Glossary Of Business Loan Terms

Accounts Receivable Financing - A loan gained by borrowing against receivables. Loans are paid down as receivables are collected.

Annual Fee - The amount charged by the lender each year to cover the administrative costs of the loan.



Business Credit Card - An amount of money, which a business can borrow against at times it needs capital. Using a card accesses the money.

Commercial Real Estate Loans - Similar to residential mortgages, but collateral is business property. Interest rates are usually fixed, the length of the loan can range from 5 - 20 years and payments due monthly.

Commercial Term Loans - Loans made to businesses that can be either secured and unsecured. Usually made to mid-size and large businesses.

Credit Rating - A predictor of the ability to pay back a loan. The credit rating is a result of credit scoring

Credit Report - Financial history supplied by a credit information company like Dun and Bradstreet, Equifax, Experian or TransUnion. Contains credit information on a business or an individual, including payment history of bank cards, store cards, mortgages, student loans, and trade payments.

Credit Scoring - The evaluation system used by lending institutions to determine relative credit riskiness of a business or consumer. When evaluating businesses, it generally considers factors such as credit payment history, new credit sought by owner of business, and financial strength and longevity of business.

CreditFYI - A web site for checking business credit reports

Debt Financing - A loan with pre-agreed terms, including payback schedule and interest.

Dun & Bradstreet - Leading provider of business credit information.

Equifax - One of three leading providers of personal credit information.

Equipment Leases - Leases allowing companies to purchase new equipment.

Experian - One of three leading providers of personal and business credit information.

Fixed Interest Rate - An interest rate that is the same throughout the life of a loan.

Interest Rate - The amount charged by a lender for the money borrowed. It can be fixed or variable.

Inventory Financing - Money borrowed on the basis of finished inventory. The loan is paid as inventory is sold.

Line of Credit - An amount of money, which a business can borrow against at times it needs capital. Often accessed by check, ATM, or business card.

Capitallynk.com - A web site for small business loan offers from a variety of lenders instantly.

Loan Term - The length of time the borrower has to repay debt.

Long Term Debt - Financing used to purchase or improve assets such as plant, facilities, large equipment and real estate.

Maturity - A loan's maturity is the life of the loan; that is, how long you have to repay the loan. It usually applies to term loans and not lines of credit.

Multi-Lender Environment - Numerous lending institution sharing the same site and information to provide instant financing to small businesses.

Personal Guarantee -A guarantee that the primary owner will assume personal responsibility for repayment of the loan, should the company not repay the loan.

Prime Rate - The rate a lender charges its best customers. The rate is calculated differently by each lender.

Revolving Credit - It is the same thing as a line of credit: an amount of money, which a business can borrow against at times it needs capital. Often accessed by check, ATM, or business card.

SBA Loan - Loans to small businesses unable to secure financing on reasonable terms through normal lending channels. The program operates through private-sector lenders that provide loans, which are guaranteed by the Small Business Administration (SBA) -- the SBA has no funds for direct lending or grants.

Secured Loan - A loan secured by specific collateral. Creditor may foreclose and seize the specific property that is collateral to satisfy an unpaid secure loan.

Small Business Administration -Established by Congress, the SBA provides financial, technical and management assistance to help Americans start, run, and grow their businesses.

Short Term Debt - Financing used to secure cash for accounts payable and inventory.

Subsequent Draw Fee - It's a fee that the financial institution may charge each time you use the line of credit after the initial use.

Term Loan - A loan for a specific amount of money. It has either have a fixed or variable interest rate, matures in between one and ten years and has a set repayment schedule.

TransUnion Corporation - One of three leading providers of personal credit information.
Unsecured Loan - A loan granted upon the good credit of the borrower. No collateral involved.

Variable Interest Rate - An interest rate that changes during the life of a loan.

U.S. housing starts, permits hit record lows in April

New U.S. housing starts and permits unexpectedly fell to record lows in April, a government report showed on Tuesday, denting hopes that stability in the housing market was imminent.

The Commerce Department said housing starts fell 12.8 percent to a seasonally adjusted annual rate of 458,000 units, the lowest on records dating back to January 1959, from March's upwardly revised 525,000 units.

"It obviously calls into question the notion that the housing market is stabilizing," said Brian Dolan, chief currency strategist at Bedminster, New Jersey.

Compared to the same period last year, housing starts tumbled 54.2 percent. Analysts polled by Reuters had expected an annual rate of 520,000 units for April.

U.S. stock index futures pared gains after the data. Government bond prices extended losses despite the weak report.

Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey, said the weak housing starts data was "not encouraging."

However, he noted that the drop in building permits, which also fell to record lows, could set the stage for a housing rebound later.

"The first step to healing the housing sector is to eat into inventory. There is so much inventory on the market that the sooner we stop building and start eating into existing inventory the better off we'll be," he said.

New building permits, which give a sense of future home construction, dropped 3.3 percent to 494,000 units, the lowest since records started in January 1960, from 511,000 units in March.

That was well below analysts' forecasts of 530,000 units. Compared to the same period a year-ago, building permits plunged 50.2 percent.

A National Association of Home Builders survey on Monday showed U.S. home builder sentiment surged to an 8-month high in May, with industry leaders hopeful the three-year housing slump was nearing a bottom and market stability around the corner.

Collapsing domestic home prices and the resultant global credit crisis pushed the U.S. economy into recession in December 2007 and restoring stability to the housing market is a key element to a recovery in the economy.

Building completions rose 4.9 percent to 874,000 units, Tuesday's data showed.

Meanwhile, aggressive cost-cutting helped Home Depot Inc, the word's largest home improvement chain, to report on Tuesday a bigger-than-expected profit in the latest quarter despite the deep U.S. housing slump.

The news followed by a day stronger-than-expected results from rival Lowe's Cos Inc that pushed up shares of both chains on Monday. Both Home Depot and Lowe's had been hurt by the housing slump.

Stimulus Bill-Small Business Loan-part 2

If you like to read fine print, here is the exact wording:

SEC. 503. ESTABLISHMENT OF SBA SECONDARY MARKET GUARANTEE AUTHORITY. (a) PURPOSE- The purpose of this section is to provide the Administrator with the authority to establish the SBA Secondary Market Guarantee Authority within the SBA to provide a Federal guarantee for pools of first lien 504 loans that are to be sold to third-party investors.

(b) DEFINITIONS- For purposes of this section:

(1) The term `Administrator' means the Administrator of the Small Business Administration.
(2) The term `first lien position 504 loan' means the first mortgage position, non-federally guaranteed loans made by private sector lenders made under title V of the Small Business Investment Act.

And further:

(2) GUARANTEE PROCESS-
(A) The Administrator shall establish, by rule, a process in which private sector entities may apply to the Administration for a Federal guarantee on pools of first lien position 504 loans that are to be sold to third-party investors.

But there is a catch. In another article I stated the SBA is doing away with the borrower paying a loan guarantee fee, which can be thousands of dollars for larger loans. Unfortunately, for the secondary market on 504 loans, the SBA will charge a fee. Currently, these loans did not have an SBA guarantee:

(3) RESPONSIBILITIES-
(A) The Administrator shall establish, by rule, a process in which private sector entities may apply to the SBA for a Federal guarantee on pools of first lien position 504 loans that are to be sold to third-party investors.
(B) The rule under this section shall provide for a process for the Administrator to consider and make decisions regarding whether to extend a Federal guarantee referred to in clause (i). Such rule shall also provide that:
(ii) The Administrator shall charge fees, upfront or annual, at a specified percentage of the loan amount that is at such a rate that the cost of the program under the Federal Credit Reform Act of 1990 (title V of the Congressional Budget and Impoundment Control Act of 1974; 2 U.S.C. 661) shall be equal to zero.

This secondary market program set up by the SBA will only last for two years under section 503 (f). Because this is emergency legislation, the SBA is to issue regulations within 15 days of the signing of the bill (503 (i)); amazingly quick for government purposes.

What about the secondary market on other loans? The typical everyday medium to large SBA loan is under the workhorse 7(a) program. For example, using the same trucking company, if they needed money to purchase more trucks, hire employees, or for general cash flow, they would seek a 7 (a) loan. The stimulus bill does not set up a new secondary market for 7(a) loans. But it does allow direct government loans (not made by private banks) to broker-dealers in the secondary market purchasing 7(a) loans. So if you are in the business of buying pooled 7 (a) loans and need a loan to do so, taxpayers monies will be used for this purpose. The idea is to stimulate this secondary market again so banks will make further loans.

But what about the small guy? here the news is very disappointing. Studies show the average small businesses loan is $10,000. None of the stimulus programs helps the secondary market on the smaller loans and so few lenders are loaning.

But do not give up hope. There are still lenders out there, including those lending their own money, that are still making loans in the range of $5,000 to $50,000 unsecured at good rates, in the neighborhood of 7.75%. You just have to know where to look.

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Stimulus Bill-Small Business Loan News

The word is out that the new stimulus bill (American Recovery and Reinvestment Act of 2009) has a special provision creating a Federal government secondary market for SBA guaranteed loans. If you are a small business owner, will this loosen up my lender purse strings and allow some money to trickle down from the big cats on Wall Street and into your pockets?

Yes, it is a good start, but hold your contagion because it is not as wildly exciting as you might think. In fact, some have openly criticized the new bill. This is a continuing article (20 in all) on the subject: Help. Is anyone out there loaning to small businesses anymore?

Let us first begin by looking at a program that is already in existence and is being sold on the secondary market. There is a loan program out there and SBA lenders are actually making loans currently: the Community Express Loan Program. This gives unsecured small business loans between $5,000 and $50,000 with very little paperwork, answers typically in two days, interest rates presently at 7.75%, funding and two weeks, and monies wired directly to your business account.

There are still lenders participating in this program, although Congress has failed to make the program permanent and still has a 10% cap on the number of loans. Enter the Obama stimulus bill. Let us look how it affects this program and small business lending as a whole.

Some undiscerning headlines claim $3 billion in the stimulus bill is being pumped into the secondary market and viola, the banks will be making more loans. Not so fast. As this article explains, that money is being pumped into an elite SBA program that will not affect the average small business owner.

Before I give a clear answer, let's define what we're talking about. Most of us have heard about SBA loans. With the exception of disaster loans and the Microloan Program (for underserved communities), the Federal government through the U.S. Small Business Administration (SBA) does not actually loan the money. Instead, it licenses private lenders, like the community bank on your block, to make loans and if there is a default, Federal government guarantees come to the rescue and reimburse for a certain percentage. So, if you got a $100,000 loan (in this economy? OK, hypothetically) that has a 75% guarantee and there is a default, after going through certain steps, the lender could receive reimbursement for up to $75,000. And remember there are literally thousands of lenders out there that do SBA loans for the simple reason they feel warm and fuzzy with the guarantee.

Now here is how the secondary market works. In the good old days absent toxic reverse mortgages, banks held onto their loans and simply kept the in-house interest. But those days are long gone and banks now pool their loans and sell to investors on the secondary market which pays them a premium because of the expected enjoyment of future loan interest. They were packaged almost like mutual funds. Unfortunately, the secondary market is now a dry creek bed. I'm not handing out excuses for our banks, but this is one of the reasons they are not loaning.

But ask the average person on the street and a grimace creeps upon their face when they hear the name SBA loan: "Yeah, in whose lifetime? I would much prefer getting a loan while I'm still young." Visions pop into their heads of pounds of paperwork, endless regulations, untold delays, and layers of government red tape. But not so fast. The SBA also has excellent smaller loans which are truly "lean and mean".

So what does the new stimulus bill do? It got on an "A" for the idea but hardly passing with the follow through-it did not go nearly far enough. Under Section 503 of the new bill it has set up a secondary market for 504 loans only (to eliminate any confusion, the term "504" refers to a section under the old Small Business Investment Act, and not the current stimulus bill) which applies primarily to larger ventures seeking commercial loans for buying land and buildings. A private lender works in conjunction with a government Certified Development Company. Typically, the private lender makes a loan for 50% of the cost under a first mortgage (not guaranteed by the SBA) with 40% loaned by the CDC in a second position (100% SBA guarantee). The other 10% would be cash by the borrower.

So, if you are a trucking company that has worked hard and increased your number of trucks from 5, to 10, to 15, and years later to 100, you need to buy a new yard and warehouse (for less than truckload jobs). Cost--$4 million. You get a bank to loan under the 504 Program as a first position commercial mortgage. The SBA now has the authority to set up a SBA Secondary Market Guarantee Authority and give guarantees for pools of 504 loans to be sold to third party investors on the secondary market. The lender has to retain at least a 5% interest at risk. The SBA loan guarantees not more than $3 billion of such pooled mortgages.

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Why Business Owner Might Not Go To A Bank For A Commercial Mortgage

Traditional banks serve a very important role in the North American economy. Nevertheless, when it comes to a business loan, there are many reasons that small business owners should not always use a traditional bank.

There are not just one or two major reasons to obtain a small business loan from another source. As you will see below, there are over a dozen compelling reasons to consider a source other than a traditional bank for a small business loan. For most small business owners, five to ten of these reasons are likely to be applicable to them.

With many small business loan borrowers, banks have already declined their loan application. That particular compelling reason to use a source other than a traditional bank (being declined by a traditional bank) does not even appear on the list below.

Here are the compelling reasons a small business owner might not go to a traditional bank for a commercial real estate loan. The compelling reasons shown below also indicate that for business borrowers that can get approved at a traditional bank, there might be better options available elsewhere.

• Minimum commercial real estate loan for many banks is $250,000 or more. With non-bank small business lenders, the typical minimum commercial loan amount is $100,000.

• Most banks charge an up-front commitment fee. Most non-bank small business lenders do not charge an up-front commitment fee for a commercial mortgage.

• Most banks will severely limit the amount of cash a business borrower can get when refinancing a commercial mortgage. When a borrower is refinancing their business property with non-bank small business lenders, they can typically get up to $1,000,000 in cash.

• Most banks are reducing their commercial real estate loan interest in properties such as bars/restaurants, auto service businesses and funeral homes. Non-bank small business lenders are very interested in these business categories (and many other special purpose properties) for a commercial mortgage.

• Most banks will require business plans for a commercial mortgage. The cost to provide this is usually several thousand dollars. Non-bank small business lenders typically do not require business plans as part of their underwriting process for a commercial real estate loan.

• Most banks will require tax returns for a commercial mortgage. Non-bank small business lenders do not require tax returns or any income verification for a Stated Income commercial real estate loan. Many banks not requesting tax returns will ask borrowers to sign IRS Form 4506 (which authorizes the lender to obtain tax returns directly from the IRS). Non-bank small business lenders typically do not request borrowers to sign this form.

• Most banks will require cross collateralization of personal property for a commercial real estate loan. Most non-bank small business lenders do not require cross collateralization of personal property for a commercial mortgage.

• Most banks will require balloon payments or the loan will be subject to recall after periods as short as 3-5 years for a commercial mortgage. With a commercial real estate loan via typical non-bank small business lenders, all properties are eligible for 25-year loans and some up to 40 years.

• Most banks will not permit seller seconds or secondary financing for a commercial real estate loan. With many non-bank small business lenders, if the business borrower uses a seller second or other secondary financing for a commercial mortgage, the business borrower can obtain a loan with a CLTV up to 95% of the property value.

• Most banks require income verification or audits even after the commercial real estate loan closes. Non-bank small business lenders do not verify income either before or after a commercial loan closes with a Stated Income Business Loan Program.

• Most banks have strict guidelines for "sourcing" or "seasoning" of assets or ownership to qualify for a commercial mortgage. Most non-bank small business lenders do not have any requirements or limitations involving sourcing/seasoning of funds or seasoning of ownership.

• Very few banks offer an assumable commercial real estate loan. Typical non-bank small business lenders have an Assumable Commercial Loan Program which includes loan amounts up to $1 million.

• With most banks, a typical commercial real estate loan will require 3 to 9 months to close. At typical non-bank small business lenders, most commercial mortgage loans close in 45 to 55 days.

• Very few banks use Stated Income (no tax returns, no income verification) for a commercial real estate loan. Non-bank small business lenders use the Stated Income Approach for commercial mortgage loans in their Stated Income Business Loan Programs (most commercial mortgages up to $2 million qualify for these programs). This especially benefits self-employed small business borrowers who frequently have income that is erratic and difficult to document properly.

Today's realty

In 2008 alone, the housing bust wiped out an estimated $2 trillion in home values. But for the first time in a long time, we are finally seeing an upside.

The same falling home prices that wreaked so much havoc in the economy are queuing up as the end-solution to the bust.

With prices down about 25 percent from their 2006 peaks, homes and buying incentives are tempting bargain hunters once again. Many economists agree that we've seen the bottom of the market and can see a faint but discernible light at the end of the long, dark tunnel. Sale volumes are up in many parts of the country, but prices aren't.

In early April this year, the average 30-year, fixed-rate mortgage loan dropped under 4.8 percent to historic lows, according to Freddie Mac, prompting some qualified buyers to buy and others to refinance.

At a spring speech, Harvey Rosenblum, executive vice president and director of research for the Federal Reserve Bank of Dallas, said the economy will improve markedly in 2010 and should be back on track by 2011. Housing, which led the country into this economic mess, could well lead it out, he said, partially because of the Obama administration's $75 billion mortgage relief plan.

The stimulus plan, in part, is offering first-time homebuyers a tax credit up to $8,000, plus a refinancing program that gives much-needed help to owners who are struggling with mortgages and incentive to their lenders.

Credit is finally starting to flow again, and prudent families with a reasonable down payment are for the most part getting the go-ahead to buy. Ian Shepherdson, chief U.S. economist at High Frequency Economics, noted this spring that falling housing prices are likely to slow heading into the summer months and possibly show improvement, cautioning that "foreclosures are weighing heavily on prices."

A history lesson
There are some important lessons to learn from the bust, lest we be doomed to repeat them. In a nutshell, here's what happened:

Years of robust health in the housing market prompted overinvesting, quick-flipping, overbuilding and credit overextension, enabled by cheap financing. Homes began to exceed their brick-and-mortar and land values vastly, and owners started borrowing against hoped-for run-ups in future values. Meanwhile, builders cranked into high gear to accommodate zealous investors and builders.

Caught up in the frothy market, lenders and buyers alike bucked basic risk-management principles by implementing unsustainable mortgage arrangements, zero-down deals and other dubious lending programs, many with upward-adjusting ARMs -- adjustable-rate mortgages that would later cut the legs out from under them.

Meanwhile, some financiers read aggressive federal anti-redlining guidelines as a green light to lend to everyone with a pulse. Lenders pushed these and other mortgage risks onto institutional investors the world over via mortgage-backed securities and bonds, which even some of the world's best financial minds failed to identify as ticking time bombs.

The last wave of investment homes was sold abruptly at big losses, and values started dropping across the board, especially in places like Florida, California and Nevada. ARMs reset and foreclosures continued to spiral. Suddenly, hundreds of thousands owed more on their homes than they were worth and had nowhere to turn. Soon, the stock market tanked, the values of retirement plans were slashed and millions of jobs were lost.

The net result: Real estate has been repriced. The rest is history -- a history we should not soon forget.

The repricing of home values almost everywhere in the country brings with it a whole new real estate reality, one that marks a return to some of the real estate "rules" of the past. It's a reversion to many tried-and-true fundamentals you should recognize and comprehend:

Save smart for a down payment. It's true that tying up all your equity in a mortgage can take away your emergency cash buffer in a downturn. But with the market starting to stabilize, the benefits of a large down payment -- from 15 percent to 20 percent -- will pay off in the coming up-cycle in the form of higher equity, lower payments, better interest rates and more readily available refinancing.

Borrow within your means. Just because you're approved by a lender for a specific mortgage amount doesn't mean you can really afford the home. The wholesale defaults that occurred on tens of thousands of too-lenient loans carry a strong message: Live within your budget. Lenders grew more complacent with underwriting and appraisal standards because double-digit annual price appreciation lulled them into believing their collateral was safe. In their gamble, they abandoned the three C's of mortgage lending -- credit, capacity and collateral -- and everyone lost. Until the run-up in values, a safe mortgage on a home was considered no more than three times a buyer's annual family income. Some old-school traditions need to become new-school traditions.

Buy for the long term. This isn't the time to try to make a fast buck in real estate. There's still some market pain left, and it's unclear when prices will rebound. If you're buying this year, plan on staying put for the long haul.

Your market is unique. National housing trends don't mean anything. Understand your market's dynamics, which include the health of the local job market, local foreclosure statistics, price movements, a home's average time on the sales block, the lack of -- or abundance -- of newly built homes coming upstream and the prices of "comp" sales in your specific neighborhood of interest.

Watch for the pricing warning signs in the next cycle. Continued home-price run-ups year after year should raise a big, bright, red flag in your castle. From 2000 to 2005, U.S. housing prices increased by an average of 53 percent, with many markets far exceeding that, including California at 109 percent, Nevada at 94 percent and Florida at 90 percent. That party ended abruptly, and nearly everyone suffered a hangover.