WHAT ARE COMMON BUSINESS LOAN TERMS TO KNOW?
You'll come across a lot of terminology or jargon when looking for a business loan. If you don't understand these terms, you might as well be borrowing trouble. Understanding the terminologies makes it easy to figure out what information banks will require for the application. We'll walk you through these terms so you can grasp all of the requirements for a business loan.
So, whether you want to know how long you'll have to repay your business loan or understand the jargon your potential lender uses, you are welcome to proceed.
17 BUSINESS LOAN TERMS YOU NEED TO KNOW
1. The Annual Percentage Rate
The annual percentage rate (APR) is the overall annual cost of taking out a loan, including total interest and additional fees, presented as a yearly rate. The quantity and timing of capital you receive, fees you pay, and periodic payments you make all factor into the APR. It is not used to calculate interest expenses.
Amortization is the process of repaying a business loan over a specified length of time. When a loan is amortized, the borrower makes regular, scheduled payments of the same amount each time until the principal plus interest is paid off.
3. Balloon Payment
This is the unpaid lump sum due at the end of a loan term. It implies that monthly payments will not be adequate to pay off the debt in full, and a lump sum payment will be required instead. Loans with balloon payments are usually short-term loans with low monthly payments until the end of the term.
4. Cash Flow Statement
A cash flow statement is a record of all your company's cash inflows and outflows over a set period of time. So, if you make a statement for the previous month, you set down how much revenue your company generated in the month, as well as the expenses it had to pay.
Collateral is an asset that you can use to secure a loan by pledging it to a lender. If you don't pay your loan, the lender has the right to confiscate your property. Sounds terrifying, right? It might be worthwhile though since you'll be more likely to qualify for funding and get better business loan terms if you have collateral.
6. Debt Financing
It's basically the procedure of getting a business loan to expand your business. You must repay the principal plus interest over a period of time.
7. Grace Period
This is a period of time after the due date (usually 15 days) during which interest on your debt is not accrued and you are not penalized for late payments. You will be able to pay your bill on time without incurring late fees.
8. Line Of Credit
A business line of credit is a type of business financing that works similarly to a credit card. Over the life of the credit line, it provides a fixed amount of capital that can be used, repaid, and then used again as needed. You will be given a credit line from which you can spend up to your credit limit. You'll only have to pay off the amount you spend.
This is the end of a loan term when the final principal and interest payments are due. A loan account matures on the day it is entirely repaid, when the principal and interest are paid in full.
10. Merchant Cash Advance
A merchant cash advance is a type of short-term business loan based on a company's daily credit card receipts into its merchant account. It is repaid on a daily basis as a proportion of your business' credit card receivables. Merchant cash advances are simple to obtain, but they are sometimes the most expensive borrowing option.
11. Prime Rate
The prime rate for business loans is the interest rate that large commercial banks charge their most creditworthy borrowers (typically large enterprises).
This rate is also the one that influences all other rates. All less creditworthy borrowers will be charged an interest rate calculated as "Prime Rate + X," where x is the interest rate determined by your creditworthiness.
Refinancing occurs when you take out a new business loan with a lower monthly payment and better interest rates or terms to pay off your old one. When done appropriately, refinancing can cut interest rates, lengthen periods, or provide other benefits. Similar to personal debt consolidation, business debt consolidation combines many debts into one.
The Small Business Administration (SBA) is a federal agency that assists small businesses in obtaining finance.
If you are authorized for an SBA loan through an eligible lender, the SBA will guarantee up to 90% of the loan.
14. Secured Loan
Simply, when a business loan is described as secure, it requires collateral or an asset as security.
Underwriting is a step in the vetting process that lenders go through before approving or rejecting a loan. When a loan lender assesses your application, he considers the risk of lending you money. The result of this process decides whether or not you'll get the loan.
16. Unsecured Loan
This is a loan that does not require the borrower to put up specified collateral to secure the loan. Due to the lack of security in lending to your business, unsecured loans can be more difficult and even expensive to qualify for. If you default on an unsecured business loan, the lender will not be able to recoup their losses as easily as they would with a secured business loan.
17. Working Capital
Working capital is all of the capital that your business uses in its day-to-day operations. It's basically the money your business has after subtracting its debt.
There you have it! If you ever hear some other term you're unfamiliar with, do some research. You have the entire world at your fingertips, so don't be afraid to do some research if you're unclear about anything you come across throughout your business loan quest.
Now that you know all the typical business loan terms, you can search for upfront business loans, quick and easy.