Business Loans Glossary
Welcome to the Business Loans Glossary! Here we have answered some of the most commonly used terms surrounding small business loans, what they are, what they involve, and how you can apply for one. Click on any of the terms below for its definition. Don’t see a term that you’d like us to define? Contact Us, and we’ll be sure to take a look at it!
A term used to describe the various ways a person may obtain a loan for personal or business reasons outside the typical bank loans. Alternative lending is usually a viable option when business owners or individuals are not approved for bank loans.
The paying off of a debt over a scheduled period of time in regular, fixed installment payments. This typically occurs with auto loans and mortgage loans. May also refer to the act of spreading out capital expenses over a specified time period.
A well-off individual who offers capital for businesses to start-up, continue running, or expand. Often times, an angel investor will provide capital in exchange for part ownership in the company they are funding.
Stand for Annual Percentage Rate. Expressed in a percentage, it is the rate at which a lender charges a borrower and is a representation of the annual cost of funds during the life of the loan. Fees are included in the APR.
The amount of time it takes for a lender to process a prospective borrower’s loan application, gather and assess all required documentation and materials and either approve or reject a loan request. Approval time is dependent upon the timeliness and accuracy of information provided by the borrower
A unique way of providing structured working capital and term loans that are secured through some type of business asset such as accounts receivable, machinery or equipment, or real estate.
When an individual or business is not capable of complying with the terms and conditions of an outstanding loan, this legal proceeding is held. It is usual initiated by the debtor. In the proceeding, a debtor’s assets are evaluated and used to pay back a part of the debt owed. After this is done, the debtor is freed from the remaining debt obligation.
A loan secured by a business owner, usually through a bank or other financial institution with the purpose of being used for the building up or sustaining of one’s business. May either be secured or unsecured loans.
Cash Flow Loan
Cash flow loans are an alternative type of business loan. The loan is secured by a company’s expected cash flow. Each day, the lender takes a percentage of the borrower’s sales to pay back the loan, meaning the daily repayment amount will fluctuate.
Cents on the Dollar
To use this expression is essentially a way of using a percentage. If the cost of something, for example, is 10 cents on the dollar, you are paying 10 percent.
At the conclusion of a real estate transaction, these are costs incurred by the either the buyer or seller that occur when the title is transferred to the purchaser of the property. The fees cover origination fees, appraisal fees, discount points, title searches, title insurance, surveys, taxes or credit report charges.
In a secured business loan, this is an asset that the business owners promises to the lender as a form of protection for the lender in the event the business owner cannot pay back the loan. Business loan collateral can include any asset associated with the business itself.
A type of asset or resource that a borrower pledges to a lender in the event the borrower defaults on the loan that the lender can use to offset losses incurred because of failed payments. Collateral can come in the form of property such as a home or any other type of asset such as an automobile that the lender may take and then sell.
A numeric value expressing how worthy a person’s credit is that is used by lenders and financial institutions to determine how likely a person is able to pay back debt and satisfy the terms of both unsecured and secured loans. Scores are based on a person’s credit history and other experiences with paying loans. The number usually ranges from 250 to 850, with the higher number reflecting better credit.
The capacity, capability or potential of a business to generate earnings from its operations. Earning power is used by stock analysts to determine the worthiness of a company and its long-term potential.
Equipment-Based Financing allows companies to borrow money to purchase machinery and equipment. The equipment purchased is typically used as collateral for the loan.
The value of an asset after all liabilities of that asset are considered. Equity can be applicable in home equity, personal equity or stocks.
Introduced in 2009 by the company FICO, this is a credit score used to determine a person’s creditworthiness. The score is designed to provide lenders with an assessment of lower-risk borrowers who may have lower scores due to minor credit deficiencies, borrowers who have a short credit history, and borrowers who may have poor credit.
Five C’s of Credit
The five C’s of credit are: Character, Capacity, Capital, Collateral, Conditions. Creditors use these factors to determine the degree to which potential borrowers are worthy of securing a loan.
In the event a person or entity defaults on a loan or cannot pay it off, a third party (often a government agency) will step in, purchase the loan and assume responsibility of it.
An installment loan is specific to CAN Capital. It is a small business loan for people in business at least 7 years, with good personal credit, and high annual sales. Because the qualifications are higher, the interest rates are lower.
The amount a lender charges to the borrower for the use of assets, such as property or cash. Rates are expressed in percentages and are typically expressed annually.
The act of purchasing accounts receivable for the purpose of obtaining immediate cash. This helps growing businesses continue to thrive without incurring debt or compromising equity.
When an individual fails to comply with the terms and repayment of a loan, a lien gives the creditor the legal right to take the property and sell it. The party holding the lien is the bank or institution that granted the loan.
Line of Credit
An extended credit source financial institutions grant to businesses or individuals. This may come in various forms such as overdraft protection, term loan, discounting or revolving credit.
The time period in which a creditor requires a borrower to repay the loan he or she has taken out. The term can be as short as one year and can sometimes last up to 30 years, such as in the case of a mortgage. The term is satisfied in installment payments (usually monthly) during the course of the fixed time.
The maximum length term, or time in months or years, that a lender will allow a borrower to pay back a loan. Max length is determined by the borrower’s credit score and history as well income and collateral.
Max Loan Amount
In an unsecured or secured loan, this number represents the maximum amount of money that a lender will allow for a person to borrower. Many factors will determine the max loan amount, including credit score and history, income, and other qualifying ratios such as debt to income.
Merchant Cash Advance (or Cash Advance)
Usually accompanied by high interest rates, a cash advance is a quick and easy transactions that allows a credit card holder to withdraw a specific amount of cash from a financial institution. With these transactions, interest is immediately applied.
A service offered to low-income individuals or the employment as a means to helping them become more self-sufficient. This option is given to those who otherwise have no way of obtaining financial assistance.
A loan that the borrower is not personally liability to repay. Most often used in real estate. On the other hand, a borrower who takes out a recourse loan is liable for repaying the loan in full.
The process whereby a home loan or mortgage is created. The origination process begins with the prospective borrower submitting financial information to the lender. The lender then determines the type of loan appropriate for the person and the extent to which they are eligible.
A nontraditional form of lending money to unrelated parties without using a financial institution such as a bank or credit union as a facilitator of the loan. The lending takes place via websites using online tools for credit checks and other lending resources. Most are unsecured loans with short terms.
In mortgage loans, this process allows the person with the debt to rework the terms and/or rate of the loan. The business or person may also replace an existing loan with a more attractive one.
In a mortgage, this clause stipulates that a penalty will be assessed to a person or business if the mortgage is paid off during a specific time frame. It is generally based off the percentage of the remaining mortgage balance.
This is an interest rate that banks and other financial institutions reserve for the most credit-worthy customers. It is typically assigned by the federal funds rate. This has a direct effect on the rates available for business loans and mortgages.
Sometimes referred to as factoring, this method of financing permits a business to sell its accounts receivables to a commercial finance company. This allows the business to receive cash quick in lieu of waiting for customer payments. in the coming days and weeks.
This is a way of raising capital for a business from investors who get a percentage of the business’s gross revenues in exchange for the amount they invested. Investors receive a share of the business income until a certain amount has been paid.
Stands for Small Business Administration. It is a government agency designed to provide strength and support to the economy by championing the causes of businesses. The SBA provides counseling and assistance to those who desire to start and enhance businesses.
Guaranteed by the SBA, these loans are specifically designed for startups to afford to conduct their business operations. The borrower is responsible for the loan even in default.
A loan in which the borrower promises a type of asset such as property or an automobile as collateral for the loan. In the event the borrower is unable or unwilling to comply to the terms of the loan, the creditor may take possession of the asset.
A short term loan gives business loans fast access to cash with a short repayment term (often under a year). Many businesses use short term loans to manage cash flow, fill orders, or cover expenses before a large payment comes through.
Simple Interest Rate Loan
This is a loan where the rate is calculated in a daily basis rather than monthly, as in a traditional loan. The interest is calculated by dividing the rate by 365, rather than 12, and multiplying by the outstanding balance.
Small Business Loan/Term Loan
This is a traditional business loan. Business owners borrow a fixed amount of money over a set period of time for business activities. For example, an entrepreneur could borrower $25k over 5 years at a 30% interest rate. This loan has predictable monthly payments and no flexible rates or terms.
A loan that is not backed by collateral, such as a home or a car. Unsecured loans are granted based on the applicant’s credit score and history, rather than use of property.
A process where investors see potential for growth in a startup company and provide financing for that young company to grow. Investors do this with confidence that the investments are sound and will pay off as the company experience long-term financial success. This high-risk investment also has potential for handsome returns.
Amounts to current assets minus current liabilities. This provides a view of a company’s current financial standing and level of efficiency.