June 16, 2024

What Are the Most Important Small Business Loan Industry Terms and Definitions

Planning to open a small business? Needing a loan for your business? Applying for a business loan and grant can be a daunting task for someone unfamiliar with the industry. Here are a few industry terms for business loans and grants and why you need to learn them before applying for a loan.

  1. Balloon payment – For loans that are not fully amortized at the end of its term, the balloon payment is the unpaid balance on that loan. This is needed to be paid in full to complete the loan payment.
  2. Asset – This is something that is of value that the borrower uses as a collateral for his loan. If the payment cannot be completed on the loan, the lender then uses the borrower’s asset as payment. Assets can be the borrower’s house, car, or other items with high monetary value.
  3. Principal – This is the total amount that the borrower can loan. The loan payments are based on the principal amount with the interest rate and the fees.
  4. Annual Percentage Rate (APR) – The annual rate of the total amount loaned, including all interests and fees. Not to be used to calculate interest, the APR allows for the periodic payments to be made and the fees required for every year of the loan term.
  5. Credit score or credit rating – This number is based on the borrower’s credit history and the lender uses this to determine the ability of the borrower to repay the loan. A low credit score may mean that the borrower is unable to complete loan payments, but this can be improved as long as the borrower can make consistent payment.
  6. Direct lending – A loan that is made between the borrower and the lender without the intervention of a third party. Direct lenders can be investment banks, equity firms, or brokers.
  7. Variable Interest Rate – The interest rate depending on the market value during the term loan. This can vary monthly or annually, depending on payment terms, and can be quite risky if the rates are high, but also profitable when rates are low.
  8. Fixed Interest Rate – The interest rate is determined from the start of the loan and does not change across the lifespan of the loan. Traditionally the safer option because the rates do not depend on market value.
  9. Loan Agreement – The contract that contains all the terms of the loan, from the type of loan to the interest rates, the fees, monthly or annual payments, and the loan period.
  10. Loan Term – The amount of time a borrower has to make the payments. This can be short term, involving only a few weeks or months or under 3 years, or long term and can be from 5 to 10 years or more.
  11. Unsecured Loan – This type of loan has no asset or collateral involved and is based on the borrower’s credit history. If the borrower is of good reputation financially, the lender can grant an unsecured loan because the borrower can pay.

When applying for a business loan and grant, you may come across more confusing words. It is always best to ask if you are unsure and consult with financial advisors who can explain terms as clearly as possible to avoid confusion. Research and studying are the most basic parts of applying for a loan, but probably the most important, so you can understand industry terms and definitions. Please visit here to learn more: https://www.newusagrants.com/small-business-loans