Important business loan terms every entrepreneur should know

We all want to do it right when it comes to money and business. However, for most of us, understanding the terms used in a loan agreement or other loan-related documents is the most puzzling part, even difficult to understand at times. Hence it is important to know all the business loan terms to avoid any confusion at a later stage. It will not only help you choose the perfect loan partner but also run your business loan tenure smoothly. If you are planning to apply for an  SME business loan here are some common terms you may come across.

1. Amortization:  
It is one of the most common terms you will come across while applying for a business loan. In the world of business loans, ‘amortization’ means the various ways the borrower can pay off a loan. When amortized, the entrepreneur pays off the loan amount in scheduled time, like EMIs. 

2. Accounts Payable and Accounts Receivable:
‘Accounts payable’ is the money you owe to someone, also commonly known as debt. ‘Accounts receivable’ is the amount of money someone owes you; it is the credit you give to someone.

3. 5 Cs of Business loans:

In context of business loans, 5 Cs are the criteria that help an entrepreneur choose the right loan for his business needs.

a. Capacity: Capacity is the borrower’s capability of repaying the principal amount and the interest amount. The lender assesses the borrower’s assets and liabilities or any outstanding debts to decide this amount.

b. Character: Credit Score says a lot about a borrower’s character. A good credit score makes the loan approval process quick and smooth. Paying off your debts on time along with good and efficient business conduct builds your character to be favourable for a business loan. 

c. Collateral: While lending a huge sum of loan, most lenders look at the collateral the borrower is taking a loan against. Collateral could be immovable assets like property or movable assets like car, gold or a stake in shares. However, there are also collateral-free business loans available for SMEs.

d. Capital: A lender studies a borrower’s loan amount requirement and whether the borrower requires that much for his/her business. They also look at the kind of capital and assets owned by the borrower. 

e. Confidence: If the borrower comes across as a not-so-confident entrepreneur who is not aware of his or her business plans, and whose business history is suspicious, it alarms the lender and makes the loan application process difficult. 

4. Bullet and Balloon payments:
‘Bullet payment plan’ is when a borrower pays a part of the interest and loan principal amount together along with his/her scheduled payment, while ‘Balloon payment Plan’ is when the borrower pays off the entire principal amount at the end of the loan tenure.

‘Earnings before Interest, Tax, Depreciation and Amortization’ is a significant ratio that defines a business. These are the net earnings of a company before taxes, depreciation, interest and amortization are deducted. It is a key indicator of a company’s financial position. 

6. Fixed interest rate:
A fixed interest rate is the interest rate of the market at the time of loan procurement and it stays the same throughout the loan tenure and doesn’t change no matter what the market condition is.

7. Floating interest rate: 
Floating interest rate is different from fixed interest rate, and it keeps changing during the tenure of a loan. A floating interest rate can be beneficial to the borrower when the rate of interest falls, and profitable for the lender when the rate of interest rises.

8. Grace period:
Grace period is the extra time given to the borrower to repay his loan when he is late.

9. The line of credit: Line of credit is the limit of a loan amount. Similar to a Credit Card limit, it lets you use money up to a certain amount and pay it back later with interest.

10. Loan agreement:
It is the official document with terms and conditions that the lender and borrower sign before loan disbursal. The details include the rate of interest, tenure, and capital. 

11. Maturity:
It is the time after which the loan expires. When the last payment is done, the loan stands matured.

12. Unsecured loans: 
There are fintech companies that offer unsecured business loans that do not require the borrower to pledge security like property, jewellery, and other valuable assets against a loan.

13. P&L statement:
P&L Statement is the ‘Profit and Loss Statement’ of a company that determines the financial position of a company. It is a document that shows the profits, interests and taxes paid, depreciation and other finance related information.

14. Tenure: It is the time period of a loan. The tenure affects your monthly interest rate and EMIs.

15. Working capital: Working capital is the amount required to carry out everyday business activities like purchasing inventory, paying utility bills or office maintenance.

Understanding these terms will help you make an informed decision while applying for a business loan. You could also keep reading fintech  blogs to understand the business loan lingo better.

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Rayyan Siddiqui 4 Months Ago

Nice Blog

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