Fortunly, a website devoted to the latest business and financial news, recently reported on some statistics from the Small Business Administration. Among those statistics include the fact that it requires an average of $30,000 to get a new business going. Since you will probably require funding at some point, knowing some common small business loan terms can help you better navigate the loan process.
Types of Loans
The first thing you will need to decide is which type of loan to apply for. The various types of small business loans include:
- Term Loan, which offers a lump sum payment and has a fixed term. This is similar to a traditional loan you might take out for personal reasons.
- Invoice Financing (or factoring), which involves selling your unpaid invoices to a financial institution at a discount. They will then provide you with cash up front, and hold a portion until the balances are paid.
- Merchant Cash Advance: In this instance, the bank advances you money against your future sales. You can repay through a portion of your sales or through a series of lump sum payments.
- Franchise Loans: These are designed specifically for buying a franchise and can cover everything from business expansion to franchise and licensing fees.
- Commercial Mortgage: A type of mortgage used to purchase commercial buildings or the land on which to develop them.
- Business Line of Credit: This is similar to a credit card and involves a lender approving you for a revolving amount of credit that you will then pay back in monthly installments.
- Equipment Loans: Loans used to purchase business equipment. The equipment you are buying normally serves as collateral.
An important loan term to know is:
- Blanket lien. With a blanket lien, you are authorizing the lender to seize all or part of your business assets in the event you default on the loan.
Other Small Business Loan Terms
Once you are familiar with the different types of loans, there are a few other terms you will need to know. The most common ones you may encounter include:
- Cash Flow Statement: A statement covering all cash flowing in and out of your business during a specific period.
- Credit Card Factoring: Also known as credit card receivables, it refers to the amount of money you are expected to earn from credit card sales in the future.
- Debt Service Coverage Ratio (DSCR): The DSCR compares your cash flow to your debt to come up with a score. A score of one or higher indicates you have sufficient income to guarantee a loan.
- EBITDA, which stands for Earnings Before Interest, Taxes, Debt, and Amortization: It measures the overall health of your business, and can be used to compare your company with others.
- Entity Type: Refers to the type of business you operate such as a sole proprietorship, LLC, etc.
- Factor Rate: Factor rates are decimals that you can multiply your principal by to determine how much you will actually pay.
- Insolvency: This means that your business is incapable of paying off its debts
- Profit and Loss Statement: A document that shows your income and expenses over a given period of time such as quarterly or semi-annually.
- Secured Debt: Any debt for which there is also a lien against any of your business assets.
- Subprime Borrower: One who is at a higher-than-average risk.
- Working Capital: All of the capital your business uses on a daily basis, minus any debt you have.
Understanding Small Business Loan Terms
Here at Ridgestone Capital, we want to help you secure the right funding so that you can ensure your own success. If you need help understanding these terms, managing equipment depreciation, or securing funding, please contact us.