Loan Types And Lending Terms Every Entrepreneur Must Know

The lexicon of loans that you avail for small business can be overwhelming at times. It is for this reason you should know all about it before you start your research. This will help you to secure the appropriate loan for you in amuch better and simpler way.

It is necessary for all those hunters for business financing to know the unfamiliar and often very confusing jargons of the terms and conditions of lending. Even the most eager and knowledgeable entrepreneur may feel overwhelmed when they review the essential terms of their loan. Therefore, know the following terms and types of loan to make an informed decision about your business financing.

  • Term loan: A term loan is usually a lump sum of cash. This you will need to pay back at the end of the pre-determined tenure or the ‘term’ along with some interest. If you opt for a traditional term loan you will be offered a longer payment terms. Usually these loans have a lower monthly payment as compared to any other short-term loans or any form of emergency financing. To secure a term loan you will however need a high creditworthiness for your business. It means, if your business has poor credit or if it is very young or carries any amount or kind of risk to the lender, you will not qualify for such a loan from a traditional lender.
  • SBA loan: An abbreviation of Small Business Administration loans, these offer even lower costs and longer terms as compared to the traditional term loans. This is because these loans come partially guaranteed by the government. SBA loans are designed especially for the small business owners. These are the most affordable financing options available because it grows with your business growth. However, you will have a competitive and a long approval process along with a lot of paperwork.
  • Line of credit: This is another popular loan product for your business that you can avail. This is a special kind of financing option that will provide you with revolving credit. It means it will allow you to borrow and pay back the borrowed money over and over. It will also help you to staywithin a maximum just like you do with your credit card. This is much unlike traditional loans as a line of credit will offeryou the capital as required. The most significant feature of a line of credit is that you pay interest only on the amount that you withdraw.
  • Annual percentage rate: Commonly called the APR, this is the annual cost of the loan you take out. It is expressed as a percentage just like the rate of interest but it is more accurate. You will know what the loan will cost you each year in terms of principal and interest. Apart from that you will also know about the inclusion of any origination fees, documentation fees, closing fees and much more. However, this APR offer may vary from one lender to another or from one loan product to another. The lender will also consider your credit history as a borrower while calculating the APR. Therefore, check this out with or any other company that you have chosen to take a loan from before you move forward. Often you will find that the total annual cost of your loan will be much higher than you initially anticipated.
  • Income statement: This is the document that will tell everything that your business earns. It must include the net income of your business along with its revenue and all expenses for a given period that may be annually or quarterly. This statement is to be provided along with your loan application and is considered to be one of the most important documents for getting an approval for your loan. Sometimes, the lender may term it as a profit and loss statement, so do not be amazed. Ideally, the income document is required to determine the financial health and prospects of your business. Such statements itself has its own set of jargon and therefore it is better if you are familiar with it. However, if your accountant prepares it then you may skip this part.
  • Collateral: Collateral is the asset that you pledge to give the lender in case you fail to repay the loan. This is an important tool that helps the lender to secure your loan. Collateral can be real estate, inventory, any equipment or even accounts receivable or anything that the lender may use to liquidate if you cannot pay back the loan therefore minimizing the risk to the lender. Unsecured loans do not need any collateral and have less strict credit necessities but will usually carry a highrate of interest.
  • Personal guarantee: you may take out a business loan on your personal guarantee. This is an optional feature of any business loan. In case of failure of repaying the loan back from the income of your business you will have to use your personal income and other sources to fulfill your commitment to the lender. It is slightly different from specific collateral as the lender canseize any of your personal assetswhich are equal to the value of totalamount outstanding. It can be your car, house or even your retirement fund. Collateral is specific and your other assets will be saved. However, you can choose limited personal guarantee to put a cap on the amount that can be collected by the lender. Unlimited personal guarantee will allow a lender to chase you till the time you pay up the loan fully. Always consult with a legal professional before you accept a loan with personal guarantee as the terms can be very vague and confusing.
  • Debtservice coverage: This is a ratioof cash available for debt servicing. This includes principal, interest and lease payments and is obtained by dividing the net operating incomeby the loan and lease payments.

Though this is not an exhaustive list by any means, but it will help you to make the right choice with confidence.


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