Commercial Lending Principles Flashcards
7 cards from real Banking Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Commercial Lending Principles flashcards as text
Which of the following is a key characteristic of an 'asset-based lending' (ABL) structure?
Answer: Loan availability is tied to a borrowing base calculated from eligible receivables and inventory
In asset-based lending, the maximum loan amount fluctuates based on a borrowing base—typically a percentage of eligible accounts receivable and inventory.
A 'balloon payment' in a commercial loan refers to:
Answer: A large lump-sum payment due at the end of the loan term after smaller periodic payments
A balloon payment is a large final payment due at loan maturity, common when the loan amortizes over a longer period than its actual term.
In commercial lending, what is 'covenant lite' (cov-lite) financing?
Answer: Loans with few or no ongoing financial maintenance covenants, giving borrowers more flexibility
Cov-lite loans have minimal or no maintenance covenants, reducing the lender's ongoing monitoring ability and increasing credit risk, particularly common in leveraged buyout financing.
Which financial statement is MOST useful for assessing a commercial borrower's ability to generate cash to service debt?
Answer: Statement of cash flows
The statement of cash flows directly shows cash generated and used across operating, investing, and financing activities, revealing the actual cash available to service debt.
A lender requires a borrower to maintain a minimum tangible net worth of $2 million. This is an example of:
Answer: An affirmative financial covenant setting a minimum threshold
An affirmative (maintenance) financial covenant requires the borrower to maintain specified financial metrics, such as minimum net worth, throughout the loan term.
What is the purpose of a 'cross-default' clause in a commercial loan agreement?
Answer: It triggers a default on one loan if the borrower defaults on any other debt obligation
A cross-default provision declares a loan in default if the borrower defaults on any other material debt, protecting the lender from being junior to other creditors who act first.
In evaluating commercial real estate (CRE) loans, what is the Capitalization Rate (Cap Rate) used for?
Answer: Estimating the property's value by dividing net operating income by the cap rate
The cap rate is used to value income-producing properties: Value = Net Operating Income ÷ Cap Rate, allowing lenders to assess whether the loan is adequately secured.