A business owner often feels the need to avail a business loan. However, when making the decision, it is vital to know a few business loan terminologies to make a well-informed decision. We’ll guide you to these terminologies to help you understand all the business loan requirements.
When you decide to find the best business loan, you’ll come across a number of terminologies or jargons. Sometimes, even the most common loan terms tend to confuse the borrower. Plus, sometimes the terms may seem straightforward in meaning, but in reality, they mean something else.
So, it is crucial to fully understand all the words that the lender uses in conversation. Additionally, it is super important to know these terms before signing the dotted line. Once you’ve covered all the jargon, rest is easy for you to make a smart choice. Let’s now take a look at the common business loan terminology:
Accounts Payable: it is often referred to as current liability as well. Accounts payable is a term that is referred to as the short-term debt of a business that it needs to repay as soon as possible. In a nutshell, accounts payable denotes what a small business owes.
Accounts Receivable: accounts receivable is the opposite of accounts payable. It is referred to the payments which are owed to the business. It can be outstanding invoices.
Amortization: within the vocabulary for business loans, amortization refers to how a loan is paid off. If a loan is amortized, then the business owner will make regular payments until his entire loan is repaid.
APR: Annual Percentage Rate is the precise measurement of how expensive the loan will be. APR includes all the costs associated with availing a business loan, such as interest, processing fee, etc. APR is the actual value/cost of the loan.
Blanket Lien: the term is crucial to know. If a business owner signs blanket lien, he agrees to give the lender the right to seize his business property if he is not able to pay off the loan amount.
Cash Flow Statement: when the business owner prepares a cash flow statement, he notes all the inflows and outflows that the business performs during a pre-determined time. So, if he prepares the statement for the last month, he writes how much income the business generated along with the expenses the business has to pay.
Collateral: if the business owner wants to avail a secured loan, he needs to offer collateral. It is essentially a secured business loan where the borrower hypothecates an asset to back the business loan It can be real estate, equipment, vehicle, financial accounts, etc.
Consolidation: consolidating a loan means paying off multiple loans with a single loan. It saves from the hassle of paying off different loans. So, the business owner can avoid interest cost related to these loans.
Debt Financing: debt financing is another fancy business loan term. It is essentially a loan for business which requires the borrower to repay the principal amount plus interest cost.
DSCR: Debt Service Coverage Ratio is a way to express if a business has enough cash to pay a debt. If DSCR is more than 1, then it indicates that a business has enough cash to pay the debt.
Entity Type: the entity type of a business indicates the category where the business falls legally. The entity type depicts the laws in which a company operates. Every business, whether a sole proprietorship or C-Corps, needs an entity type.
Five C’s of Credit: 5 C’s of credit are the list of criteria upon which a lender decides whether a business qualifies for a loan or not. A lender looks at character, capital, capacity, collateral, and conditions to determine the risk in lending.
Grace Period: a grace period is a pre-determined tenure in which the business owner can repay the payment without incurring any penalty or late fees.
Insolvency: insolvency, in terms of a business loan, refers to a business not being able to repay loans/debts.
Lien: a lien is an act of possessing someone’s property until he repays the loan amount.
Line of Credit: line of credit is a kind of business funding that acts like a credit card. In this, a business owner is extended a line of credit up to which he can spend the credit limit. He’s required to repay only what is borrowed.
Loan Agreement: a loan agreement is a document where the borrower signs on taking a debt. It delineates the terms and conditions of availing a loan.
Long-term: this term is used for business loans which are repaid in more than a year.
LTV Ratio: loan-to-value ratio is considered by the lender when an applicant applies for a loan. For instance, if a business owner looks forward to availing a capital loan, LTV will indicate the worth of the business expansion, which will be covered by the loan amount.
Maturity: a loan account reaches maturity on the day it is fully repaid, i.e., once the principal amount and interest are fully repaid.
Prepayment Penalty: it is crucial to know the prepayment penalty of the loan. When a business owner decides to repay the loan amount before its tenure, he is charged a prepayment penalty. However, several loan lenders in India that don’t levy any prepayment penalty after the successful payment of 6 EMIs.
Principal: the principal is the size of the loan amount. That is if a business avails a business loan of Rs. 4,00,000, his principal would be Rs. 4,00,000.
Profit & Loss Statement: profit & loss statement or P&L is a document that shows the business’s income and expenses over a specific period. Many lenders require P&L to process the loan application.
Proprietorship: Sole proprietorship or proprietorship is a type of business entity which is incorporated by individuals.
Refinancing: when a business owner decides to refinance the loan, it means he is paying off the debt with a new and better loan. It saves a lot of money, which otherwise was to be paid as interest cost.
Secured: when a business loan is called secured, it means it is taken with a lien of an asset. So, if a loan requires collateral or asset, it is called a secured loan.
Short-term: short-term loans are any loans which are repaid in a shorter period. Generally, a loan is repaid within a year. However, some lenders also use the term for loans of up to 2 years. As a rule, short-term loans are easy to avail and processed fast.
Term: many borrowers tend to get confused about this term. However, generally, this terms is used for the amount of time a loan will be repaid. It can be anywhere from 3 months to 25 years.
Underwriting: when a loan lender underwrites an application, he accesses the risk associated with lending money to a particular borrower. The result of the underwriting process is the decision of whether or not a borrower qualifies for a loan.
Unsecured: unsecured in terms of business means there is no need for collateral to back the business loan. This type of loan is riskier for the lender. Therefore, not all banks offer it. A business owner can avail unsecured business loan from an NBFC.
Working Capital: working capital is the amount which is required to finance the day-to-day working of the business. It is essentially the money a business has, minus the debt.
Now that you know all the typical business loan terms, whether terminology or repayment terms, you can search for the best loan for your business.