The money lending industry has come a long way in the past few years. And when you look at how well the business is doing, you might feel the need to want to get in on the action as well. At Northcash we make sure that our clients are fully aware of the agreement they are signing when getting credit from us. But this industry has with it some pretty complex and strange terms that only the people involved in the business understand. You go to the mining industry and you will find different terms and languages being used there as well, and the same goes for, Geoscience, space exploration, etc.
But don’t fret, as this article will try and explain to you some of the terms that are used by lenders that you probably should know about. They have been broken down into simpler English so that you can easily understand them.
1. Term loan
A term loan is the lump sum of the whole cash you have to pay back to the lender over a certain fixed period. It includes the interest as well. For a borrower to secure a term loan, however, requires that he/she has a high credit worthiness degree on his/her part of the business.
2. SBA loan
This is short for a Small Business Administration loan. These types of loans are known to offer even longer terms and for lower costs compared to the traditional term loans. The reason for this is that they come already partially guaranteed by the United States government. These loans are meant to give the small business owners affordable financing as they grow into their own stable businesses.
3. Line of credit
This term is used to refer when a creditor is providing a borrower with revolving credit. This simply means that the borrower can get credit and pay it back over and over as he/she stays within a maximum. It’s kind of like what you would see with a credit card. A line of credit offers you capital when you need it, unlike a loan, and you will only be required to pay interest on the amount you borrow.
4. Annual percentage rate
Also APR. It is basically the annual cost of your total loan. But it is quoted as a percentage. Kind of similar to your interest rate. The only difference is that the APR provides a more accurate view and data about what your total loan will cost you. The APR also includes any origination fees, documentation fees, closing fees, etc. The APR varies from one lender to another, based on the loan products that you are looking for, and your borrowing history.
5. Income statement
As a businessman, you should have heard of this term once or twice. An income statement is what usually details your business’s net income, its revenue, and expenses as well for a specific period. It can be monthly, quarterly, or annually. The income statement is what shows your business’s financial strength and health to the lender who can use it to determine whether or not you can qualify for a loan and the amount you can get.
Collateral is a term used to describe any asset that you choose to pledge to the lender to help you secure a loan. This can be anything from accounts receivables, real estate, inventory, equipment, etc. Which the lender can liquidate if you default to repay the loan.
7. Personal guarantee
A personal guarantee commits you to being personally responsible for the debt that you take in the event that you default to pay back the loan. This type of security will allow the lender to seize any of your personal assets to compensate for the loan should you default.
8. Debt-service coverage ratio
Also known as debt coverage ratio. This is the ratio of the money a business has available to service its debts. It includes the making of payments on principal, leases, and interests. It is usually computed by dividing the business’s cash flow by the debt service payments.
This list is not an exhaustive one, but it does help explain some of the most commonly used terms by lenders and can help point you towards the right direction.