiating contracts for a
client buy who does not loan the money himself.
COLLATERAL
Property pledged to secure a loan.
COMMITMENT
A contract issued by a lender to make a loan on specific terms or conditions to a borrower
or builder.
COVENANT
A written agreement or restriction on the use of land or promising certain acts.
Homeowner Associations often enforce restrictive covenants governing architectural
controls and maintenance responsibilities. However, land could be subject to restrictive
covenants even if there is no homeowner's association.
CONVENTIONAL LOAN
A mortgage underwritten using conventional standards including reviewing tax returns of
the borrower, credit histories, resumes of principals and other such information deemed
necessary to assess the risk of a particular transaction.
CREDIT REPORT
A report documenting the credit history and current status of a borrower's credit standing.
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DEBT-SERVICE COVERAGE RATIO (DSCR)
The ratio of available cash flow of a business to annual debt obligations.
DOWN PAYMENT
Money paid to make up the difference between the purchase price and the mortgage
amount. Down payments usually are 10 percent to 20 percent of the sales price on
conventional.
EQUITY
The value an owner has in real estate over and above the obligation against the property.
ESCROW
Funds that are set aside and held in trust, usually for payment of taxes and insurance on
real property. Also earnest deposits held pending loan closing.
FIXED RATE MORTGAGE
The mortgage interest rate will remain the same on these mortgages throughout the term
of the mortgage for the original borrower.
GUARANTY A promise by one party to pay a debt or perform an obligation contracted
by another if the original party fails to pay or perform according to a contract.
HAZARD INSURANCE
A form of insurance in which the insurance company protects the insured from specified
losses, such as fire, windstorm and the like.
INDEX
A published interest rate against which lenders measure the difference between the current
interest rate on an adjustable rate mortgage and that earned by other investments (such as
one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on
loans closed by savings and loan institutions, and the monthly average costs-of-funds
incurred by savings and loans), which is then used to adjust the interest rate on an
adjustable mortgage up or down.
LOAN-TO-VALUE RATIO
The relationship between the amount of the mortgage loan and the appraised value of the
property expressed as a percentage.
MARGIN
The amount a lender adds to the index on an adjustable rate mortgage to establish the
adjusted interest rate.
MORTGAGE
A voluntary lien filed against property to secure a debt, usually a loan. To foreclose, the
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lender must often institute a court action and the borrower may have the right to reclaim
the property after foreclosure.
ORTGAGE INSURANCE Money paid to insure the mortgage when the down payment is
less than 20 percent.
MORTGAGEE
The lender
MORTGAGOR
The borrower or homeowner
NOTE
A written promise to pay a certain sum of money at a certain time. A negotiable note starts
"Pay to the order of" and is transferable by endorsement similar to a check.
ORIGINATION FEE
The fee charged by a lender to prepare loan documents, perform credit checks, inspect and
sometimes appraise a property; usually computed as a percentage of the face value of the
loan.
POINTS
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the
loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
PREPAYMENT A privilege in a mortgage permitting the borrower to make payments in
advance of their due date.
PRINCIPAL
The amount of debt, not counting interest, left on a loan.
SECOND MORTGAGE
A mortgage made subsequent to another mortgage and subordinate to the first one.
UNDERWRITING
The decision whether to make a loan to a potential home buyer based on credit,
employment, assets, and other factors and the matching of this risk to an appropriate rate
and term or loan amount.
All information herein contained in from sources deemed reliable, but no warranty is made
as to its accuracy.
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