Applying for a small business loan can be difficult to navigate, especially when there are financial terms being thrown at you that you don’t understand. As a small business owner, it’s important that you familiarize yourself with terms you’ll see during your application process.
Here are 14 financial terms you should know in small business lending.
Revenue
- Revenue is the money that comes into your company from any business-related activities, such as yearly sales. This is calculated by taking the average sales price and multiplying it by the number of units sold.
Cash Flow Statement
- Your business’s cash flow statement clearly identifies the amount of money coming and going out of the business. This includes ongoing operation expenses and investments. The document is updated monthly, quarterly, or annually.
Accounts Receivable
- Accounts receivable is the money your business is owed from customers or any outstanding invoices.
Accounts Payable
- Accounts payable is everything your business has the obligation to pay to its vendors or lenders.
Term
- Your term is the amount of time you are given to repay your loan and is determined on character, credit score, capital, collateral, and conditions of your business. Some loan products come with a set range of terms.
Annual Percentage Rate (APR)
- Is the calculated yearly interest of the money borrowed, fees and additional costs encompassed into one rate.
Loan Origination Fee
- The lender charges a loan origination fee to cover the cost of underwriting, processing, and funding the loan. This fee is charged at the start of the application process and ranges from the percentage of the total loan amount.
Collateral
- Collateral is an asset you offer to secure a loan. This helps a lender mitigate the risk of approving funds. If you default on your business loan, the lender will seize your assets that were offered as collateral.
Personal Guarantee
- A legally-binding document an individual signs taking responsibility for the loan should the business default. Businesses often name the owner or an executive as a ‘guarantor’. If you are named a guarantor of a loan, it is legally binding.
Loan Agreement
- The loan agreement is a legal document that lists the obligations between the lender and the borrower. It also lists the agreed upon method to pay off the loan and penalties if you default.
Amortization
- Amortization is a schedule of how much of each payment will go to the interest and the principal loan until the maturity date.
Maturity Date
- A maturity date is an extremely important date for the lender because that is the date that the loan will be fully paid back—in other words, this is the date of your last payment.
Prepayment Penalty
- Prepayment penalties are fees that your lender may charge you for paying off your loan before the maturity date.