When considering a loan for your business, it is important to understand key financial concepts and terms. By familiarizing yourself with these terms, you can make more informed decisions to secure funding for your company’s growth. Here are the key terms you should know:

Assets

Assets are valuable objects owned by an organization or borrower. Banks and credit unions can require collateral to qualify for business loan. Assets include equipment, vehicles, and buildings owned by a business. By valuing assets correctly, you will be able to negotiate better terms and offer more collateral.

Cash Flow

Cash flow measures the daily money flows into and out of an enterprise. Positive cash flow is achieved when a company earns more money than it spends. This allows it to pay its debts and handle future financial challenges. Cash flow is different from revenue because it refers to the amount of cash available rather than income. Cash flow is essential for your business’s sustainability and to meet loan repayment schedules.

Closing Costs

Closing costs are fees and charges that some loans include. Ask the lender upfront about closing costs to avoid any unpleasant surprises. Closing costs include origination fees, title insurance, and survey fees. They can also include environmental assessments, tax monitoring, and certification of good status. These costs can add up, so you should factor them into your overall loan expense.

Collateral

Collateral is an asset provided by the borrower to secure a credit. If the borrower defaults, the lender can take the collateral. Collateral can include real estate, equipment, or inventory. Offering collateral can reduce the lender’s risk and result in better loan terms, including lower interest rates or larger loan amounts.

Current Liabilities

Current liabilities are debts or obligations that a business expects to pay within its normal operating cycle, or in the next 12-18 months. This includes salaries, income tax, short-term obligations, and other expenses. Understanding your current liabilities will help you manage your short-term financial health and plan for loan repayment.

Down Payment

The down payment is the initial contribution that the borrower makes to a project. The amount of the down payment can range from 10% to 30%, depending on the type of loan. Higher down payments can often lead to more favorable loan conditions, including lower interest rates and reduced monthly payments.

Interest Rate

The interest rate is a percentage of the amount borrowed. Interest rate for business loan are affected by a number of factors, including the type and industry of the loan as well as market interest rates. To find the best interest rate for your business, it’s crucial to compare rates from different lenders.

Repayment Schedule (Amortization Schedule)

This plan includes the repayment period and the amount of each payment. It helps you to plan your finances and meet your loan obligations with ease.

Personal Guarantee

To secure a business loan, most lenders ask that the owner sign a personal guarantee. In the event that the business is unable to repay the loan, this agreement stipulates that the owner may use his or her personal assets and cash flow to pay the loan. If your business is new or has few assets, a personal guarantee will increase your chances of getting a loan.

Understanding the Loan Agreement

Before signing, you should thoroughly read the terms of the loan agreement. It is important to read the fine print and understand the lender’s policy on late payments, prepayments, or any additional fees. Be sure to read all terms and conditions to avoid potential pitfalls.

Conclusion

Understanding these terms and concepts, as well as the criteria for eligibility for a business loan, is crucial before applying. Being well-informed will help businesses make better decisions and secure funding for operations and growth. With the right preparation and knowledge, a successful loan application can be achieved.