Small Business Loan Terminology You Should Know
Business loan terminology can be confusing for small business owners. It consists of a set of words and phrases used in the lending and borrowing of money. Some common terms in a business loan agreement include principal, interest, maturity, and amortization.
Alternative lenders
These are lenders that are not traditional banks or financial institutions and offer alternative lending options like merchant cash advances. They may be online lenders, peer-to-peer lenders, or even family and friends.
Annual Percentage Rate (APR)
The Annual Percentage Rate or APR is the annual rate charged for borrowing, expressed as a percentage of the business loan amount. It includes the interest rate on the loan balance and other associated charges.
Amortization
The process of repaying a business loan in periodic installments. The installment payment includes principal and interest.
Balloon Payment
A balloon payment is a lump sum payment made at the end of the business loan term. This type of payment is typically used when the loan has a shorter term than the amount of time it takes for the business to earn enough money to pay off the loan.
Bank Loans
A bank loan is a loan issued by a traditional bank or financial institution.
Borrower
The person or business borrowing money or taking out a business loan.
Borrower’s Monthly Payment
The periodic loan payment made by the borrower to the lender, usually including interest and principal.
Bridge Loan
Short-term loans used to bridge the gap between the time a business needs money and the time it can access long-term financing. These loans are typically for six months or less.
Business Credit Cards
Business credit cards can be a great way to finance a business, offering benefits like cashback rewards, travel rewards, and 0% APR introductory rates.
Business Line of Credit
A type of loan that provides a set amount of money for a business to use for any purpose. With a business line of credit, funds can be withdrawn up to a limit set by the lender.
Business Loan Term
The amount of time for which a loan is valid. Generally, the loan term is less than the time it takes for a business to earn enough money to pay off the loan.
Business Plan
A document outlining a company’s goals and how it plans to achieve them, including information about products and services, marketing strategy, financial forecast, and management team.
Business Loan Terms & Rates
Specific details of the loan agreement, which typically include the interest rate, repayment period, and any associated charges.
Capital
Funds used by a business to start or grow its operations, which can include cash, equipment, inventory, or real estate.
Cash Flow
The movement of money in and out of a business, used to measure financial health and performance.
Cognovit Note
A note allowing the lender to take legal action against the borrower if they default on the loan, usually used for high-risk borrowers.
Co-borrower
A person or business cosigning a loan with the borrower, equally responsible for repayment.
Collateral
An asset, such as property or equipment, used to secure a loan. If the borrower defaults, the lender can seize and sell the collateral to repay the debt.
Cosigner
Someone who signs a loan with the borrower, typically a friend or family member with good credit helping the borrower get approved.
Credit Bureaus
Organizations collecting and maintaining credit histories, used to create credit reports showing creditworthiness.
Credit History
A record of credit transactions and credit scores, used to create credit reports showing creditworthiness.
Credit Limit
The maximum amount a business can borrow with a credit card, important to avoid damaging credit scores by exceeding it.
Credit Line
A loan providing a set amount of money for a business, similar to a credit card but with a lower interest rate.
Credit Report
A document showing a person’s or business’ credit history, transactions, and score, used to determine creditworthiness.
Credit Score
A number representing creditworthiness, used by lenders to assess loan eligibility.
Debt Consolidation
Combining multiple debts into a single loan with more favorable terms like lower interest rates or manageable payments.
Debt Instruments
Financial tools businesses can use to borrow money, including loans, lines of credit, and credit cards.
Debt-to-Income Ratio
A calculation showing a business’s debt compared to income, used to assess financial health and risk.
Default
Failure to make loan payments according to agreed terms, leading to credit score damage and potential legal action.
Existing Loan
An approved and active loan.
Equipment Financing
A loan providing funds for equipment purchases, typically for large investments like vehicles or machinery.
Equity
A business’ ownership portion funded with the owner’s money, used as loan collateral and subject to seizure if default occurs.
Equity Financing
Raising capital by selling shares to investors, offering ownership stakes with-profit sharing and risk-taking.
Fair Market Value
The agreed price for buyer and seller acting in good faith, used to assess a business or asset’s worth.
FICO
A credit scoring system assessing creditworthiness, used by lenders to approve loans.
Fixed Interest Rate
A loan with a constant interest rate over its term, ensuring consistent monthly payments.
Grace Period
A period allowing loan payments without penalties.
Gross Income
Total revenue before deductions, used to calculate debt obligations and loan payments.
Guarantor
A person or organization promising loan repayment if the borrower defaults, required for high-risk loans or limited credit businesses.
Hard Credit Check
A rigorous credit assessment impacting credit scores, used for loan approval.
Interest Payments
Fees paid to a lender for borrowing money, typically calculated as a percentage of the loan amount.
Invoice Financing
Loan using outstanding invoices as collateral, providing cash flow before customer payments are received.
Lien
A legal claim against assets securing a loan, enabling collateral seizure in default.
Loan Agreement
Outlining loan terms, including interest rates, repayment schedules, and default penalties.
Loan Amount
Total borrowed funds.
Loan Commitment
Formal loan agreement outlining terms and conditions beyond a standard loan agreement.
Loan Covenant
A loan condition requiring borrower fulfillment or restrictions on certain activities.
Loan Documents
Paperwork securing a loan, including the loan agreement, commitment letter, and related documents.
Loan Principal
Borrowed amount determining monthly payments.
Loan Servicing
Administering loan activities from release to payoff, including statements, collections, tax payments, and account management.
Loan to Value
The loan amount compared to collateral value determining lending risk.
Merchant Cash Advance
Quick funding used to pay suppliers, offering alternative financing options.
Monthly Payments
Fees paid to lenders for money borrowed.
Net Income
Profit remaining after expenses, used to measure business profitability.
Non-Recourse Loans
Loans without collateral, protecting borrower assets from seizure in default.
Net Worth
Asset value minus liabilities, determining financial health.
Origination Fee
Lender fee applied at loan inception.
Personal Guarantee
Business owner promise to repay loans, securing financing.
Personal Loan
Individual loan for non-business purposes.
Pre-Payment Penalty
Fee for early loan payoff.
Pre-qualification
Initial credit assessment affecting loan approval chances.
Prime Rate
Offered interest rate for credit-worthy borrowers, used as a loan benchmark.
Principal and Interest
Borrowed amount and fee paid for money borrowed.
Principal Balance
Remaining loan amount for repayment calculation.
Promissory Note
A document securing loans with terms, conditions, and relevant details.
Recourse Loans
Loans secured with collateral, allowing asset seizure in default.
Refinance Transaction
Paying off an existing loan with a new one, potentially for better terms.
Repayment Period
Time given for loan repayment.
Repayment Terms
Loan repayment details including time period and monthly payments.
Revolving Credit
Borrowing up to a limit with repayments over time.
Secured Loan
Loan secured with collateral.
Short-Term Business Loans
Loans to finance short-term business needs.
Small Business Loan
Loans for business purposes with lower interest rates than personal loans.
Soft Credit Check
Non-impacting credit check assessing creditworthiness.
Subprime Loan
High-risk loan with higher interest rates for poor credit or low-income borrowers.
Term Length
Loan duration determining payments and interest amount.
Title Insurance Company
Insures lenders against property title issues.
Underwriting
Lender risk assessment using credit, income, and asset evaluation to approve loans.
Unsecured Loan
Loan without collateral, typically with higher interest rates.
Variable Interest Rate
Interest rate fluctuating during the loan term.
Working Capital Loan
Financing operational business costs like inventory, payroll, and rent.