If you’ve started looking for a business loan, then odds are you’ve come across a lot of finance terms; some you probably recognise and some maybe not so much.
Just in case you weren’t sure about a few, we’ve put together a list to bust that finance jargon!
Credit Score
A credit score (or credit rating) is an analysis of your credit report all summed up into a single number and is used to assess your creditworthiness or borrowing power. For bank lenders in particular, your credit score will be a big factor in deciding how much you will be able to borrow and secure approval.
You will have a separate score for both your business and personal credit files, however similar aspects influence both. This includes things like the number of credit enquiries you’ve made, late repayments and any outstanding debts.
Annualised Percentage Rate (APR)
Annualised Percentage Rate (APR) measures the cost of a loan over a one-year comparable term and is probably one of the best tools to use for a thorough loan comparison. APR isn’t exactly the same as an interest rate because interest rates can be applied annually, monthly, weekly or even daily.
Because APR takes into account upfront fees, monthly charges, repayment periods and interest rates, it provides a much more accurate and standardised representation of how much a loan will cost per year.
Amortising Loan
An amortising loan is one where you pay off the principal over the course of the loan itself. Unlike other loans, where there are interest-only payments and balloon payments, amortising loans involve equal amounts of principal and interest over a fixed schedule.
The most common types of amortising loans include vehicle finance, home loans, most personal loans and most business loans.
Personal Guarantee
In most unsecured lending, particularly small business loans, lenders will ask for a personal guarantee as part of the loan contract.
A personal guarantee means that if the business cannot repay the loan, the borrower becomes personally responsible for covering repayments.
A personal guarantee isn’t the same as security because you aren’t putting forward a specific asset. Instead, it provides lenders with additional reassurance.
There are also third-party guarantees where another individual or entity agrees to take ownership of the debt if the borrower cannot repay it.
Early Repayment Penalties
If you decide to pay off your loan earlier than agreed, the lender may charge an early repayment fee. This may be a fixed administration cost or a percentage of the remaining balance.
Be careful however, as some lenders may advertise no early repayment fees but instead charge outstanding interest on the loan amount. This is why understanding what lenders don’t always tell you can be useful.
Security
When discussing business finance, security is an asset that holds monetary value. The most common type of security is property.
Secured Loans
A secured loan is one where the borrower is required to put up an asset as collateral.
The interest rates for secured loans are generally lower because lenders take on less risk.
The downside is that lenders can take action against those assets if repayments are not maintained.
Unsecured Loans
Unlike secured loans, unsecured loans require no security. While they generally attract slightly higher interest rates, many business owners prefer them for smaller short-term lending.
Examples include credit cards, student loans, personal loans and no doc and low doc business loans.
Non-Bank Lender
A non-bank lender is a financial institution that is not a traditional bank.
While banks are often cheaper due to their scale and resources, they can involve longer approval processes and more documentation.
Non-bank lenders can often provide faster approvals and more flexible lending criteria.
Working Capital
Working capital refers to the difference between a business’ current assets and liabilities.
Working capital acts as a snapshot of short-term financial health and indicates whether a business has enough resources to cover operational costs.
Businesses looking to improve working capital often explore working capital finance or business overdrafts.
So there you have it, the basics. If you have any questions, please don’t hesitate to call your Broker on 1300 736 780.
