MCCU Comprehensive Guide to Small Business Lending

Table of Contents
What is an SBA Loan?.........................................................................................................................................3
What can a small business loan be used for?....................................................................................................4
Why should you use an SBA loan to finance your small business?...............................................................5
Fact or Fiction? Common Beliefs about SBA Loans.........................................................................................6
Types of Small Business Loans...........................................................................................................................7
What is an SBA 7(a) Loan?...................................................................................................................................8
What is a 504 loan for small businesses?...........................................................................................................8
What Are the Main Differences Between SBA 504 Loans and SBA 7(a) Loans?.........................................9
Applying for a Small Business Loan................................................................................................................10
What to Consider When Applying for SBA Financing.................................................................................11
At a Glance: SBA Loan Evaluation....................................................................................................................15
Small Business Loans for Commercial Real Estate.........................................................................................16
What types of real estate projects can I finance with a small business loan?.............................................17
Why should I use a small business loan for real estate?................................................................................17
Small Business Real Estate Ownership vs. Leasing........................................................................................19
To Build or to Buy? SBA Loans for Commercial Construction.....................................................................20
The Process...........................................................................................................................................................21
Purchasing Commercial Real Estate with an SBA Loan................................................................................22
Seller Second Lein Financing.............................................................................................................................22
Non-Conventional Business Space...................................................................................................................24
Refinancing Small Business Real Estate with an SBA Loan..........................................................................25
SBA Loans: Refinancing the Right Way...........................................................................................................26
Plan for Success: How to Create a Business Plan that Adds Strength to Your SBA Loan Application....27
Business Loan Application Information Request Checklist..........................................................................29
Glossary of SBA Terms.......................................................................................................................................30

W
ith so much misinformation out
there, looking for a small business
loan can be an overwhelming
process for someone who has never
encountered the world of SBA lending. In this
guide, you will learn the basic principles of
small business lending, the benefits of using
a small business loan, and the truth about the
different aspects of SBA loans.
Government-backed SBA financing is offered
to small businesses in order to make small
business financing available with lower down
payments, longer repayment terms, and
easier qualifying criteria than conventional
bank loans. Small businesses can use SBA
financing to buy a building for their business,
to construct a new building, to remodel the
facility, to buy new equipment, to acquire
a business, to buy out a partner, to obtain
working capital for expansion, or to refinance
existing debt for better repayment terms.

S
BA government-guaranteed loans are small business
loans with partial government guaranties from the
U.S. Small Business Administration. SBA loans are
offered by state and nationally chartered banks and credit
unions, as well as by a handful of licensed, non-bank SBA
lenders. Since they are available to small businesses in
amounts up to $5 million per borrower, they are a great
way to finance real estate for your small business.
The participating lender provides loan funds from their
own assets. In the case of depository institutions, they are
lending out their depositors’ money. In the case of licensed,
non-bank SBA lenders, they are lending out investors’
money. Both types of lenders can offer more leeway
on their credit decisions for small business borrowers
requesting SBA loans, due to the partial government
guaranty which reduces the lending risk for their
depositors and investors. For the small business borrower,
this usually means lower down payments, longer
repayment terms, and easier qualifying criteria than they
will receive from conventional bank financing.
What is an SBA loan?

SBA loans are available for small businesses to finance any
legitimate business expenditure.
Here is a complete listing of how SBA loan proceeds may
be used by a small business:
. Purchase real estate in which at least 51% of the square
footage is occupied by the small business
. Construct a new building in which at least 60% of the
square footage is occupied by the small business
. Renovate and/or expand an owner-user small business
property
. Purchase a business
. Start up a new business
. Purchase business equipment
. Buy out a partner or shareholder
. Consolidate debts
. Provide working capital for expansion of the business.
In a December 2013 study from Biz2Credit, credit unions
were shown to approve small business loan applications at
a rate of 43.90%. The same study showed that “big banks”
approval rate for SBA loan applications fell just short
of 18%.
(http://www.biz2credit.com/small-business-lending-index/december-2013.html)
DECEMBER 2013
SBA Loan Application Approval
43.90%
18%
BIG
BANKS
CREDIT
UNIONS
What can a small business loan be used for?

H
ere are some of the reasons a small business
might benefit from paying the SBA guaranty
fee and obtaining financing through the
government-backed small business loan program:
SBA financing provides a long
term repayment program.
Most real estate loans are repaid over 25-30 years, and
non-real estate loans are repaid over 10 years. For small
business real estate debt, conventional bank financing
typically offers a 10-20 year repayment amortization;
however, a balloon feature requires refinancing in 1, 3, or 5
years, along with additional closing costs and origination
fees. SBA loans, therefore, do not have renewal risk like
most conventional bank loans.
A small business owner may have a hard time predicting
his likelihood of approval for a loan renewal, or the
economy might be affecting his business performance at
that time, and he does not know if the bank management
will be the same or look at his loan in the same way at
the time of renewal. Long term financing can be a strong
positive benefit of SBA financing to eliminate renewal risk
and to keep payments as low as possible due to the longer
repayment amortization.
SBA financing requires lower down
payments, and it preserves cash for
working capital in the business.
Working capital financing can sometimes be the most
expensive form of bank financing. If a small business
can preserve working capital for operations, by putting a
lower down payment on their new building, this can be a
significant borrowing cost saving, or it might merely make
working capital available that would otherwise be difficult
to qualify to borrow.
In a time of economic uncertainty,
or in situations of uncertainty
such as business startup, small
businesses have problems
qualifying for conventional bank
financing.
The partial SBA government guaranty on a small business
loan request is often just the right amount of incentive to
cause a lender to approve a loan request that they could
not otherwise get comfortable with.
In the final analysis, small businesses are providing the
fuel for economic stimulus, and SBA loans are providing
financing terms which could not otherwise be offered
through conventional means. A cost/benefit analysis will
often make the SBA guaranty fee look like a small price
to pay for accommodating the small business’ need for
funding a project which will enhance the small business
return more than the cost associated with it.
Why should you use an SBA loan to finance your
small business?
A 2012 study from the National Small Business
Association said that nearly half of small business
owners said they needed funds at one point in the
last four years, but were unable to find any willing
sources.
(http://www.huffingtonpost.com/2012/07/11/small-businesses-small-banks-lenders-
loans_n_1665253.html)
1
2
3

Fact or Fiction?
Common Beliefs about
SBA Loans
The process of receiving an SBA
loan takes a long time and requires
a lot of paperwork.
FICTION
Do you know what a lender requires to process a
conventional (non SBA) loan request? If so, the information
is virtually the same for an SBA loan request, so it generally
does not take any longer to process the loan application.
A business loan request generally
requires more time and paperwork
than a consumer loan request.
FACT
Relatively speaking, SBA loan processing times should not
be more burdensome than any other type of commercial
loan request, because the information required for
underwriting is essentially the same.
All SBA loans are processed
by the U.S. Small Business
Administration.
FICTION
Today, the SBA direct loan program is limited primarily to
disaster relief. Most SBA loans for small businesses are now
processed by banks, credit unions, and licensed non-bank
lenders through an indirect loan program called the SBA
7(a) loan program. SBA 7(a) loan proceeds are available in
any amount up to $5 million for any eligible small business
and for any legitimate business purpose. Instead of going
directly to the U.S. Small Business Administration to
borrow government funds, the small business now goes to
a participating lender who will loan their own funds using
SBA forms and guidelines.
The participating lender will receive a partial government
guaranty for the loan, and this allows the lender to
approve terms with lower down payment requirements,
longer repayment terms, and more relaxed underwriting
guidelines than a non-guaranteed or conventional loan.
If the lender has been qualified by the SBA under the
Preferred Lender Program (PLP), that lender now has the
authority to approve loans on behalf of the SBA. Loan
requests, which may have languished for six months under
the old direct SBA government loan programs, can now be
approved in as little time as two weeks.
1
2
3
Did you know?
Members Choice Credit Union is
proud to be a Preferred Lender for the
U.S. Small Business Administration.
Over the last year, we’ve been ranked
7th in Houston and 21st in SBA
Region VI!
“
“

Types of
Small Business Loans
The United States Small Business Administration offers a number of loan programs to accommodate the needs of
a variety of different types of small businesses. Each type of loan offers unique advantages and has its own list of
application requirements. Here, you can gain an introductory understanding about two of the most common SBA loans,
the 7(a) and the 504. Equipped with a basic, working knowledge of each loan, you will want to meet with a
PLP (Preferred) SBA lender to decide which loan is best for your small business.

The 7(a) loan program from the United States Small
Business Administration is the most common type of SBA
loan, and provides financial assistance for small businesses
with special requirements. Commonly referred to as a
“general purpose small business loan”, SBA 7(a) loans may
be used for any legitimate small business expenditure,
including but not limited to the following activities:
. Business real estate purchase
. Business real estate new construction, remodeling,
or expansion
. Business acquisition
. Partner buyout
. Business equipment acquisition
. Refinancing and debt consolidation
. Business expansion and working capital
What is a 504 loan for small businesses?
Commonly referred to as a CDC, or Certified Development Company, loan, the 504 loan program is for small businesses
that are looking to acquire financing for major fixed assets, such as real estate or equipment. Unlike the general purpose
7(a) loan, the 504 loan has specific requirements about what it can and cannot be used for. Approved uses of an SBA 504
loan, as taken from the U.S. Small Business Administration, include:
. The purchase of land, including existing buildings
. The purchase of improvements, including grading, street
improvements, utilities, parking lots and landscaping
. The construction of new facilities or modernizing,
renovating or converting existing facilities
While the 504 loan has many uses within the realm of small
business real estate, it cannot be used for:
. Working capital or inventory
. Consolidating, repaying or refinancing debt
. Speculation or investment in rental real estate
What is an SBA 7(a) loan?

What Are the Main Differences Between SBA 504
Loans and SBA 7(a) Loans?
SBA 504 LOAN
(Commercial Real Estate &
Equipment only)
SBA 7(a) LOAN
(General Purpose)
Loan Size $125,000 to over $13,000,000 $50,000 to $5,000,000
Interest Rate
Fixed rate on SBA 504 second lien debenture which
is fully amortized through the term of the loan. Interest
rates on 504 loans are set monthly at the time of funding
at an increment above the current market rate for
five-year and ten-year U.S. treasury issues. Typically, a
variable interest rate is negotiated with bank on first lien
bank loan which is 50% of the total project cost.
Typically, a variable rate adjusted quarterly
Fully amortized through the term of the loan. Interest rates are negotiated
between the borrower and the lender subject to SBA maximum of Prime plus
2.75%. No pre-payment penalty (ppp) on real estate loans.
Prepayment Penalties
Prepayment penalty on SBA debenture is
10%,9%,8%,7%,6%,5%,4%,3%,2%,1% for first 10 years
respectively. Prepayment penalty on bank portion of
financing is negotiable.
Prepayment penalty is 5%,3%,1% for the first three years respectively.
Eligible Business Size
The SBA has established standards for small business
size, but there are exceptions for certain industries.
Check with your SBA lender for your business’ SBA
loan eligibility. In general, privately-owned, for-profit
businesses are usually eligible, while public and middle
market companies are too large.
The SBA has established standards for small business size, but there are
exceptions for certain industries. Check with your SBA lender for your business’
SBA loan eligibility. In general, privately-owned, for-profit businesses are usually
eligible, while public and middle market companies are too large.
Terms Available and
Amortization Periods
SBA second lien debenture
20 years fully amortized – real estate loan
10 years fully amortized –
equipment loan
Fixed interest rate
No balloon payments
First lien bank loan negotiable
25 years fully amortized – real estate loan
10 years fully amortized – non real estate loan
Variable interest rate
No balloon payments
Loan Structure
(minimum down payment requirement)
50% bank loan
40% CDC first lien debenture - second lien
10% borrower down payment
90% bank loan
10% borrower down
Loan Purpose
Purchase existing building
Land acquisition and ground up construction (includes
soft cost development fees)
Expansion of existing building
Finance building improvements
Purchase equipment
Will not provide interim construction financing
Expand, acquire or start a business
Purchase or construct real estate
Refinance existing business debt, including interim construction financing
Buy equipment
Provide working capital
Construct leasehold improvements
Purchase inventory
Partner buyout
Loan Program
Requirements
51% owner occupancy required for
existing building
new construction
Equipment with a minimum 10 year economic life
existing building
new construction
All assets financed must be used to the direct benefit of the business
Collateral
Generally, the project assets being financed are used
as collateral
Personal guaranties of the principal owners of 20% or
more ownership are required
Collateral is the subject assets acquired by loan proceeds
May require pledge of personal assets if equity available
Personal guaranties of the principal owners of 20% or more ownership are
required
Loan Fees
Fees are financed in the 504 loan
Fees are negotiated for the 50% bank loan
accompanying the 504 loan
The bank does not charge a fee. Instead, the bank collects and remits to SBA a
loan guaranty fee. The fee may be financed in the transaction.
SBA-504 and SBA-7a Comparison

Applying for a
Small Business Loan
Despite their government image, most SBA loans for small businesses are now processed by banks, credit unions, and
licensed non-bank lenders through an indirect loan program called the SBA 7(a) loan program. SBA 7(a) loan proceeds are
available in any amount up to $5 million for any eligible small business and for any legitimate business purpose. Instead
of going directly to the U.S. Small Business Administration to borrow government funds, the small business now goes to a
participating lender who will loan their own funds using SBA forms and guidelines.

W
hile many small business owners understand
the basic requirements of the loan application
process, including meeting eligibility
requirements and creating a solid business plan, they often
fail to consider other factors that can influence whether or
not they get approved for the small business loan.
Management
Experience
The SBA loan application process is one of the most
consistent models for approving and declining small
business applications, but SBA lenders are constantly
challenged to make their credit approval processes most
effective. Statistics produced by the U.S. Small Business
Administration have proven that a primary reason for
a business failure, and a loan default, is inadequate
management experience. For that reason, it is of prime
importance for the participating SBA lender to document
the SBA loan file with evidence of business management
expertise.
Industry Expertise
The ideal applicant is a business owner who has already
produced consistent profits in the business applying for
the loan, or previously in a related industry. The least
qualified applicant is a person who has never owned
or managed a business before, or has no experience in
the small businesses’ designated industry. For all the
applicants who demonstrate a range of experience between
these two extremes, it is incumbent upon the lender to
document their investigation of the applicant’s educational
background and practical experience to successfully
manage the business borrowing the SBA loan funds. The
body of proof may include one or more of the following
ingredients which sway the loan decision in a positive
manner:
What to Consider When Applying for
SBA Financing
1

If the primary owner/manager of the company does not
have a track record of successful business management
experience, a personal guarantor may be added to the loan,
because his or her credentials display characteristics which
are conducive to an effective advisory role in the business.
The loan application should focus upon the strengths of
the primary owner/manager for the borrowing entity
which are relevant to the successful management of the
borrowing entity.
The borrower should provide a business plan and financial
projections which are so thoroughly researched and
documented that the lender is swayed toward a positive
assessment of their management abilities.
A new business owner may structure a short term
management contract with the seller to assure a smooth
ownership transition.
The borrower may affiliate with a franchise to strengthen
the management model for the business. In some cases,
a proven franchise system prefers less experienced
franchisees, because they are more trainable for the
franchise management model. SBA lenders research
the successes of a franchisor, and they may accept less
experienced borrowers for franchise businesses if the
franchise has proven itself.
Business Cash Flow
The business’ income is recognized as the primary source
of repayment for a small business loan. The historical track
record of the business’ income is the best indicator of its
profitability and success in the future. A small business
lender typically uses the business’ last three years income
tax returns, plus current interim financial statements,
to evaluate the amount of cash flow available to make
loan payments. The available cash flow in each period is
compared to the proposed loan payment requirements
to compute debt coverage ratios. Small business lenders
generally like to see debt coverage ratios of 1.2X or better.
A debt coverage ratio of 1.2X indicates the business has
available cash flow which is 120% of its operating expenses
and loan payments. That 20% cushion gives the lender
comfort that the small business has adequately planned for
unanticipated business expenditures.
Credit History
Lenders love statistics. The best indications of how a
borrower will meet his loan obligations in the future are
the statistics reflected on a credit investigation that shows
how other creditors have been paid by the borrower in
the past. Small business lenders evaluate the repayment
records of the individuals who own the business, as well
as for the business itself. Credit reports are available from
credit reporting agencies, as well as from direct contact
with previous creditors. The more debts which reflect
satisfactory payments in accordance with the loan terms,
the more comfort the small business lender will derive
from them.
Collateral
We have established the fact that a lender is not an owner,
and the lender should only assume a level of risk which is
appropriate for the limited income they will receive from
lending money. It should be evident, therefore, that the
lender will look for other ways to decrease their lending
risk when approving loan terms. Besides evaluating risk
based upon management experience, “skin in the game”,
cash flow repayment ability and credit history, the business
lender will also look at collateral offered for the loan.
Collateral is represented by assets which can be sold to
recover losses if loan payments can no longer be made by
the small business borrower. Typically a lender will use the
assets being financed as collateral. Other business assets
and personal assets can be added to the collateral package
to decrease the lender’s risk and to enhance a borrower’s
chances for loan approval.
2
3
4

Business Owner’s Investment
E
very loan transaction will have a level of investment, on the part of the business owners, with which the lender
finds comfort. Predicting the success of a business, and the resulting satisfactory repayment of a small business
loan, is not an exact science. Every small business lender has its own individual appetite for the types and sizes
of loans it wants to fund. By the same token, each lender will find comfort in granting the loan based upon the level of
investment made by the borrower. The following are examples of the types of investment that a small business owner
may hold in the business, and that the lender would like to see:
Dollar Investment
The lender will compute a debt-to-equity ratio, and compare it to industry
averages and other financial benchmarks, to determine if the borrower has
adequate “skin in the game.” Part of that investment includes a measure of
the dollars invested in the business by the owner compared to dollars he
has received from loans.
Collateral Investment
Even though the lender will look at the borrower’s dollar investment in
the business as a measure of contributed equity, the lender will also look at
the borrower’s assets offered as collateral for the loan. He may also accept
other assets outside the business, pledged as additional collateral, in lieu of
more cash contribution.
...Seller Investment
Not all small business lenders will accept seller investment to help a
buyer of small business assets to qualify for financing. The Small Business
Administration rules, however, allow the SBA lender to accept seller
standby financing for a portion of the buyer’s qualifying equity. There is a
catch. The seller debt needs to “act like” equity. That means the seller will
sign an SBA Standby Agreement agreeing to delay requiring payments
until the SBA loan is satisfied first. It also means the SBA lender will have
first lien rights on the business assets sold by the selling note holder who is
permitted to file a second lien on these assets. The standby creditor earns
and accrues interest on his loan, but he receives no cash payment until the
SBA loan is paid off first.
5

At a Glance:
Here are a few of the common ratios that the SBA uses to
evaluate a business’ loan application:
Debt to worth
Working capital
The rate at which income is received
The rate at which debt is paid
The rate at which the service or product moves
from the business to the customer

Small Business Loans for
Commercial Real Estate
The United States Small Business Administration
offers a number of loan programs to accommodate
the needs of a variety of different types of small
businesses. Each type of loan offers unique
advantages and has its own list of application
requirements. Here, you can gain an introductory
understanding about two of the most common
SBA loans, the 7(a) and the 504. Equipped with a
basic, working knowledge of each loan, you will
want to meet with a certified SBA lender to decide
which loan is best for your small business.

An eligible small business “real estate” loan request
includes financing for the following types of projects:
. Purchase real estate to be used and occupied by the
small business, as long as the business occupies at least
51% of the square footage under roof.
. Funds to remodel or expand an existing small business
facility, as long as the business occupies at least 60% of
the proposed square footage under roof.
. Funds to buy land and construct a new small business
facility. The small business must occupy at least 60% of
the proposed square footage under roof.
SBA loans are really attractive for small business real estate
financing for many reasons, some of which include:
. Real estate is eligible for a 25 year permanent mortgage
with SBA financing. Banks are typically short-term
lenders for small business real estate. Short term
loans, that require refinancing on a periodic basis, will
expose the small business to renewal risk. The small
business will face potential problems each time they
reach renewal time. Will the small business qualify for
refinancing at renewal time? Who will own and who
will be controlling management of the bank at that
time? Will their credit criteria have changed? What will
be the state of the economy and the small business?
What types of real estate projects can I finance
with a small business loan?
Why should I use a small business loan for
real estate?

SBA real estate loans can sometimes be structured and
qualified with only 10% down. The typical down
payment for conventional bank real estate financing is
25%-30%.
. Since an SBA real estate loan is a small business loan,
the SBA does not limit the use of loan proceeds to real
estate. If the business needs funds for new equipment,
for moving costs, or for other business expansion needs,
those funds can be included in the SBA real estate loan.
As long as over half of the loan proceeds are designated
for real estate, the eligible SBA loan term is 25 years. If
less than half the loan proceeds are designated for real
estate, the eligible loan term is 10 years.
. SBA lenders can provide interim construction financing
as part of the same loan as the permanent financing.
Enough time (usually 9 months) is allocated for the
construction, and the small business has no payment
requirements during construction. SBA lenders
understand that small businesses are usually still
paying rent or building up a new business during the
construction period, and they do not want to strain
the business cash flow with payments required before
the building is completed. Interest that accrues during
construction is treated as part of the construction costs,
which are funded by the lender.
In summary, SBA “real estate” loans are actually “long-
term small business” loans available for any legitimate
business spending category. They provide lower down
payments, longer repayment terms, and easier qualifying
criteria than conventional bank financing. SBA loans
allow small businesses to take advantage of growth
opportunities in earlier stages of business development
than a conventional bank lender can, due to the partial
government backing on the loan. The multiple eligible
uses of loan proceeds, along with the more liberal
underwriting criteria, make the SBA loan program a most
versatile financing option for small businesses with growth
opportunities.

A
s with many small business decisions, the choice to move from a leasing agreement into a contract for property
ownership is one that should be carefully considered. Each small business owner has his or her own unique
situation and circumstances when it comes to the business, all of which should be factored into the ultimate
decision. Here are some of the pros and cons of small business ownership that should be considered:
Additionally, the small business owner should seriously consider contacting and hiring a qualified commercial real
estate expert to protect the interest of the buyer (or lessee). These benefits may include full coverage of the commercial
real estate opportunities in the small business’ market, a needs analysis, identifying opportunities and scheduling tours,
protection from common real estate buying errors, managing the transaction among all parties involved, and savings
of time and effort through their professional expertise. The prudent business owner should consult with his accountant
and his attorney to help weigh the benefits and drawbacks of owning the small business real estate before making any
decisions. To reach a decision, the business owner needs a good understanding of real estate value versus business value,
as well as a formula for comparing the financial and legal aspects of leasing to those of owning a business property.
Small Business Real Estate Ownership vs. Leasing
Pros:
. An owner can accumulate equity with long-term
real estate ownership through paying down the
mortgage and experiencing market appreciation in
the value.
. A landlord cannot dictate rent increases or uses of
the property. The property owner can lock in a
fixed overhead cost for his or her facility.
. Excess space may be used to produce incremental
income from rent.
. There may be significant income tax savings from
depreciation.
. Financing options are more numerous for real
estate than for other capital assets.
. The business owner can establish a separate real
estate holding company to own the real estate
asset.
. When the business is closed or sold for retirement,
the real estate asset will retain important,
appreciated value and rental income potential in a
separate holding company.
Cons:
. Being tied to a facility with limited space and a
specific location may not be the best strategy for a
rapidly growing company.
. A down payment is required to finance a building
purchase. A business that is still in its early stages
of development, may not want to sacrifice cash
which can be used for growing the business.
. A property owner must be ready to take on
responsibilities for maintenance, security,
remodeling, and other property management
issues.
. For an owner who is growing his business in order
to sell it, cash used to buy a building may not be
its best use. Since businesses are bought and sold
based on cash flow, the value created by the cash
flow may far exceed the likely appreciation of the
real estate during that time frame.
. Personal guarantees are required for most small
business property mortgages.

For small business owners, it’s one thing to buy a building; however, it is an entirely different challenge to construct a
new one. The business decision to construct a building brings with it many additional variables which translate into
more potential risks.
To Build or To Buy?
SBA Loans for
Commercial Construction

The Process
T
he typical scenario in financing small business
construction involves obtaining one loan for interim
financing and another loan for the permanent
financing. The small business owner must find a lender
with an appetite for, and expertise in, construction lending.
Even in the best economic environment, this task is not
always easy.
With the SBA 7(a) loan program, we are able to
accommodate both the interim construction and the
permanent financing of a small business property with
only one loan and a one-time closing. We are able to
structure loan terms such that the small business has no
payment obligations until the construction is completed
and the building is occupied. The interest that accrues,
while we advance funds to the contractor, is treated as part
of the construction costs which we fund with the loan. We
use a third-party, professional, construction management
company (CMC) to qualify the contractor’s credentials, to
monitor the job, and to control our loan disbursements.
The CMC establishes a draw schedule which the contractor
adheres to when requesting funding, and the CMC inspects
the job for percentage completion in accordance with the
draw schedule and construction contract before advancing
loan funds to the contractor. Ten percent of each draw
is retained by Members Choice Credit Union (MCCU),
F
or small business owners, it’s one thing to buy a building; however, it is an entirely different challenge to construct
a new one. The business decision to construct a building brings with it many additional variables which translate
into more potential risks.
What kind of structure should I build, and who is best qualified to design it? Will construction costs remain stable
throughout the project? How do I select a reliable contractor? How do I navigate the permitting process? Will the weather
cooperate with my time line? These are just a few of the dilemmas which can be experienced by the business owner
who needs to focus on his business rather than managing a construction project. On the flip side of the coin, a newly
constructed building will have exactly what the business owner needs to accommodate a growing business, since it is a
custom design.

until the construction is completed to the small business
borrower’s satisfaction, all subcontractor bills are paid,
and the Certificate of Occupancy is issued. The borrower
is well-protected by this process, and “what’s good for the
borrower is also good for the lender!”
As an added benefit, SBA construction loans exhibit the
same characteristics as all other SBA loans. SBA loans have
lower down payment requirements, longer repayment
terms, and they are easier to qualify for than with
conventional bank loans.
Purchasing Commercial
Real Estate with an
SBA Loan
For many business owners, small business loans provide
an excellent alternative to conventional bank financing
when purchasing a business or small business real
estate. However, due to the relatively complex nature
of commercial real estate transactions, small business
owners can become overwhelmed or unsure of the best
way to utilize their SBA loan. Here are a few of the special
circumstances a small business owner may find his or
herself in:
Seller Second Lien
Financing
If a small business finds itself marginally qualified for SBA
financing, a small amount of seller second lien financing
can make the transaction happen. In general, seller second
lien financing is used to supplement the buyer’s qualifying
equity in cases where the buyer is providing at least a ten
percent down payment.
Many business lenders do not allow second liens behind
their primary loan, but most SBA lenders do allow it. The

most common form of second lien financing is from a seller
who wants to help the buyer qualify for primary financing
where a business is being acquired, or business real estate
is being purchased. Small business borrowers usually
want to preserve cash for business operations, and they are
reluctant to part with down payments sufficient to satisfy
equity requirements of their business lender. In these cases,
if the seller agrees to subordinate their second lien to the
SBA lender, and if the seller agrees not to take payments
until the terms of the loan satisfied, the Small Business
Administration allows that second lien financing to be
treated as part of the buyer’s qualifying equity.
Why would a seller of a business, or a seller of business
real estate, agree to carry some second lien financing on a
standby basis? In many instances, the seller is anxious to
sell the business or business real estate as soon as possible.
Since the seller is receiving a large amount of cash from the
buyer’s down payment, plus the buyer’s loan proceeds,
they may be willing to carry a small amount of second lien
financing. This action allows the seller to delay some of
their income tax liability and provide them with a better
than market interest-earning asset. If the seller believes the
buyer will continue to be successful with their business,
they know they will be repaid on the seller financing when
the primary loan is satisfied. For a business acquisition
scenario, the buyer and the lender like to see seller second
lien financing, because the seller still has some “skin in the
game” to make sure the ownership transition is smooth
and successful. Also, the seller often enjoys offering seller
second lien financing, so they don’t have to negotiate
further with price reductions.

W
hile many US real estate markets have
seen losses in commercial real estate, office
condominiums have emerged with the
potential for continued growth. This innovative use of
traditional condominium property has many advantages
over leased office space. Houston area community,
The Offices at Spring Cypress, is a new business park
development comprised of 12 buildings, housing 96 condos
and 2 business centers. Small to medium sized businesses
in Northwest Houston can benefit from a central location
and a flexible space that they own.
The concept of using a condominium as an office is similar
to residential condominium use. Instead of renting a suite
of offices, a company purchases an individual unit in an
office or retail building. Common areas are co-owned
by all tenants and a board oversees landscaping and
maintenance. Office condos are uniquely positioned to
meet the needs of small- and medium-sized businesses
such as medical and dental practices, lawyers, engineers,
accountants, architects, real estate and mortgage brokers,
general contractors, boutique investment firms, and many
other small businesses.
Perhaps the greatest advantage of purchasing office space
in the form of a commercial condominium is the safety of a
long-term mortgage -especially at current low rates-versus
the uncertainties of the commercial rental market; rental
properties are under the control of a landlord, and monthly
rent can be raised or the lease terminated with short notice.
Ownership of office space helps small business owners to
avoid these surprises.
Non-Conventional Small Business Space

W
ere you a small business owner who felt the
pinch in your business a few years back? Did
you own your small business real estate with
equity you used to borrow against to help you through
the crunch times? Perhaps your lender felt the need to
lend you the funds to keep afloat, because of their existing
investment in your business with other loans. Perhaps they
felt that being out on the limb with you meant staying the
course as long as you could provide collateral with equity
for borrowing the additional funds. You invested in the
ownership of your small business property, so you could
build equity for your retirement. You never thought you
would have to tap that equity to save your business, but
2009 and 2010 happened, and your business came to a
standstill with the economic times. You bit the bullet, and
you borrowed against that equity to save and grow your
company during times when you needed more working
capital in the company. Your lender was not exactly
accommodating with a good rate or long repayment terms,
but the cash was what you needed to keep your small
business alive.
The imaginative story above represents just one situation
where a small business owner found himself with onerous
monthly payments on his small business property. The
story could have been one where the factors were all very
positive for the growth and enhancement of the company,
yet the company accepted a short term repayment
program, or a higher interest rate, because it was the easiest
capital to access quickly. When the business recognized the
benefits it can experience from lower payments and longer
repayment terms, SBA financing became attractive. SBA
financing may also appear attractive to the small business
owner whose short-term real estate loan comes due on a
balloon balance with their bank. Banks by nature are short
term lenders, and they typically style their repayment
terms to include a balloon balance owing after the loan
matures in three years or five years. To the small business
borrower, the balloon feature represents loan renewal risk.
The small business owner does not know who will own the
bank, who will be in charge of management of the bank,
the state of the economy, or the interim condition of the
business at the time the balloon balance comes due and
ready for renewal. They don’t know for sure whether the
bank will renew the loan.
Refinancing Small Business Real Estate with an
SBA Loan

W
ith SBA loans, if over half of the loan proceeds
were originally used to purchase or renovate
real estate, the SBA loan is eligible for a
25 year repayment term. The SBA real estate loan is a
permanent mortgage with no balloon balances or loan
renewal risk. In addition to financing or refinancing small
business real estate costs, the 25 year SBA real estate loan
can also provide funds for working capital, new business
equipment, renovations, or business expansion. An SBA
loan can be a very versatile small business real estate loan!
The primary mandate for an SBA lender contemplating
refinancing of small business real estate loans is that SBA
requires the lender to provide a lower interest rate and/
or longer repayment terms such that the small business
borrower can lower their payments by at least 10%. The
savings in the loan payment is considered a method for
freeing up working capital to grow the business, and that
causes the SBA loan request to be eligible in accordance
with refinancing guidelines.
For whatever reason the small business owner wants to
stretch out their loan terms and lower their payments, the
SBA loan program can be a good option. In general, SBA
loans offer small businesses with lower down payments,
longer repayment terms, and easier qualifying criteria than
conventional bank loans. A small business borrower that
maintains healthy deposit balances and has a long track
record with their banker may not need SBA financing, but
it is still a great option for many. Unfortunately, in a time
where more big banks are taking over the small community
banks, accommodations for small business financing
becomes more and more challenging. It is much easier for
the big banks to accommodate middle market and public
companies. The SBA loan program continues to be a lifeline
for many small businesses.
SBA Loans: Refinancing the Right Way

Plan for Success:
How to Create a Business Plan that
Adds Strength to Your SBA Loan Application
B
enjamin Franklin said, “If you fail to
plan, you’re planning to fail.” He knew
what he was talking about. He had two
failed businesses, yet today he’s known only
for his many successes. Like Franklin, careful
planning and thorough preparation are what
will ultimately set your business apart. The
first step in preparing for success is creating
a strong business plan- this is especially
important if you hope to fund your business
with an SBA loan. Many small businesses fail
due to lack of planning and cash flow issues,
and the U.S. Small Business Administration
needs to know that your business has an
actionable plan for managing funds and
achieving consistent growth.

Make Your Case
Your business plan should make a clear case for the
potential of your business, showing market need, how
you intend to meet that need (including details on product
pricing and profit margin), and how SBA funds will help
you meet this need to generate revenue.
Creating Financial
Statements and Cash
Flow Projections
The most important aspect of your business plan will be
your financial statements and your cash flow projections.
Not only will you need to show that money will be coming
in, but the SBA wants to see that your projected cash flow
will be enough to comfortably cover your loan payments
and operating expenses with enough left over to reinvest
in the company for continued growth. To give the bank
this information, you will need to have accurate and timely
financial statements. These statements should go back three
years, and should support your projections and claims.
Demonstrating stable revenue growth will give strength to
your application.
Backing Up Your Plan
with Data
Once you’ve demonstrated that you can afford to repay
the loan, you need to show a clear plan for the funds. How
will your loan proceeds be used to establish and grow
your business? Loan proceeds can be used for anything
from purchasing equipment, investing in your premises,
or providing cash flow through the slow season. Whatever
your intentions are, let them know that every dollar has a
defined purpose in the growth and development of your
business.

Glossary of SBA Terms
Accounts payable - Unpaid bills. Accounts that are owed to suppliers (trade creditors) as distinguished from accrued
interest, rent, salaries, taxes, and other such accounts. Accounts payable are shown under current (short-term) liabilities
in the balance sheet. Lenders and investors examine the relationship of these accounts to the firm’s purchases in order to
judge the soundness of its day to day financial management.
Accounts receivable - Sales made but not paid-for by the customers (trade debtors). Accounts receivable are shown as
current (short-term) assets in a balance sheet and are, in fact, unsecured promises by customers to pay in the future.
These sums are a key factor in determining a firm’s liquidity. Accounts receivable may be discounted and sold to a factor;
or, they may be used to obtain a short term bank loan. A provision is usually made in the accounts of a firm to offset
uncollectible accounts receivable (bad debts) as losses.
Acquisition - Taking possession of an asset by purchase. SBA financing provides long term business acquisition
financing, small business real estate acquisition financing, and other small business asset financing.
Amortization - Gradual repayment of a loan in equal (or nearly equal) installments which include portions of interest and
principal amounts.
Architect - Qualified professional who designs and supervises the construction of buildings or other structures.
Architectural drawing - Rendering of an architectural design as plan and/or elevation views of a building or structure.
Assumptions for financial projections - The set of assumptions that a firm will make about the upcoming business
environment. A firm will often make assumptions about what the market or business environment will be like during a
certain time, in order to predict how this will affect their business plan including financial projections. Assumptions form
the basis of reasonable financial projections by a business owner.
Balance sheet – A financial statement which shows the firm’s assets, liabilities, and net worth on a stated date.
Income statement - (also called profit & loss account) a financial statement which shows how the net income of the firm is
arrived at over a stated period of time.
Balloon feature – When a loan balance becomes due and payable before regular payments retire the loan in full. Banks
typically institute balloon features in order to reevaluate their willingness to refinance the balloon balance coming due
based upon their investment appetite, the economic environment, and the health of the borrower. Refinancing a balloon
balance also allows the lender to reset the interest rate to current market rates.
Bank - An establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an

intermediary in financial transactions, and provide other financial services to its customers. In the United States, banks
are privately or publicly owned, for-profit businesses.
Build-to-suit purchase – A real estate purchase contract whereby the buyer contracts with the seller to buy land with a
building to be designed and constructed according to the buyer’s specifications. SBA loans allow build-to-suit financing
with construction-to-perm financing.
Business condominium - Single, individually-owned commercial unit in a multi-unit building. The condominium owner
holds sole title to the unit, but owns land and common property (elevators, halls, roof, stairs, etc.) jointly with other unit
owners, and shares the upkeep expenses on the common-property with them. Unit owner pays property taxes only on his
or her unit, and may mortgage, rent, or sell it just like any other personal property.
Business expansion - The growth of a business’ product and service offerings.
Business plan - Set of documents prepared by a firm’s management to summarize its operational and financial objectives
for the near future (usually one to three years) and to show how they will be achieved. It serves as a blueprint to guide
the firm’s policies and strategies, and is continually modified as conditions change and new opportunities and/or threats
emerge. When prepared for external audience (lenders, prospective investors) it details the past, present, and forecasted
performance of the firm. And usually also contains pro-forma balance sheet, income statement, and cash flow statement,
to illustrate how the financing being sought will affect the firm’s financial position.
Capital - Money invested in a business to generate income.
Cash flow statement – a financial statement which shows the inflows and outflows of cash caused by the firm’s activities
during a stated period of time.
Certificate of occupancy - Authorization issued by a government agency, that a newly completed (or substantially
completed) building meets the required health and safety standards and therefore can be inhabited.
Closing - 1. Accounting: Transfer of account balances from subsidiary ledgers (containing nominal or temporary accounts)
to income summary account at the end of an accounting period. Also called closing the accounts or closing the books.2.
Mortgage lending: Date on which the mortgage deed and loan documents are signed and delivered, and the proceeds of
the loan are advanced to the borrower.3. Real estate: Date on which the title to a property is conveyed to its buyer and the
sales proceed funds are transferred to its seller.4. Selling: Final stage in a selling presentation where a salesperson asks for
a buyer’s order or commitment to buy.
Closing costs - All costs and fees paid by a borrower in an SBA loan transaction. Fees may include an SBA loan packaging
fee, filing fees, legal fees for document preparation, appraisal fees, environmental site assessment fees, and other costs
related to the loan transaction.
Collateral - Specific asset (such as land or building) pledged as a secondary (and subordinate) security by a borrower

or guarantor. The principal security is usually the borrower’s personal guaranty, or the cash flow of a business. Except
for highly creditworthy customers (who can get loans against only their signatures) lenders always demand collateral if
the primary security is not considered to be reliable or sufficient enough to recover the loan in case of a default. A lien
is created when the collateral is registered in the public records office, giving the registered lender priority over other
lenders on the same asset or property. Lenders have the legal right to seize and sell collateral if the borrower cannot pay
back the loan as agreed. Sometimes the asset being financed (such as accounts receivable, inventory, machinery) is itself
used as a collateral; in home mortgages the property being bought serves as a collateral.
Commercial real estate – Land and buildings which are owned for commercial use, rather than for residential occupancy.
Residential properties can be classified as commercial real estate if they are owned by landlords rather than the occupants.
Compensation Package - Sum of direct benefits (such as salary, allowances, bonus, commission) and indirect benefits
(such as insurance, pension plans, vacations) that an employee receives from an employer. Small businesses have
compensation packages for their owners, and SBA lenders will want to know the monthly burden, or cost, of this
compensation package when evaluating the business cash flow available to make SBA loan payments.
Construction - Clearing, dredging, excavating, and grading of land and other activity associated with building small
business facilities.
Construction contract - Formal agreement for construction, alteration, or repair of buildings or structures.
Construction management - Organizing, scheduling, mobilizing, and directing equipment, material, and personnel in
performance of a construction contract.
Construction-to-perm loans – Loans which include interim construction financing and permanent financing in the
same transaction with only one loan closing and one set of loan closing costs. SBA construction loans also include the
permanent financing. The SBA borrower generally has no payment requirements until the construction is completed.
Contractor - Also called construction firm. Independent entity that agrees to furnish certain number or quantity of goods,
material, equipment, personnel, and/or services that meet or exceed stated requirements or specifications, at a mutually
agreed upon price and within a specified timeframe to another independent entity called contractee, principal, or project
owner.
Cost benefit analysis - Process of quantifying costs and benefits of a decision, program, or project (over a certain
period), and those of its alternatives (within the same period), in order to have a single scale of comparison for unbiased
evaluation.
Credit investigation – Reviewing personal credit reports from Credit Reporting Agencies, reviewing Dunn & Bradstreet
reports for businesses, and conducting direct inquiries with loan applicants’ creditors.
Credit reporting agencies - Companies responsible for assigning independent ratings indicating the credit-worthiness

of the loan applicants. Credit reporting agency ratings are used to assess credit risk and to determine interest rates for
debt products. There are 3 major credit reporting agencies that create personal credit reports: Experian, TransUnion, and
Equifax.
Credit risk - Probability of loss from a debtor’s default. In banking, credit risk is a major factor in determination of interest
rate on a loan: the longer the term of loan, usually the higher the interest rate. Also called credit exposure.
Credit Union - Financial cooperative created for and by its members who are its depositors, borrowers, and shareholders.
Operated on non-profit basis, credit unions offer many banking services, such as consumer and commercial loans
(usually at lower than market interest rates), time deposits (usually at higher than market interest rates), credit cards, and
guaranties. Credit unions are normally taxed at rates lower than those applied to commercial banks and other financial
institutions. Their members often have a common-bond, such as employment in the same firm or domicile in the same
community.
Debt coverage ratio - Proposed annual payment requirements on all the business debt are divided by the annual cash flow
available for debt service. Ideally, historical and projected annual debt coverage ratios should exceed 1.2 times. The .2
excess is the cash flow cushion the lender likes the borrower to have.
Debt consolidation - Replacement of several smaller loans with one large loan. Usually, the new loan has longer payback
period, and its monthly installment amount is smaller than the total of the monthly installment amounts of the older
(replaced) loans.
Debt service – All historical monthly, quarterly or annual loan payments added together.
Design - Realization of a concept or idea into a configuration, drawing, model, mold, pattern, plan or specification
(on which the actual or commercial production of an item is based) and which helps achieve the item’s designated
objective(s).
Developer - Person or a firm that improves raw land with labor and capital, and arranges for utilities and essential
services, in order to sell subdivided parcels of land or to build structures for rent and/or sale.
Dividend - A share of the after-tax profit of a company, distributed to its shareholders according to the number and class
of shares held by them.
Document - Something tangible that records communication or facts with the help of marks, words, or symbols.
A document serves to establish one or several facts, and can be relied upon as a proof thereof. Generally speaking,
documents function as evidence of intentions, whereas records function as evidence of activities.
Down payment - down payment is the difference between the purchase price of a property and the mortgage loan
amount.

Draw schedule - A construction draw schedule is a financial tool used by contractors in identifying percentage of
completion points in the project for the bank to advance proceeds to the contractor. The construction draw schedule is
instrumental in keeping the project moving along. Without good points in the schedule to draw funds, the contractor can
run out of funding and the project could grind to a halt. It is essential to negotiate with the buyer and the bank for proper
release points in the construction draw schedule.
Economy - An entire network of producers, distributors, and consumers of goods and services in a local, regional, or
national community.
Eligible passive company – Or EPC. A nonoperating company is not eligible for SBA financing, unless it owns the real
estate or equipment being used by an operating company that is eligible for SBA financing. In that case, it is referred to as
the EPC and co-borrower for the SBA loan along with the operating company.
Entity - A person, partnership, organization, or business that has a legal and separately identifiable existence.
Equipment - Tangible property (other than land or buildings) that is used in the operations of a business. Examples of
equipment include devices, machines, tools, and vehicles.
Equity – (1) Funds contributed by the owners (stockholders) plus retained earnings or minus the accumulated losses. (2)
Net worth of a person or company computed by subtracting total liabilities from the total assets. (Also known as “skin in
the game”.)
Feasibility study - An analysis and evaluation of a proposed project to determine if it (1) is technically feasible, (2) is
feasible within the estimated cost, and (3) will be profitable. Feasibility studies are almost always conducted where large
sums are at stake. The study generally includes market competition research and industry statistics which allow the small
business borrower to model their plan for success.
Financial leverage - The use of borrowed money to increase production volume, and thus sales and earnings. It is
measured as the ratio of total debt to total assets. The greater the amount of debt, the greater the financial leverage.
Financial projections - A forecast of future revenues and expenses for a business, organization, or country. A financial
projection will typically take into account both internal information such as historical income and cost data, and estimates
of the development of external market factors, providing estimated figures in addition to projections of the general
financial condition of the company in the future.
Financial risk - is divided into the following categories: Basic risk, Capital risk, Country risk, Default risk, Delivery risk,
Economic risk, Exchange rate risk, Interest rate risk, Liquidity risk, Operations risk, Payment system risk, Political risk,
Refinancing risk, Reinvestment risk, Settlement risk, Sovereign risk, and Underwriting risk.
Financial statement - Summary report that shows how a firm has used the funds entrusted to it by its stockholders
(shareholders) and lenders, and what is its current financial position.

First lien – or first security interest. Primary claim on a property that takes precedence over all subsequent claims.
Franchise - (1) A privilege granted to make or market a good or service under a patented process or trademarked name.
(2) A business operating under such privilege.
Homestead - Texas homestead law exempts qualifying real property from forced sale by general creditors. In Texas, every
family and every single adult person is entitled to a homestead exempt from seizure for claims of creditors, except for
encumbrances properly fixed on homestead property. A small business borrower’s primary residence may not be used as
additional collateral for an SBA loan in Texas; however, it may be used in other states.
Indirect loan program – The SBA 7(a) government-guaranteed loan program is an indirect loan program. Participating
lenders receive a partial government guarantee (usually 75% or 85% of future losses from loan default) for loans they
originate under SBA guidelines. The bank, credit union, or non-bank lender loans their own funds under more liberal
terms than they would on a conventional basis due to the reduced loss exposure from the government guaranty. The
government guaranty on the loan also makes it possible for these lenders to sell the government-guaranteed portions of
their loans in a healthy secondary market.
Infrastructure - Relatively permanent and foundational capital investment of a project that underlies and makes possible
all its economic activity. It includes administrative, telecommunications, transportation, utilities, and waste removal and
processing facilities. Real estate developers create infrastructure on land which enables construction of new residences or
commercial buildings.
Interest - A fee paid for the use of another party’s money. To the borrower it is the cost of renting money, to the lender the
income from lending it.
Interest rate - The annualized cost of credit computed as the percentage ratio of interest to the principal. Each lender
can determine its own interest rate on loans but, in practice, local rates are about the same from bank to bank. In
general, interest rates rise in times of inflation, greater demand for credit, tight money supply, or due to higher reserve
requirements for banks. A rise in interest rates for any reason tends to dampen business activity (because credit becomes
more expensive).
Interest rate risk – The risk assumed by the borrower for a variable rate loan, or for a loan with a balloon feature.
Increases in interest rates will cause increases in the borrower’s payments.
Interim construction financing – Generally short term financing for the purpose of completing construction of a building.
Interim financial statement - A document highlighting a company’s financial status during the year, instead of annually.
Interim interest – Interest payable, which accrues for future payment liability by the borrower to the lender, on an interim
construction loan.

Inventory - The value of materials and goods held by an organization (1) to support production (raw materials,
subassemblies, work in process), (2) for support activities (repair, maintenance, consumables), or (3) for sale or customer
service (merchandise, finished goods, spare parts).
Investment - Money committed to a business or property acquired for future income.
Investment real estate – Land and buildings owned primarily for the purpose of rental income and resale. Investment
real estate is not eligible for SBA financing.
Landlord - A person or company who rents property to another person or company.
Legal liability - Obligations under law arising from civil actions (torts) or under contract.
Liquidation value - Price an asset will fetch at an auction (forced sale). Banks and other lenders value the asset offered as
collateral at its forced sale price and not on the price the asset will command when sold in the normal course of trading.
Also called fire sale value.
Management - The activities associated with running a company, such as controlling, leading, monitoring, organizing,
and planning. SBA loans require personal guarantees from management personnel and define them as people who own
20% or more of the company, or who are critical to the success of the business operations.
Management contract - Agreement between investors or owners of a project, and a management company hired for
coordinating and overseeing a contract. It spells out the conditions and duration of the agreement, and the method of
computing management fees.
Market - A place where forces of demand and supply operate, and where buyers and sellers interact (directly or through
intermediaries) to trade goods, services, or contracts or instruments, for money or barter. Markets include mechanisms
or means for (1) determining price of the traded item, (2) communicating the price information, (3) facilitating deals
and transactions, and (4) effecting distribution. The market for a particular item is made up of existing and potential
customers who need it and have the ability and willingness to pay for it.
Market research - Scientific discovery methods applied to marketing decision making. It generally comprises of (1) Market
research: identification of a specific market and measurement of its size and other characteristics. (2) Product research:
identification of a need or want and the characteristic of the good or service that will satisfy it. (3) Consumer research:
identification of the preferences, motivations, and buying behavior of the targeted customer. Information for marketing
research is collected from direct observation of the consumers (such as in retail stores), mail surveys, telephone or face-
to-face interviews, and from published sources (such as demographic data). The main objective is to find a real need and
fulfill it in a most cost effective and timely manner.
Mortgage - an agreement by which somebody borrows money from a money-lending organization and gives that
organization the right to take possession of property given as security if the loan is not repaid.

Non-bank lender - These institutions are not banks, but either extend loans, securitize bank loans or otherwise play roles
in the extension of credit, long-term or short-term. In the U.S., they are licensed in their state of domicile to conduct
lending in accordance with that state’s laws.
Nonoperating company – A company not involved in the operations of a business, but instead is meant to generate
additional income or shield legal liability.
Operating company - The company that is the actual manufacturer of a product or service.
Origination fee - Charge imposed by a lender on a borrower to cover costs associated with handling of a mortgage loan
application. These costs include those of credit check and title search and, in some instances, are equated with interest and
may be tax deductible. SBA lenders do not charge an origination fee. They collect the SBA guaranty fee along with fees
payable directly to third party providers for credit check, title search, appraisals, etc.
Owner-user real estate – Land and buildings which are primarily owner-occupied by a small business are eligible for
SBA financing. Must be at least 51% owner-occupied for financing the purchase of existing buildings with SBA financing.
Must be at least 60% owner-occupied for financing new construction with SBA financing.
Partner - Individual who joins with other individuals (partners) in an arrangement (partnership) where gains and losses,
risks and rewards, are shared among the partners.
Payment history – Or payment track record. A record of monthly payment status on individual’s or company’s credit
report listed since the time the accounts were established. A payment history is an indication for lenders and creditors
whether an individual or company is a lending risk due to a history of late or missed payments.
Participating SBA lender – A bank, credit union, or licensed nonbank SBA lender is authorized to originate government-
guaranteed SBA loans via an SBA lending agreement. An experienced participating SBA lender can earn Preferred
Lender (PLP) status which enables them to approve SBA loans on behalf of SBA without a second approval process from
the SBA.
Permanent financing – Long term financing with a term related to the life of the asset or project being financed. SBA loans
provide a twenty-five year repayment term for small business real estate and ten years for small business equipment and
working capital.
Personal assets - Items of value and cash belonging to the business owner(s), for example, cars, real estate, and jewelry.
Personally owned real estate may be pledged as additional collateral for SBA loans.
Personal guarantee - Agreement that makes one liable for one’s own or a third party’s debts or obligations. A personal
guarantee signifies that the lender (obligee) can lay claim to the guarantor’s assets in case of the borrower (obligor)
default. It is equivalent of a signed blank check without a date. The obligee is generally not required to seek repayment
first from the obligor’s assets before going after guarantor’s assets. The lender’s actions are usually based on whose assets

are easier to take control of and sell. Once signed, a personal guarantee can only be cancelled by the obligee. SBA loans
require personal guaranties from each owner of 20% or more of the company.
Plans and specifications - All the drawings pertaining to a development under consideration, including the building, and
mechanical and electrical drawings. Includes written instructions to the builder for materials, workmanship, style, colors,
and finishes.
Proforma debt service - All projected monthly, quarterly or annual loan payments added together.
Raw land – Land which has not been improved with commercial or residential buildings or facilities. Raw land is only
eligible for SBA financing if the loan proceeds include construction funds, or if the raw land is used commercially for
parking or storage by a small business.
Real estate - Land and anything fixed, immovable, or permanently attached to it such as appurtenances, buildings, fences,
fixtures, improvements, roads, shrubs and trees (but not growing crops), sewers, structures, utility systems, and walls.
Title to real estate normally includes title to air rights, mineral rights, and surface rights which can be bought, leased, sold,
or transferred together or separately. Also called real property or realty.
Record - 1. Document that memorializes and provides objective evidence of activities performed, events occurred, results
achieved, or statements made. Records are created/received by an organization in routine transaction of its business or
in pursuance of its legal obligations. A record may consist of two or more documents. 2. All documented information,
regardless of its characteristics, media, physical form, and the manner it is recorded or stored. Records include accounts,
agreements, books, drawings, letters, magnetic/optical disks, memos, micrographics, etc. Generally speaking, records
function as evidence of activities, whereas documents function as evidence of intentions.
Refinance - Acquiring a new (usually larger) loan that retires an older (usually smaller) loan over a longer-term, using the
same asset(s) as collateral.
Renewal risk – The risk assumed by the borrower for a loan with a balloon feature. This risk is caused by not knowing
whether the lender will want to renew the loan when the balloon balance comes due.
Repayment ability – Lenders use this phrase to indicate a small business’ capacity to keep its loan agreements. Proposed
annual payment requirements on all the business debt are compared to the annual cash flow available for debt service in
order to assess the adequacy of business cash flow to make all loan payments.
Revenue - The income generated from sale of goods or services, or any other use of capital or assets, associated with the
main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the top item
in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to arrive at net income.
Also called sales.
SBA - The Small Business Administration is a United States government agency that provides support to entrepreneurs

and small businesses. The mission of the Small Business Administration is “to maintain and strengthen the nation’s
economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of
communities after disasters.” The agency’s activities are summarized as the “3 Cs” of capital, contracts and counseling.
SBA 504 loans, SBA 504 debentures – long term financing for small business equipment or real estate with no government
guaranty. These loans are enhanced for lenders by an SBA Certified Development Corporation (CDC) providing
second lien financing for 30%-40% of the project cost. That portion of the financing is provided by an SBA government-
guaranteed debenture. The participating lender has a priority first lien for 50% of the cost of a fixed asset.
SBA eligibility - Conditions an applicant must fulfill to be eligible for SBA financing including citizen or Legal Permanent
Resident status, small business size standard, use of loan proceeds guidelines, etc.
SBA guaranteed loans, SBA 7(a) loans, and SBA government-guaranteed loans – small business loans with partial
government guaranties for the participating lenders. They are available to small businesses in amounts up to $5 million
per borrower for any legitimate business purpose. SBA loans are offered by state and nationally chartered banks and
credit unions, as well as by a handful of licensed, non-bank lenders.
SBA guaranty fee – The fee paid by the borrower to the U.S. Small Business Administration for the government guaranty
offered to the lender as an inducement to grant the loan.
SBA Preferred Lender Program (PLP) – The PLP designation is earned by an SBA lender after having originated sufficient
loan volume to demonstrate their expertise to the U.S. Small Business Administration (SBA). The PLP designation allows
the lender to approve SBA 7(a) government-guaranteed loans in-house without requiring an additional approval from
the SBA. It has greatly expedited the processing of SBA 7(a) loans such that they can be processed just as quickly as the
lender would process a conventional (non-government guaranteed) loan.
Second lien financing - Loan secured by the property owner’s equity (market value of the property less balance on the
first mortgage) in a property that is already mortgaged. Second mortgages are junior (subordinate) to the first mortgage
and, in case of a foreclosure sale, are paid out only after the full satisfaction of the first mortgage. Both mortgages run
concurrently and, typically, the second mortgage has shorter maturity period than the first one.
Second mortgage – or Second lien. Loan secured by the property owner’s equity (market value of the property less
balance of the first lien) in a property that is already mortgaged. Second mortgages are junior (subordinate) to the
first mortgage and, in case of a foreclosure sale, are paid out only after the full satisfaction of the first mortgage. Both
mortgages run concurrently and, typically, the second mortgage has shorter maturity period than the first one.
Seller financing - Sales generation method in which a seller transfers the possession and use of the purchased item to its
buyer, but retains the title until the purchase price (plus interest) is paid off in fixed and regular installments. Sellers of
businesses and sellers of small business real estate will sometimes offer seller financing to enable the buyer to make the
purchase without bank or other institutional financing.

Seller Standby financing – Second lien financing provided by the seller of a small business, or small business real estate,
whereby the seller agrees to “stand by” (not accept payments of principal and/or interest) until the first lien is paid off
or a specific time period has lapsed. SBA lenders will often allow a reduction in the down payment requirement of the
buyer when a seller offers some standby financing.
Shareholder - An individual, group, or organization that owns one or more shares in a company, and in whose name the
share certificate is issued. Also called stockholder.
Small business - SBA has established numerical definitions of small businesses, or “size standards,” for all for-profit
industries. Size standards represent the largest size that a business (including its subsidiaries and affiliates) may be to
remain classified as a small business concern. In determining what constitutes a small business, the definition will vary to
reflect industry differences. These size standards are used to determine eligibility for SBA’s financial assistance and to its
other programs, as well as to Federal government procurement programs designed to help small businesses.
Sources of repayment – consist of (1) business cash flow, (2) outside personal sources of income, and (3) sale of assets
pledged as collateral for the loan.
Special purpose real estate – Land and buildings which are primarily designed for one type of business. Generally more
difficult to finance with traditional lenders, special purpose properties are often financed with SBA loans.
Startup business – a brand new business with no track record of performance.
Tax avoidance – or Tax advantage. Lawful minimization of tax liability through sound financial planning techniques such
as phasing the sale of assets over a period long enough to effect maximum exemption from capital gains tax. Whereas tax
avoidance is legal, tax evasion is not.
Underwrite - Evaluate a lending risk through the detailed analysis of a loan applicant’s credit information (such as ability
to service the loan, credit history, value and quality of the collateral offered) and to match it with appropriate loan terms
and rate of interest.
Wall Street Journal Prime Rate – The average prime rate from a consensus of lenders surveyed by the Wall Street Journal.
Considered an index rate, The WSJ rate is often used as a basis for establishing short-term interest rates for various
products at lenders such as banks, credit unions and mortgage brokers. The maximum interest rate allowed by SBA for
government-guaranteed SBA loans is WSJ Prime + 2.75%, adjustable quarterly.
Working capital - Net liquid assets computed by deducting current liabilities from current assets. The amount of available
working capital is a measure of a firm’s ability to meet its short-term obligations. Sources of working capital are (1) net
income, (2) long-term loans, (3) sale of capital assets, and (4) injection of funds by stockholders. Ample working capital
allows management to take advantage of unexpected opportunities, and to qualify for bank loans and favorable trade
credit terms. In the normal trade cycle of a company, working capital equals working assets. Also called net current
assets.
Supplemental resource for Bruce Hurta’s definitions
http://www.businessdictionary.com/

MCCU Comprehensive Guide to Small Business Lending

MCCU Comprehensive Guide to Small Business Lending

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Destaque

Destaque (20)

Semelhante a MCCU Comprehensive Guide to Small Business Lending

Semelhante a MCCU Comprehensive Guide to Small Business Lending (20)

MCCU Comprehensive Guide to Small Business Lending