Important Lending Terms for Business Owners to Know

Important Lending Terms for Business Owners to Know

Whether you have just set up your small business or have been in business for about two decades, it can be overwhelming for you to seek business financing. As one of the effective small business tips, for taking an informed decision regarding the financing of business it is important to have proper grasp of all these important lending terms.

Term loan

Term loans refer to a complete payment that you make for paying back, along with interest, over a fixed time period. Generally, traditional term loans offer lower monthly payments and longer payment terms as compared to short-term loans as well as other types of emergency financing. However, you might find it tough to get a term loan from a regular lender.

SBA loan

Small Business Administration (SBA) loans offer lower costs and longer terms as compared to standard loan terms. The U.S. government offers partial guarantee for the same. These kinds of loans are designed especially to provide the most economical funding to small business owners for business growth. However, such owners need to be prepared for plenty of paperwork and a long-drawn process of approval.

Line of credit

It is another famous loan product that might be offered by lenders. This type of financing offers revolving credit to a borrower, which allows them to borrow and pay the amount back over and over – similar to the credit card process. A credit line, as compared to a loan, offers the capital as required. Borrowers only need to pay the interest on the sum that they withdraw.

Annual percentage rate (APR)

This is basically the annual loan cost. This is quoted in the form of a percentage, similar to the interest rate, but offers a more precise view of the loan cost. Your APR, other than the interest owed, will also comprise of documentation fees, closing fees, origination fees and more. The annual percentage rate offer that you get will differ from one lender or lending organization to another. The rate will also depend on which loan product you want, and what your borrower history is.

Collateral

It means any asset that you pledge to any lender for securing a loan. It might include inventory, accounts receivable, equipment or real estate, anything that could be liquidated by a lender in case of a default. With collateral, the risks can be minimized for the lender in case you fail to honor the bargain. In case you are planning to get a secured loan, you should expect placing collateral while applying. There is no need for collateral in case of unsecured loans, and these generally have credit requirements and higher rates.

Income Statement

It details the net income, expenses and revenue of businesses for a particular period, annually or quarterly. You can find this term at the time of filling a loan application. This is an important component of the loan applying process. It might also be seen as a “profit and loss statement.” Such a statement can be prepared with the assistance of an accountant or even on your own.