Business loan terminology you should be accustomed with
When looking for a business loan for the first time, the terminology can be somewhat confusing. To help you along the way, we’ve compiled a list of the most important lending terms that you should be aware of.
It is very important to make sure you fully understand all the terminology the lender uses in the prospecting phase and what is written in your business loan agreement. By making sure you know all the terminology you will be fully aware of what exactly to expect during the collaboration with the lender.
Let’s dig in into the terminology you’ll encounter most frequently:
Working capital is all the money that your business uses in its everyday transactions.
The business’s entity type indicates what category it falls under legally. The entity type you choose and declare will affect the way your business operates within the law. From sole proprietorships to limited liability companies, every business, no matter how big or small, needs an entity type.
Cash Flow Statement
When you prepare a cash flow statement, you take note of all cash inflows and outflows that your business performs during a certain period.
Profit and Loss Statement
A profit and loss statement, or a P&L or income statement, is a document that shows your business’s income and expense over a specific amount of time.
Many businesses will need a P&L to apply for business financing.
A grace period is a pre-determined amount of time following a payment’s due date in which you’ll be able to make do on your payment without incurring late fees.
Debt financing is a loan or any way of financing your business that will require you to repay a principal amount plus interest over time.
This is the contract you’ll have to sign when taking on debt, it’s a contract called a loan agreement. This agreement will delineate the terms of your loan.
Term of the loan
When we say term, we usually refer to the amount of time you must repay the debt your company takes on. In our days the terms of a business loan wary from as quick as few weeks for as long as 25 years.
Lenders use this word to refer to the amount of time you’ll be repaying your loan. Loan terms can range from 3 months to 25 years—depending on your company’s financial needs.
Short-term means any loan that will be paid back in a short amount of time. Usually short-term refers to terms of within a year. However, some short-term lenders still use the term for loans with repayment periods of up to 2 years.
Short-term financing is usually easier to secure, quicker to fund, and is considered more expensive than long-term financing.
When talking about business financing, long-term usually refers to any debt that will be paid back in more than a year.
A loan maturity represents the day when you make your last loan payment. Once you pay off the principal and the interest on a loan, that loan has reached full maturity.
A proprietorship, or a sole proprietorship, is a business entity-type for unincorporated businesses that consist of one individual.
When you refinance your debt, you pay off your debt with a new, better loan. By refinancing debt, you could save your business money in avoided interest.
Within the context of business loan terms, the principal refers to the original size of your loan. If your business borrows €100,000, then your principal is €100,000.
In business loan terminology, unsecured refers to debt that doesn’t have collateral backing it.
Unsecured debt is riskier for the lender and, as a result, often more expensive for the borrower. Unsecured loans can also be harder to qualify for because there isn’t much security in lending to your business. If you can’t pay back your unsecured business loan, the lender doesn’t have an easy means to recoup their losses like they do with security business loans.
If you need to secure a loan, you can do it with collateral. Collateral is something valuable that you or your business owns (like real estate, vehicles, equipment, financial accounts, etc). The term collateral refers to any property that you offer up for a lender to seize if you’re unable to pay off your debt.
When talking about business loan terms, secured refers to debt that is taken on with a lien to any of your assets, also known as collateral. If a loan requires collateral, then that loan is a secured loan.
A personal guarantee is the individual’s legal promise to repay credit issued to a business for which they serve as an executive or partner. Providing a personal guarantee means that the individual is personally responsible if the business becomes unable to repay debt then. The personal guarantee provides an extra level of protection for credit issuers, as they want to make sure they will be repaid.
APR (Annual Percentage Rate)
This is the most precise measurement of how expensive borrowing money will be. APR will consider any additional fees to measure how much a business loan will cost every year.
For example, if you prepare a cash flow statement for last month, you denote how much income your business took along with all the expenses your business had to pay.
EBITDA (Earnings Before Interest, Taxes, Debt, and Amortization)
This is yet another way of indicating your business’s financial health and measures your income without considering accounting decisions.
Fixed Interest Rate
As opposed to a variable interest rate, a fixed interest rate stays the same during the entire life of a loan.
Variable Interest Rate
This rate is an interest rate that will vary depending on market interest rates over the life of a business loan.
The prepayment penalty is a crucial business loan term for you to understand. Lenders with prepayment penalties, also known as prepayment fees, will charge you for paying your loan off early.
Insolvency is a business loan term that refers to the state of a company for being unable to repay debts.
Line of Credit
A line of credit is a business funding option that functions very similarly to a credit card. You’ll have access to a line of credit from which you’ll be able to spend money up to your credit limit. You’ll only have to pay off what you spend.
When a lender checks your application, also known as underwrites your application, they are accessing the risk they would take on by lending to you.
The results of the underwriting process are the decisions of whether your business qualifies for a loan along with the exact terms of your loan if you qualify.
We advise you to look at your business and your finances objectively before agreeing to any business loan agreement. Go through all the possible scenarios each term could affect your business and your personal finances down the line.
With Ferratum Business, you can apply for a business loan online, in just a few minutes and get an answer as early as the same day. Any British business owner with at least 12 months of activity and a business bank account can be eligible for getting working capital with a repayment period of up to 18 months.