Small Business Loan Jargon Buster
If you've started looking for a business loan then odds are you've come across a lot of finance terms; some you probably recognise and some maybe not so much.
You have probably already heard a lot of these terms and know what a lot of them mean. But just in case you weren’t sure about a few or wanted some more detailed information about others, we’ve put together a list to bust that finance jargon!
A Credit Score (or credit rating) is an analysis of your credit report all summed up into a single number and is used to assess the ‘creditworthiness’ or borrowing power. For bank lenders in particular, your credit score will be a big factor in getting approved and how much you will be able to borrow.
You will have a separate score for both your business and personal credit files, however similar kinds of things will influence both. This will include things like the number of credit inquiries, late repayments and any outstanding debt.
More on Credit Scores and how to improve yours.
Annualised Percentage Rate (APR)
Annualised Percentage Rate (APR) measures the cost of a loan over a one-year comparable term and is probably the best tool to use to get a thorough loan comparison. APR isn’t exactly the same as Interest Rate, as interest rate is more of a loose term that can be applied annually, monthly, weekly or even daily.
Because APR takes into account any upfront fees, monthly charges, repayment periods and interest rates, its a much more accurate and standardised representation of how much a loan is going to cost per year and a useful tool when comparing loans.
More on how to really compare business loans with APR.
An amortizing loan is one where you pay off the principal over the course of the loan itself. Unlike other loans, where there are interest-only payments and balloon payments, in amortizing loans you pay an equal amount of capital and interest over a fixed amortization schedule that is decided while discussing the terms of the loan.
The most common kinds of amortising loans are auto loans, home loans, most small personal loans and most business loans.
Use our Loan Calculator to see what repayments would look like for an amortising business loan.
In most unsecured lending, particularly smaller business loans, lenders will ask for a Personal Guarantee as part of the loan contract. A personal guarantee basically means that should the business not be able to repay the loan, you (the borrower) will cover the repayments with your personal finances.
A personal guarantee isn’t like security, you don’t have to put up any assets when you sign the guarantee, but rather its away to ensure the loan gets paid in case something happens to the business.
There are also Third Part Guarantees, which are basically the same as personal guarantees but instead, someone else (a person or entity that is not the borrower) agrees to take ownership of the debt should the business fail to repay the loan. This person then becomes the Guarantor.
Early Repayment Penalties
If you do decide to pay off your loan earlier than the decided term, then the bank or lender might charge you an early repayment fee. This could be in the form of a set administration fee or a percentage of the remaining amount. Some lenders though might not have any early repayment fees at all, allowing you to flexibly pay off your loan early in full or incrementally (make larger repayments when you can handle them).
Be careful however, as some lenders may advertise that they have no early repayment fees but will actually charge you for the outstanding interest on the loan amount. In these cases, paying off your loan early might cost the same or even more than if you just let it run out its full term.
When talking about business finance, Security is an asset that holds some type of monetary value with the most common type of security being property. There are two main types of loans associated with security: Secured Loans and Unsecured Loans.
A Secured Loan is a loan that is issued where the borrower is required to put up an asset as collateral for the loan. This asset is known as security and is usually property. The interest rates for secured loans are typically lower as the lender is taking on less risk by lending on terms that require security. The flip side of this is that should you fail to repay the loan with interest, the lender can take action to seize and sell your asset to recover what you owe them.
A lot of business owners aren’t comfortable risking their personal home for their business finance, particularly on smaller loans.
More on Secured v Unsecured Loans.
As opposed to a secured loan, an Unsecured Loan is when you take a loan over a fixed period with no security. While unsecured loans will have slightly higher interest rates than their secured counterparts (because the lender is taking on more risk), they are generally favoured for smaller, short-term loans as the borrower isn’t required to risk their property as collateral.
Many business owners opt for unsecured loans for smaller value loans of up to around $250,000 because it means they won’t have to secure it with personal (or business) property. This is the same for loans with loan periods of under 12 months. Examples of unsecured finance options are credit cards, student loans, most personal loans and small business loans (like Moula’s).
More on Unsecured Business Loans.
A Non-Bank Lender (or alternative lender) are financial lenders that, as the name suggests, are not banks. These lenders are usually smaller than their traditional bank counterparts and don’t offer as many different kinds of products. Moula is an example of a non-bank lender.
Both bank and non-bank lenders have their pros and cons. For loans in particular, banks are usually slightly cheaper due to their size and resources. However, this also means that their application process can be slow and drawn out, they aren’t as flexible with their loan terms and they require a lot of paperwork and documentation. While non-banks are slightly more expensive, they have a much faster application process (we’re talking hours compared to weeks), are much more flexible and can process loans online with less documentation.
More on Bank and Non-Bank Lenders.
Working capital refers to the difference between a business’ current assets and current liabilities. Assets being anything the business can quickly turn into cash within 12 months and liabilities being the costs and expenses within that same 12 months.
A business’ working capital acts as a snapshot of its short-term financial health and is a good indicator as to whether the business has enough assets to cover its short-term operational costs. A healthy working capital ratio generally indicates good business and financial management.
More on Understanding Working Capital.