Key terms to know about small business loans
Whether you want to launch a new business, purchase an existing one, upgrade your equipment, finance a new product line or ease your cash flow, a business loan can help you fund the next stage of your company’s growth.
However, you’ll need to show your lender that your business is worthy of a loan. As part of your loan application, most lenders will require you to provide balance sheets, profit and loss statements and tax returns for the last two years, along with a business plan and security assets that show you’ll be able to make the loan repayments.
Sound confusing? It doesn’t have to be. Here’s a glossary of the key terms you should know when researching business loans.
This refers to the amount of time you have to repay the loan. The shorter the loan term, the higher your repayments will be, but the sooner your loan will be paid off. By paying off your loan faster than planned, you’ll pay less interest over the life of the loan.
A business overdraft is a loan given to provide cash-flow relief by helping you cover business expenses such as paying your staff and suppliers while you wait to be paid by your clients.
You may be charged a dishonour fee if you fail to make a scheduled repayment by the due date. Dishonour fee policies vary between lenders, so check your contract for the dishonour terms that apply to your loan.
Line of credit
If you own a residential or commercial property, you may be able to take out a line of credit that you can use to fund the expansion of your business. These tend to be shorter-term loans.
Variable interest rate
Your business loan may be offered with a variable interest rate. This means your lender may increase or decrease the interest rate they charge you depending on a range of economic conditions.
Fixed interest rate
A fixed interest rate means you’ll always pay the same amount of interest throughout the fixed-rate payment period. You’ll save when variable rates go up, but you won’t receive interest discounts when variable rates go down.
You may be asked to guarantee your loan. In some instances you can guarantee your own loan, where you are personally responsible for securing the loan (see secured business loan below). In other cases, another person will be required to secure the loan.
Secured business loan
A secured business loan requires you to provide an asset – such as your car or family home – as collateral against the loan. Secured business loans tend to be offered with lower interest rates and longer payment terms.
Unsecured business loan
An unsecured business loan does not require you to provide an asset as collateral against the loan. This can be a good option if you don’t own any major assets, but unsecured loans tend to attract higher interest rates and shorter payment terms.
Now that you have the lingo down, start comparing business loans to get your business up and running today.