You may apply for a business loan in your startup company or established small to mid-sized business. Business owners need loans for many reasons. This includes business renovations, payroll, new products, and more.
Applying to business loans means lots of new terminologies. Know at least the basics when you apply for a loan to show professionalism and understanding.
Are you getting ready to apply for a business loan? You need to know these loan terminologies and definitions.
ACH Payments (Automatic Clearing House): This electronic bank-to-bank payment occurs when a 3rd-party vendor has access to your bank account to withdraw fees with your approval. It is most commonly used when employers deposit payroll into employee’s bank accounts.
Amortization: This is the process of gradually writing off the initial cost of a loan within the statement period.
Annual Percentage Rate (APR): This calculation results in how much credit costs. It considers the timing and amount of capital received, fees paid, and periodic payments made.
Assets: An asset is anything owned by yourself or your company that has value. These are collateral in business loans.
Balloon Payment: A balloon payment is the unpaid amount of a loan due at the end of a loan term.
Bridge Loan: This short-term loan typically covers expenses until more permanent financing is available. Bridge loans have high-interest rates.
Cash Flow: A business’s cash flow statement shows the total amount of money, both physical or virtual, transferred in and out of the business. It is a combination of information from the profit & loss statement and balance sheet.
Debt-to-Income Ratio: To calculate the debt-to-income ratios, divide all monthly debt payments by gross monthly income. This shows lenders your ability to make monthly loan payments.
Gross Profit: Also known as gross income, this amount equals the cost of goods sold minus total revenue.
Interest: This payment differs in amounts each month, but is paid regularly by the borrower to the loaner. Interest payments may be higher at the beginning of the loan, but then lower as time goes on.
Liabilities: These are debts and financial obligations that your business handles.
Line of Credit: Use this fixed amount of capital any time until the term ends. After it is paid off, you may continue to borrow the fixed amount.
Net Income: A business’s net income equals total earnings minus the cost of goods, taxes, and interest.
Origination Fee: This fee comes from a lender for managing your loan.
Principal: The principal is the total amount of money borrowed. This does not include interest payments and fees.
Promissory Note: A promissory note is a document the borrower signs to agree that they will repay all borrowed money by a specific date.
Repayment Period: This is the time given for the borrower to make all payments due on a loan.
Secured Loan: A secured loan requires collateral from the borrower in the event they default on the loan.
Unsecured Loan: An unsecured loan does not need collateral from the borrower in the event they default on the loan.