What Lending Terms are Important for Me to Understand?
You don’t need to be a financial expert to get the loan your business needs, but you may be more comfortable meeting with your lender if you familiarize yourself with some common lending terms. Among them are:
Term loan: A sum of money you borrow and subsequently repay with interest on a specific schedule. Often used to purchase major equipment or real estate, term loans are typically paid off in one to twenty-five years.
Line of credit: A flexible loan that provides access to a specific amount of money you can draw from and repay again and again as needs arise. Lines of credit are primarily used to finance short-term operating expenses. You only pay interest on the amount you withdraw.
Secured vs. unsecured loan: A secured loan requires you to pledge collateral (i.e., an asset like inventory or equipment) that you forfeit to your lender if you default on the loan. An unsecured loan does not require collateral. Look for a lender that helps determine what is best for your business.
SBA Loan: These loans typically offer lower interest rates and more favorable terms to small businesses that qualify. Guaranteed by the Small Business Administration, SBA loans are offered through some lenders.
Principal: The amount of money being borrowed, excluding interest and fees.
Interest rate vs. Annual Percentage Rate (APR): The interest rate that lenders charge to borrow money does not include any fees associated with the loan. The APR, which is slightly higher than the interest rate, includes certain fees and costs, and reflects the total cost of credit. You can use the APR to compare the cost of loans from different lenders.
Income statement: A report that summarizes a company's revenue and expenses over a given period. Lenders typically ask for an income statement when considering a loan.
Current liabilities: The debt a business owes to creditors. Current liabilities include things like short-term debt, accounts payable, unpaid expenses and other similar debt. Lenders consider your current liabilities during the loan process.
Debt-service coverage ratio: The ratio of cash a business has available to pay its current debt. This ratio helps lenders determine if a business can afford to take on more debt.
The bottom line: If you hear an unfamiliar term not included here, ask your banker or loan officer for clarification. They should be happy to help.
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