Understand Your Commercial Banker Better with These 5 Definitions

Some estimates say there are as many as 3,500 financial services acronyms. Luckily, you don’t need to know them all, but here’s a short list of some of the most common commercial loan terms to help you better speak the same language as your commercial banker:

SBA 504 Loans

Need to really move the needle of your small business by purchasing real estate, equipment, or other fixed assets? An SBA 504 loan can do the trick. This program features 10-25 year terms, low interest rates and a 10-15% down payment. The loan itself is broken down into three parts: 50% bank loan, 40% certified development company loan and 10% down payment, although startups and special use properties must put 15% down.

SBA 7(a) Loans

Maybe you saw the recent news that Guaranty Bank led Southwest Missouri in 7(a) lending for the SBA’s FY 2020 first quarter. So, what’s the difference between this loan and a 504? Put simply, a 7(a) loan can be used for a wide variety of financing needs like acquiring land, purchasing equipment, and working capital. It’s the SBA’s flagship loan program, as well.

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization

A measure of a company’s overall financial performance, EBITDA starts with operating profit – also called earnings before interest and tax (EBIT) – and adds back depreciation and amortization. This can provide a clearer reflection of profitability and allows for comparisons across companies and industry averages.

Common Loan Lengths

Most everyone knows that a 30-year mortgage is the most popular home loan term, but for commercial loans it’s a bit murkier. Here’s a general breakdown of loan lengths:

  • SBA 7(a) Loans: 5-25 years
  • SBA 504 Loans: 10-25 years
  • SBA Microloans: Less than 6 years
  • Traditional Bank Loans: 3-10 years
  • Medium-Term Business Loans: 1-5 years
  • Short-Term Business Loans: 3-18 months
  • Business Lines of Credit: 6 Months-5 years

Term Length Versus Amortization Length

The term length of a loan is just that, the length of time a borrower agrees to pay back a loan from a creditor. In residential lending, the term length and amortization length are typically the same, where the full loan amount is repaid over the life of the loan. But in commercial lending that’s not always the case. A lender could set a loan term for seven years and an amortization period of 30 years, where monthly payments would be made based on the loan being paid off over 30 years followed by one final balloon payment of the entire remaining balance.

Guaranty Bank is a leader in local SBA lending.

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