Our goal at Benchmark Commercial Lending is to provide access to commercial loans and leasing products for small businesses.
Accounts payable are business debts that must be paid off within a relatively short period of time, as opposed to long term debt such as mortgage loans and equipment loans. Accounts payable are short term or current liabilities (debts) as opposed to mortgage loans and equipment loans that are reported on the balance sheet as long term liabilities.
These are assets on the balance sheet, other than cash, fixed assets (such as real estate, machinery & equipment, inventory) and include such items as accounts receivable, goodwill, and prepaid expenses.
The amount of principal reduction (repayment) on a loan or debt. Amortization payments are generally regular payments (usually monthly), made to reduce the debt along with the interest payments over the term of the loan. The term Amortization is used in connection with the periodic expensing of the cost or value of an intangible asset such as patents, trademarks or copyrights (similar to depreciation of a tangible assets well as prepaid expenses, such as subscription revenue whereby the amount prepaid is periodically included in income over the life of the subscription or prepaid expense.
The Annual Percentage Rate or APR is often referred to as the effective rate of interest since it will include the effects of the compounding of interest (see Compound Interest) and may include the cost of upfront fees. The APR generally reflects the true cost of the loan over its full term.
Asset Based Financing can be either working capital or term loans secured by assets such as accounts receivable, real estate, equipment, inventory etc. Factoring is also a form of asset based financing.
When used in connection with business loans these are the fees generally paid by the borrower to legal counsel representing the borrowing entity and the lender for legal documentation and preparation for the closing of a loan.
A Bridge Loan is generally a short term loan that is used by business borrowers until a longer term loan can be arranged or a scheduled event occurs which provides the funds to repay the loan. Bridge loans may be used to, among other things, acquire real estate, make improvements, put tenants in place, etc. Bridge Loans may also be referred to as Interim Loans and generally carry higher interest rates and fees than Conventional Loans or Permanent Loans (Permanent Mortgage Loan).
A business credit report is a profile of your business that contains critical information such as payment history that lenders examine when evaluating a business loan application. Dun & Bradstreet (D&B) is a well known for issuing business reports.
A commercial loan that generally provides for working capital needs of a business. A working capital line (loan) is generally revolving, which means that the business can draw down on the line up to the authorized amount, repay any amount borrowed and re-draw funds as needed during the time that the “Line” is in place. It may be secured by collateral or unsecured.
The process of determining the economic value of a business or of a medical, dental, legal or similar practice. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, financing, establishing partner ownership and divorce proceedings. Often times, owners will turn to professional business valuation companies for an objective estimate of the business value.
The Cap Rate is utilized in commercial real estate financing and sales transactions. It is the percentage derived by dividing the income generated from the use of the property by the value of the property. It is used to determine debt service coverage for a loan or potential return on investment. It also used for appraisal of properties whereby appraisers will use an assumed “Cap Rate” (according to market conditions) to determine the value of the property when using the “income approach” to valuation. See Commercial Real Estate Appraisal below.
Certificate issued by the designated authority in a State (generally the Secretary of State) to verify that a corporation or other business entity actually exists, has paid all its statutory fees, has met all filing requirements and, therefore, is authorized to transact business in that State. A Good Standing Certificate is generally required for any type of closing to take place, whether acquisition or financing.
An estimate of the “market” value of Commercial Real Estate prepared by a licensed appraiser. Appraisers may be licensed by the State and may also be designated as an MAI appraiser (usually required by banks). When making business loans collateralized by real estate lenders will generally require the appraisal to conform to the Uniform Standards of Professional Appraisal Practice (USPAP), which sets forth guidelines for valuing property. Generally, appraisers use three methods for determining values: the “cost approach,” which refers to the value of the land and the cost to construct the building and improvements, the “sales comparison approach,” which analyzes the sales of similar properties in the area, and the “income approach,” which analyzes the income generated or projected to be generated by the use of the property and applying a capitalization rate to that number. Appraisers will often use and reconcile all 3 approaches to arrive at a value.
A fee charged by the lender for the construction component of a loan. The fee is typically calculated as a percentage of the total construction costs. Points can also be charged by lenders on Permanent Loans as well as by mortgage brokers and loan brokers for services rendered in connection with obtaining a loan.
A business loan, secured by a mortgage, to a borrower that uses all or substantially all of the property securing the loan for the operation of its business. Loan purposes may include the purchase or refinance of a commercial business property (owner-user), construction and improvements.
Inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out (FIFO i.e. first purchased is first sold), or average cost. Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and saleable condition. Costs of goods sold by the business include material, labor, and allocated overhead.
A report containing detailed information on a person’s credit history, including identifying information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower’s permission, to determine his or her creditworthiness.
Often referred to as the FICO score is a numerical rating determined by an analysis of your Credit Reports. The FICO scores range between 300 and 850, with the lower number allegedly representing a greater credit risk.
A liquidity ratio that measures the ability of a business to pay short-term obligations. It is often used by banks when evaluating business loan requests. Formula: Current Ratio = Current Assets ÷ Current Liabilities.
The amount of cash flow available to meet annual principal and interest payments on business loans and investment real estate loans. Formula: Debt Service Coverage Ratio = Net Operating Income ÷ Debt Service
Ratio of the business’s debt to net worth. It is calculated by dividing liabilities by shareholders’ equity or the company’s net worth. The lower this ratio, the greater the size of buffer available to creditors/lenders, the higher the ratio the greater the potential risk.
Default Interest is a higher rate of interest that is charged to a business borrower while their loan is in default (the default rate of interest will be set forth in the loan documents). Late charges are amounts that will be charged if a borrower is late in a payment that is due even though the loan is not in default.
A form of Prepayment Penalty on commercial mortgage loans. Defeasance is technically not a prepayment but is a substitution of collateral. Generally, Treasury bonds are purchased and used as substituted collateral with maturity dates geared to provide the same return to the mortgagee. If treasury returns are low the cost to the borrower can be quite high. If treasury rates are high the borrower could potentially get a discount on prepayment.
In accounting, an expense recorded to deduct a business’s tangible asset’s cost over its useful life. Because depreciation is a non-cash expense, it does not impact cash flow but it does decrease reported earnings.
EBITDA is one of the measures that lenders use to evaluate a business’s creditworthiness and its ability to repay a loan. It is calculated by taking the net earnings of the company (revenues minus expenses) and then adding back interest costs, taxes, depreciation and amortization.
Environmental Site Assessment or Phase I Site Assessment A study of real estate to determine any unique environmental attributes, encompassing everything from endangered species to existing or potential hazardous waste to historical significance. Generally it involves visual inspection, interviews, and checking local records.
Environmental Site Assessment Phase II A Phase II report will normally be performed when a potential environmental condition is indicated after a Phase I report. The Phase II will include sampling and evaluation of suspect materials or areas on the site.
Charges associated with documents that are filed and become public record in connection with a sale (transfer tax, documentary or deed stamps), formation of a company, filing of a mortgage or lien on property.
The accounting rules for financial presentation of a business’s income, expenses, assets and liabilities. The standards are set by the Financial Accounting Standards Board (FASB) a non-profit organization. The rules are modified from time to time.
Good Will is an Intangible Asset on a business’s balance sheet, generally arising from the difference between the purchase price paid for the business minus the net value of its assets (assets minus liabilities).
Gross Profit is calculated by taking the revenue generated by the business and deducting the cost of acquiring and/or producing the goods sold or providing the service performed. It generally does not include costs attributable to indirect labor, taxes, rent, utilities and interest.
This is calculated by dividing the Gross Profit by the revenues. It provides some guidance as to whether the pricing for the products or services are adequate or too low and whether the costs associated are adequate or too high. The margin should be large enough to cover operating and other expenses and provide a reserve for growth.
Generally the obligation of one party to pay or assume the obligation of another if the other does not pay. A guarantee may be an Unlimited Guarantee or it may be a Limited Guarantee. A Limited Guarantee may provide that the person guaranteeing (Guarantor) is only responsible for certain obligations or amounts.
Loan typically issued by a non-Bank lender based on the quick-sale of a piece of commercial real estate, an opportunistic opportunity to acquire property at a bargain price and possibly a distressed financial situation that may not qualify for traditional conventional financing. Hard money loans generally are short term “Bridge Loans” and carry high rates of interest and points.
Intangible Assets are business assets (other than cash or cash equivalents) that have value and generally are not physical assets. Examples of intangible assets are trade secrets, patents, trademarks, and copyrights. Good Will is also an intangible asset.
The raw materials, work-in-process goods and completely finished goods that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess because the turnover of inventory represents one of the primary sources of revenue generation and earnings.
A lien is a Security Interest in property to secure repayment of an obligation. A Mortgage is a lien on real estate to secure repayment of the mortgage loan. A Tax Lien is a lien on real estate to secure payment of real estate taxes, a Mechanic’s Lien is a lien on real estate to secure payment for work done on real estate, and a judgment lien is a lien to secure payment of a judgment. A lien on personal property such as machinery and equipment or accounts receivable is generally perfected by filling of a UCC financing statement and execution of a security agreement.
Loan to Value is an important ratio for lenders. It is the amount of the loan divided by the value of the collateral taken as security for the loan (if there is a lien that will have a priority interest in that collateral, then the amount of that lien is deducted from the value of the collateral when determining the LTV.)
Net Cash Flow is the amount (positive or negative) of the changes in a company’s cash balance over a given period of time (usually measured monthly, quarterly and annually). It can consist of cash generated from operations, investments and financings minus expenses.
A lease which requires the Tenant to pay some or all of the costs associated with the leased premises. A Triple Net Lease (NNN) requires the tenant to pay its share of the real estate taxes, insurance and maintenance with respect to its space. A Double Net Lease (NN) requires the tenant to pay for its share of taxes and insurance and a Single Net Lease requires the tenant to pay its share of the real estate taxes.
Income from property or a business after operating expenses have been deducted, but before deducting income taxes and financing expenses. Operating Income is earnings before interest and taxes (EBIT).
Generally used in connection with real estate loans whereby the borrower is guaranteeing repayment only to the extent of the value of the real estate or other collateral pledged as security for the loan. In other words the lender’s sole recourse in the event of a default is to liquidate the collateral. An Unlimited Guarantee or Recourse Guarantee permits the lender to seek repayment from the guarantors either before or after the collateral is liquidated, (depending upon the terms of the guarantee and the laws of the applicable jurisdiction).
An O & M Plan is generally put into place by businesses with existing or potential environmental concerns such as asbestos, lead contamination, etc. It sets forth the guidelines for identifying, monitoring and dealing with existing or potential environmental problems as well as complying with governmental regulations.
The amount of money that the business owner takes out of the business. When analyzing a small loan request, lenders will often review the owner’s personal living expenses to determine the minimum salary or draw that is required by the business owner(s) to cover personal expenses and this amount, at a minimum will be deducted when determining Debt Service Coverage for the business loan.
A Loan secured by a mortgage on real estate generally with a term of at least 5 years or more. A permanent loan can be self-amortizing which means that the loan will be fully repaid by the required debt service payments during the term of the loan or it could be a balloon loan where there is a balance due at the end of the term of the loan.
These are provisions generally found in commercial mortgage loans which provide extra protection against loss of expected income to the lender if a loan is paid off before its maturity date. A prepayment penalty generally takes the form of a fee or points, measured as a percentage of the remaining loan balance at the time of prepayment, to be paid to the lender (e.g. 1%).
Indicates the ability of the business to quickly generate cash to pay its current liabilities’ inventory is generally not used in the calculation. It is determined by dividing the sum of cash on hand, marketable securities and accounts receivable by the current liabilities.
Residential Appraisal A valuation of Residential Real Estate based upon the professional opinion of an authorized person. In order to be a valid appraisal, the authorized person will have a designation from a regulatory body governing the jurisdiction the appraiser operates within.
Bank or non-Bank loan and subordinated debenture provided by a Certified Development Company (CDC) which is 100% guaranteed by the Small Business Administration (SBA). Provided to start-up and existing small businesses for major fixed assets acquisitions, expansion or modernization.
Bank or non-Bank loan provided for start-up and existing small businesses for a variety of loan uses including real estate, machinery and equipment and working capital. The federal government through the SBA guarantees repayment of a portion of the loan to the lender although the borrower remains fully liable for the whole loan (to the lender and/or the SBA for their respective portions).
To offset the costs of its loan programs, SBA charges lenders a guaranty fee and a servicing fee for each loan approved and disbursed. The amount of the fees is based on the guaranteed portion of the loans. The lender may charge the upfront guaranty fee to the borrower after the lender has paid the fee to SBA and has made the first disbursement of the loan. The lender’s annual service fee to SBA cannot be charged to the borrower. For more on how to calculate the SBA guarantee fee please visit the BoeFly Intelligence Center.
A second mortgage is a mortgage on property that is subordinate to the first mortgage. The holder of the prior mortgage (First Mortgage) has priority over the second mortgage lender with respect to proceeds from liquidation of the collateral property pledged for repayment of the loan.
The term is generally used in connection with construction projects to differentiate between the “hard” construction costs such as materials and labor associated with the physical construction from the other costs such as financing, legal, architectural, engineering, etc.
This can refer to either a commitment by a lender to make a loan if certain circumstances occur or borrowed subordinated financing which by its terms requires no payment on the loan while the primary loan is in place.
Ratio that measures a business’s ability to absorb losses, without reducing its ability to service existing debt. The lower the ratio, the greater the size of buffer available to creditors/lenders. Formula: (Accounts payable + Long-term debt + Other Loans ÷ Total net worth – intangible assets such as copyrights, patents and intellectual property).
Often a lender will require a borrower to put in escrow (generally on a monthly basis) an amount calculated to pay for the real estate taxes and insurance premiums, when due, with respect to the real estate collateral pledged to secure its loan.
A closing cost used to ensure that borrowers pay their property taxes. A tax service fee is typically paid by the business borrower at the time the mortgage is made (the Closing), and it is standard practice for the lender to then pass this sum on to a tax service agency. The role of a tax service agency is to look for delinquent property taxes and alert the lender to prevent tax liens from existing against the borrower’s property. Since tax liens have priority over lender liens, banks want to ensure that they, not the taxing municipality, become the owner of these properties in the event of default.
Code of laws governing various commercial transactions that was designed to bring uniformity in these areas to the laws of the various states. To properly file a lien and take a security interest in personal property owned by the borrower, a lender must file the UCC financing statement with the appropriate governmental authority.
United States Department of Agriculture loan programs are offered to improve, develop or finance businesses and industry and improve the economic and environmental climate in rural communities. There are several programs that provide partial loan guarantees to lenders.
Vacancy Allowance is an amount generally deducted when calculating Net Operating Income to account for actual or estimated vacancy in an investment property. Credit Loss Allowance is an amount generally deducted when calculating Net Operating Income to account for actual or estimated losses due to non-payment of rents or other accounts receivable.
Penalty Another form of Prepayment Penalty on commercial mortgage loans. Yield Maintenance provisions require the borrower prepaying a loan to also pay an amount that would give the lender the same return on the loan as if it were held to maturity. Essentially, the lender will be paid the difference, if any, between the interest rate on the loan and the current market rates the lender would receive if it loaned the money at the time of prepayment. If rates are higher when the loan is prepaid there may be little or no prepayment penalty, conversely the lower the rates at the time of prepayment, the greater the penalty.