4 Small Business Lending Terms You Should Know
If you run a small business, you have likely thought about, tried to, or successfully taken out a loan at some point. Navigating the world of small business lending can be intimidating. This is especially true if you don’t know the language. The following four (technically five) lending terms will help you better understand what you are doing when you borrow.
1) Term Loan vs. Line of Credit
The distinction between term loans and lines of credit can be slightly confusing at first. The former is a type of loan that gives you X amount of money now which you pay back with interest. A home mortgage is a type of term loan.
Conversely, a line of credit is an amount of credit that you can borrow at any time. There is a maximum limit that you can borrow. When you pay back the amount you borrowed plus interest, you can borrow it again up to the limit. A credit card works a lot like a line of credit.
2) Annual Percentage Rate
If you are comparing loans, looking at the interest rate alone may not be enough. The annual percentage rate is a more accurate representation of the annual cost of the loan. APR includes interest, fees, and other annual costs. Therefore, it gives a better sense of how much you will need to spend per year.
3) Prime Rate
The prime rate is an agreed-upon interest rate set by banks and based on the rates offered by the Federal Reserve. It is typically the lowest interest rate you can receive on a loan at any given time. Many loans are advertised as prime plus a specified amount. Additionally, changes in the prime rate can affect variable-rate loans and new fixed-rate loans.
Sometimes when you borrow, you need to provide assets that can be sold off if you default on the loan. This is called collateral. If you are buying real estate, the property is typically considered the collateral. However, small businesses can use all sorts of collateral to secure their loans. This can include equipment, inventory, accounts receivable, and more.
Learn more today about small business lending. Exploring the different options and learning the terminology will help you to make better decisions for your business’s borrowing needs. Even knowing the four basic terms above is a major leg up over many other potential borrowers.