Ten Small Business Loan Terms You Need to Know

While applying for a loan for your business, you might have come across some financial terminologies. There are many business terms in the financial dictionary, and an understanding of these terms will guide you while making financial deals with lenders. Here are a few of the commonly used small business loan terms that every borrower needs to know.

Ten Small Business Loan Terms

• Annual Percentage Rate (APR)

It is easy to confuse the Annual Percentage Rate with the interest rate of a loan. It shows all the fees applicable for a loan including the interest rate, processing fees, documentation fee, closing fee, etc. If you want to know how much a loan is going to cost you every year, APR is what you should look at. It is an ideal indicator to reveal how expensive the loan can be.

• Collateral

Collateral is a term that you come across while applying for secured loans. These are personal or business assets that the borrower offers to the lender in return for the loan. The lender has the advantage of seizing the collateral if the borrower is unable to pay up the loan. This lowers the risk of extending money to the borrower. Collateral includes business assets such as equipment and machinery, property, vehicles, etc.

• Line of Credit

Otherwise known as the business line of credit, this is a funding option available for businesses. It provides them with the capital that can be used as required until the term of the credit ends. This option acts like a credit card and you only need to pay off the amount that you have used.

• Maturity

The maturity date of a loan is when it attains full maturity by paying off the principal amount, interest, and any other fees associated with it.

• Prepayment Penalty

When you decide on a loan with a lender, you have to agree upon a term for which the loan can be paid up. However, if you choose to pay back your loan ahead of the pre-set loan term, you will have to pay a fee called prepayment penalty. It is usually a percentage of the remaining loan balance. The prepayment clause mentioned in the loan agreement will have additional details about the lender’s prepayment penalty. If you are concerned about this, talk to your lender or look for loans that are offered with no penalty on early closure.

• Cash Flow

The cash flow statement provides insight into the financial health of a business. It shows the cash inflow and outflow for a business during a specific period. It is a good indicator for lenders to observe if the company is making more profit than the funds, they are expending.

• Liabilities

Liabilities of a business include any financial obligations and debts that they have during the course of their operations. It includes mortgages, loans, accounts payable, accrued expenses, deferred revenues, etc. In short, liability refers to any commitment that the business has with another party and is not completed or paid up.

• Secured Loan

A secured loan is a loan that is backed up with an asset or property called collateral. By pledging the collateral, the lender holds the deed or title of the collateral until the loan is completely paid off. If the borrower does not repay the loan, the lender has the leverage of seizing the collateral. As a result, the borrowing limits of secured loans are higher and the interest rates lower.

• Unsecured Loan

Unlike a secured loan, an unsecured loan does not involve collateral for security. The absence of collateral makes it risky for the lender and thus such loans are offered at high interest rates. If the borrower is unable to pay off the loan, the lender is devoid of measures to recover the loss occurred, unlike secured loans.

• Term Loan

A term loan is a specific amount of money given by a lender to a borrower for a predetermined interest rate and repayment tenure. The terms for a loan vary based on the type of loan you are applying for and on the lender. It could be short-term loans that are offered for a few months or long-term loans that are borrowed for several years.

If you are unfamiliar with a specific terminology used in a finance deal, clarify the same with the lender. You can also do a quick search on the internet to get help in decoding the jargons used while you are dealing with business loans and credits.