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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

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With 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.

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SBA 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?

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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 shortof 18%.(http://www.biz2credit.com/small-business-lending-index/december-2013.html)

DECEMBER 2013SBA Loan Application Approval

43.90%

18%BIG

BANKSCREDITUNIONS

What can a small business loan be used for?

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Here 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)

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Fact or Fiction? Common Beliefs aboutSBA 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.

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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!

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Types ofSmall 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 aPLP (Preferred) SBA lender to decide which loan is best for your small business.

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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 smallbusiness 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?

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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 quarterlyFully 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 PenaltiesPrepayment 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 debenture20 years fully amortized – real estate loan

10 years fully amortized –equipment loan

Fixed interest rateNo balloon payments

First lien bank loan negotiable

25 years fully amortized – real estate loan10 years fully amortized – non real estate loan

Variable interest rateNo balloon payments

Loan Structure(minimum down payment requirement)

50% bank loan40% CDC first lien debenture - second lien

10% borrower down payment

90% bank loan10% borrower down

Loan Purpose

Purchase existing buildingLand acquisition and ground up construction (includes

soft cost development fees)Expansion of existing building

Finance building improvementsPurchase equipment

Will not provide interim construction financing

Expand, acquire or start a businessPurchase or construct real estate

Refinance existing business debt, including interim construction financing Buy equipment

Provide working capitalConstruct leasehold improvements

Purchase inventoryPartner buyout

Loan ProgramRequirements

51% owner occupancy required forexisting building

60% owner occupancy required fornew construction

Equipment with a minimum 10 year economic life

51% owner occupancy required forexisting building

60% owner occupancy required fornew construction

All assets financed must be used to the direct benefit of the business

CollateralGenerally, the project assets being financed are used

as collateralPersonal guaranties of the principal owners of 20% or

more ownership are required

Collateral is the subject assets acquired by loan proceedsMay require pledge of personal assets if equity available

Personal guaranties of the principal owners of 20% or more ownership are required

Loan FeesFees 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

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Applying for aSmall 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.

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While 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 ExpertiseThe 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 forSBA Financing

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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 FlowThe 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 HistoryLenders 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.

CollateralWe 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.

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Business Owner’s Investment

Every 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.

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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 movesfrom the business to the customer

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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.

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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 forreal estate?

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. 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.

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As 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.

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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 forCommercial Construction

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The Process

The 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),

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.

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.

To Build or To Buy?SBA Loans forCommercial Construction

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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 anSBA 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 FinancingIf 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

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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.

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While 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

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Were 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.

Non-Conventional Small Business Space Refinancing Small Business Real Estate with anSBA Loan

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With 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

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SBA Loans: Refinancing the Right Way Plan for Success:How to Create a Business Plan that

Adds Strength to Your SBA Loan Application

Benjamin 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.

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Make Your CaseYour 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 ProjectionsThe 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 DataOnce 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.

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Glossary of SBA TermsAccounts 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

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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

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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

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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.

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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.

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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.

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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.

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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

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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

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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.

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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 definitionshttp://www.businessdictionary.com/