Being an entrepreneur, it is not an easy job to make every financial decision, especially in this era of a heavily competitive market. In case you have just started your hunt for funding your business, you will possibly find yourself knee-deep in unfamiliar lending terms and financial jargons. Some of the terms while seeking funds can make even most of the eager entrepreneur feel overwhelmed for a while, however, it is important to make a financial decision only when you are able to understand the terms and conditions completely. In other words, you have to make the final and informed decision regarding the financing of your startup only when you are able to carefully review some of the essential terms.
That is why it is important to seek funding from reliable sources such as ‘LibertyLending’ that will help you out in understanding the financial terms. With that being said, here are some of the must-know lending terms that every entrepreneur should know prior to financing their business:
8 Lending Terms That Every Startup Owner Must Know
1. Term Loan
This is one of the most essential loaning terms that every entrepreneur must know prior to seeking funding in the market. Term loans mean that you will be acquiring a lump of cash that you will be paying back along with the rate of interest and over a fixed period of time. Generally speaking, the traditional term loans are decked with longer payment terms while the main highlight of the loan term is lesser monthly payment. Term loans turn out to be the perfect financial tool for startup business owners who are seeking an emergency financing option. Although the nature of term loans seems quite lucrative, it takes a certain degree of creditworthiness in order to secure a term loan for your business. In case your business is exceptionally young in the market or showcases poor credit or any other form of risk to the lender, you might find it difficult to acquire the term loan from a traditional lending source.
2. SBA Loan
Small Business Administration or SBA loans confer even lower costs and longer terms compared to those of the traditional term loans. This is because the SBA loans are partially guaranteed by the federal government. SBA loans are sprucely crafted to proffer small business owners and newbie entrepreneur with the most affordable form of financing possible as they develop their business regime.
3. Line of Credit
The line of credit is yet another popular lending product that you might come across while seeking finance for your business. This form of financing offers a borrower revolving credit where you are provided with the opportunity to seek lending and pay back the money repeatedly while being within a maximum, likewise a credit card. In contrast to a traditional loan, the line of credit provides you with the capital you need and you will be only paying interest on the total withdrawal amount.
4. Annual Percentage Rate
An APR or annual percentage rate is usually the annual cost of the loan that you have acquired. Even though it is addressed as a percentage just like your rate of interest, it proffers a more precise and accurate view of what your loan terms will cost you. Apart from the interest owed, your annual percentage rate will also be infused with any form of closing fees, origination fees, documentation fees and so on. The APR offer that you will be getting will keep varying from lender to lender as it depends on the loan product that you are looking for along with your credit history.
5. Income Statement
Lenders need to know your income statement, which displays information about your business’s net income along with the expenses and revenue for a certain period, for instance, quarterly or annually. You will be coming around a lot with this term especially when filling out your loan application, as it is designed to be one of the most crucial elements of your application. Sometimes, the income statement is also addressed as a “profit and loss statement.” In order to prepare an income statement of your business, you will need the help of an accountant as the document itself comes with its own set of jargons.
Collateral means any asset you promise to a lender in order to obtain the loan. This can include equipment, real estate, inventory, and accounts receivable or anything that will help the lender to liquidate in case of any default. Collateral lowers the risk of your lender while providing you with the loan amount. If you are seeking a secured loan, make sure that you have a collateral ready to put up while filling out the application.
7. Debt-Service Coverage Ratio
Also known as the debt coverage ratio, it describes the ratio of cash a business has available for servicing the loan it has acquired that includes payments on leases, interest, and principal. According to Entrepreneur.com, most lenders in the market want to see a debt-service coverage ratio of 1.25 or above prior to offering you the credit. The DSCR is determined by dividing the cash flow in your business or the net operating income by the loan and lease payments or your debt service payments.
8. Personal Guarantee
This is where you will be asked for a commitment to be personally responsible in terms of any default event. Contrary to collateral, this form of security provides the lender with permission to seize your personal assets in case you are not able to pay back the loan that you have acquired. Some of the personal assets that are most likely to be seized in this kind of security include your retirement fund, property or the vehicles that you own. The personal guarantee is further classified into two categories namely the limited and unlimited ones. Unlimited personal guarantees let the lender pursue you until the entire debt payment has been fulfilled while the limited personal guarantee certifies on how much needs to be collected.
Hopefully, this list you will help you in better understanding the lending terms next time you opt for a loan. Keep these terms in mind and understand the conditions to secure the right loan for your business.