You’ve got a business to run. Even though you need funding, trying to secure the capital you need isn’t the only task on your plate. And it doesn’t help that the process can be downright confusing. The lending and financing industry is filled with lingo that can leave you scratching your head and wondering if you’ve entered a foreign country.
But have no fear. We’ve taken the liberty of demystifying some of that jargon to make lending and financing more accessible (and less confusing) for business owners everywhere. Here are some financing and lending terms you should know to secure the best loan for your business’ goals.
Amortization allows borrowers to pay off their debt with fixed repayment schedules. Amortized loans usually spread out payments over a specific timeframe, with the largest portion of each payment going toward interest. By the time the loan reaches maturity, one final payment comprised largely of the principle and a small amount of interest will be required—and with that, the transaction is complete.
Annual Percentage Rate (APR)
Every loan comes at a cost. And the APR is that cost. It’s basically the interest you will pay monthly or yearly on a loan, and includes a number of costs such as closing fees and documentation fees, to name a few. Not all APRs are created equal, so shop around for a low rate and a lender you can trust. If you’ve found both, you’ve got the golden ticket.
Collateral are the assets a lender can take control of if you can’t pay back your loan. Agreeing on collateral minimizes the risk for a lender who is trusting that you’ll be able to fulfill your end of the loan deal. Collateral can be anything from business equipment and tools, property or your company’s inventory or payments not yet received.
Also known as a Profit and Loss statement, the income statement provides lenders with all the details they need to know to grant you a loan. Revenue. Expenses. Net income. All the financial information they need to know to make sure you’ll be good for the money, and won’t pose a major risk to them.
Every loan must be paid back, and typically that payback date is agreed upon before the final loan agreement is reached. When the day comes for the final loan payment (and any associated interest), it’s referred to as maturity. If your loan has been fully amortized, then the end date means the end of your payments too. But if its only partially amortized, or not at all, then there will be a balance left beyond the end date of your loan that you will need to pay back.
The LTV is a ratio of the loan amount to the value of the property, equipment or other asset that a loan will be used for. The LTV ratio helps lenders assess the risk of underwriting a particular loan. The lower the LTV, the less potential risk to the lender of a borrower defaulting on the loan.
A personal guarantee is similar to collateral, except that you’re guaranteeing that you’ll pay the loan at the cost of your personal property. That means if something happens and you can’t pay the loan back, the lender has the right to take control of your personal assets. If you ever consider making a personal guarantee on a loan, make sure to have a lending expert go over the details with you. The fine print can be confusing, and if you aren’t sure what you’re agreeing too, it can really hurt.
SBA loans are offered through the Small Business Administration, and are earmarked specifically for small business owners. The competitive loans are backed by the SBA so if an owner defaults on a loan the lender won’t be left in the cold. SBA loans take the needs of the small business owner into account, and thus are typically more affordable with longer terms and lower interest rates than other loans. There are two types of loans, SBA 7(a) and SBA 504. A lender can help you determine which type is right for you, based on your funding needs.
Learn the terms well, because knowing them can help keep the loan process smooth and headache-free.
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