In the world of business financing, understanding the jargon associated with loans is crucial. Whether you’re a seasoned entrepreneur or a newcomer to the business landscape, having a solid grasp of loan terminology can empower you to make informed decisions about your company’s financial future. In this comprehensive guide, we’ll explore a variety of terms commonly encountered in the realm of business loans.

Amortization: The process of gradually paying off a loan through regular payments, which typically cover both principal and interest.

Annual Percentage Rate (APR): The total cost of borrowing, expressed as a yearly percentage. It includes interest rates as well as any additional fees or charges associated with the loan.

Collateral: Assets that a borrower pledges as security for a loan. If the borrower fails to repay the loan, the lender may seize the collateral to recoup their losses.

Debt Service Coverage Ratio (DSCR): A financial metric used by lenders to assess a borrower’s ability to repay a loan. It compares the borrower’s operating income to their debt obligations.

Default: Failure to fulfill the terms of a loan agreement, such as missing payments or violating other conditions specified by the lender.

Line of Credit: A flexible loan arrangement that allows borrowers to access funds up to a predetermined limit. Borrowers can withdraw and repay funds as needed, paying interest only on the amount borrowed.

Personal Guarantee: A commitment by an individual, typically the business owner, to personally repay a loan if the business is unable to do so.

Principal: The original amount of money borrowed, excluding interest and other charges.

Secured Loan: A loan that is backed by collateral, reducing the lender’s risk. In the event of default, the lender has the right to seize the collateral to recover their losses.

Term: The period over which a loan is repaid, typically expressed in months or years.

Unsecured Loan: A loan that is not backed by collateral. Because unsecured loans pose a higher risk to lenders, they often come with higher interest rates.

Working Capital: The funds available to a business for day-to-day operations, calculated by subtracting current liabilities from current assets. Working capital loans are designed to cover short-term expenses such as payroll, inventory, and rent.

Underwriting: The process of evaluating a borrower’s creditworthiness and determining the terms and conditions of a loan. This includes assessing the borrower’s financial history, income, and ability to repay the loan.

SBA Loan: A loan backed by the U.S. Small Business Administration, designed to provide financing to small businesses that may not qualify for traditional bank loans. SBA loans offer favorable terms and lower down payments than conventional loans.

Revolving Credit: A type of credit that allows borrowers to repeatedly borrow up to a predetermined limit, repaying and re-borrowing funds as needed. Credit cards and lines of credit are common examples of revolving credit.

By understanding the terminology used by lenders and financial institutions, business owners can make informed decisions that support the growth and success of their companies. Whether securing a loan to launch a new venture or to support ongoing operations, a solid understanding of loan terms is an essential tool in the entrepreneur’s toolkit.