As a small business owner, financing your small business is probably a major concern for you. After all, 82% of small businesses fail due to poor cash flow or bad cash management! Having the right type of funding is important for getting your business off the ground. Getting that funding can be a difficult process— you have to understand your way around a bunch of jargon. Furthermore, big banks only authorized 23% of loans as of 2016. You will improve your odds of making the grade for a traditional small business loan if you improve condition on what you are getting yourself into.
Here are 10 terms to get first-class and convenient lending process— you will be better equipped to discover the financing you need for your small business.
- Term Loans
A term loan is the bread-and-butter of small business financing. It is a lump sum amount of cash you borrow from the lender to put into your business that you have to pay off in installments (daily, weekly or monthly). A small business term loan can be used for a various functions, such as buying equipment or using it as working capital. You can get a term loan from all kinds of sources, from banks to online lenders. For instance, the Small Business Administration (SBA) provides business owners a variety of term loans, from disaster loans to commercial real estate loans.
- Business Line of credit
A business line of credit features similar to a credit card. When you are approved for a business line of credit, you are free to draw funds as you need up to a specific limit. You only need to pay interest on the cash that you actually borrow. A small business line of credit is a stable option for any business; it offers you with flexibility in how you use your finances. The cash has to be used for business expenses.
The majority of people consider that APR is identical with interest rate, but this isn’t the case. APR stands for annual percent rate consists of the interest rate plus additional expenses, like the origination fee, documentation costs, and closing fee.
APR provides you with a more comprehensive look at how much a small business loan will cost you. An interest rate on a loan can be confusing, mainly if fees are high. Make certain you know what you are agreeing for.
- Origination Fee
The definition of this term is what it seems like: it is a fee the lender charges when you enter the loan agreement. It covers the costs of setting up and processing the loan and is typically expressed as a percent of the total loan amount, which includes 2.5%, or an actual amount, like $500.
- Maturity Date
Before you settle to financing for your small business, check out the maturity date of the loan, credit line, or some other type of funding in question. That maturity date is when you will have to have paid the principal and ultimate interest and expenses completely. Watch out for balloon loans, which only ask for small payments for each installment; however then require a large final payment to repay the balance. In fact, paying back the loan in full on that maturity date will be quite problematic, if not impossible, for many small businesses.
Amortization is when you progressively an obligation through periodic payments of principal and interest. Therefore when you get approved for a small business loan, you will probably acquire an amortization schedule. The amortization schedule mainly indicates what you are paying in principal, interest, fees, and other expenses for each and every installment until the loan is paid in full. Odds are you will like looking at the amortization schedule even more as you get into compensation.
Small business loan brokers help with navigating the financing process. Basically, their role is to connect you with funding that fits your business financial situation. For instance, you need to ask about broker fees and compare with others. You have to inquire about the total loan cost—not just the interest rate. The broker must provide details on how loans are searched and evaluated. Also, you have to ask how the broker is compensated; check out if he is incentivized to support one loan type over another.
- Prepayment Penalty
Consequently, you took out a small business loan. You effectively put that money to work. Now, your business is the talk of the city and you are in a position to pay that cash back early. A prepayment penalty is a penalty or fee for paying back your loan early. In case you think that is discriminating, you’re not alone. Fortunately, many lenders don’t charge a prepayment penalty, but you should check out for one before taking out any loan.
- Factor rate
You will experience a factor rate when you apply for a cash advance or short-term loan, which is also a cash advance that is repaid by taking a percentage of your daily credit card sales. Cash advances are excellent option in case you need an immediate cash infusion, but they are expensive. Factor rate demonstrates how much you will pay back on your loan. Factor rates typically range from 1.1 to at least 1.5, based on the age and financial health of your business and average monthly credit card sales.
As per the SBA, collateral for small business financing is “business and personal assets that can be offered in case the cash generated by the small business isn’t sufficient enough to pay back the loan”. There are many small business loan programs that require some type of collateral, with a few exceptions. Collateral can be anything ranging from equipment to real estate.