Small Business Loan Terminologies: Everything You Need to Know

Hey fellow entrepreneurs! Whether you’re a startup or a seasoned small business that wants to know how to smoothen out cash flow bumps, understanding the ins and outs of financing is a complete game-changer. With this, navigating the world of business loans can be dizzying; you will be much better off getting the funding to help you meet business needs once you learn some of the key terms in this regard.

Overview of Small Business Loans

Small business loans are the financial aid which enables the fund for daily operational expenses. These loans are provided by traditional banks or alternative funding lenders which provide startups and small businesses with the essential funding they need to boost thriving businesses.

Some of the most common examples for a business loan include working capital to help solve cash flow problems, financing the acquisition of a small business, repaying some debt, and the expansion of the business.

Importance of Understanding the Business Loan Terminologies

Understanding the terminologies is crucial to maintaining clear and smooth communication with the lenders. When you are aware of every term, you can anticipate the consequences of the loan terms and, in the end, make informed decisions. Being armed with better knowledge will also allow you to negotiate better terms with lenders and plan your finances accordingly.

It helps you anticipate cash flow needs, manage legal obligations, and avoid unexpected costs. This knowledge lets you make better choices that keep your business financially healthy and help it grow over time.

Business Loan Terminologies SMEs Must know

Most Common Loan Types

Secured Business Loans

A secured business loan is provided by financial institutions such as banks where a business asset or property acts as the security to this type of loan. This loan can finance anything up to a wide range such as an expansion of business, new machinery, and tools.

Lenders perceive secured loans to below-risk lending options and hence they advance a significant amount of loan at relatively low interest rates, which makes them an attractive option for borrowers.

Unsecured Business Loans

Contrary to the secured loan, unsecured business loans have come to be one of the most preferred business financial options among SMEs. Unsecured business loans provide monetary aid that is accessible without collateral. This includes several financing options available for SMEs such as term loans, business lines of credit, invoice factoring, etc. However, here it is to be noted that personal guarantee is required by lenders.

Term Loan

Term loans provide businesses with a set of money to repay over a fixed period. It includes short, medium and long-term loans. This includes short, medium, and long-term loans. Such a loan gives the borrower access to a fund that can be used in meeting emergency costs for investment in a business. Usually, the interest rate is lesser compared to the line of credit.

Line of Credit

Line of credit is a type of revolving credit whereby you may withdraw cash to meet particular needs at times rather than loaning to repay a one-time amount paid out as a lump sum. Here, you will pay interest only on the withdrawn amount in such a loan.

Invoice Financing

It provides firms with the money against the value of their outstanding invoices. Under this form of financing, the borrowers sell their invoices to a third party. The lenders then acquire payments from consumers and in exchange they charge a certain amount known as advance rate.

Common Financial Terminologies

APR (Annual Percentage Rate)

APR is the annualised cost of borrowing money. The cost of borrowing includes interest and fees. A fee comprises loan fees such as some of the main closing fees and an origination fee.

Amortisation

Amortisation means repaying the loan in equal periodic payments. These payments include the principal amount as well as interest.

Balloon Payment 

This is a repayment method in which the borrower must repay a large portion of the loan within a shorter time than it takes to earn the respective amount. 

Cash Flow 

Cash flow is the money that transacts in and out of your business. Operations of business performance are tracked and evaluated by watching over the cash flow statement-the transaction namesakes-of a business. 

Collateral 

Collateral is something valuable you own that you promise to the lender when you take out a loan. It could be equipment or property. If you can’t pay back the loan, the lender can take this item to cover what you owe.

Credit Score 

It measures the borrower’s creditworthiness. Lenders or banks tend to favour borrowers with a higher credit score; hence, people with low scores tend to encounter much hassle in getting a loan. For those with bad credit scores, unsecured loans may be relatively more plausible. 

Debt-to-Income Ratio (DTI) 

It is percentage of gross monthly income, which is an indication of how much debt you carry against the income. It is a metric applied by the lenders to establish the borrower’s risk in accessing loans. Although DTI of 43% is taken as maximum for any borrower who can still be eligible for any loan, lenders embrace ratios more than 36%. 

Debt financing 

It a situation when a company raises money by selling debt instruments to investors. Debt financing is a method where companies take up debt or lump sum money.  

Personal Guarantee 

It is a promise made by the borrower to repay the loan amount in the event of business failure. It provides extra security for the lender and encourages them to fund the small business. Personal guarantees allow lenders to go after the borrower’s personal assets such as bank account real estate etc., before they come after their business assets. 

Repayment Schedule 

A repayment schedule provides a detailed overview of periodic business loans over a specified period. It includes payment frequency (monthly, quarterly or at another interval), payment amount, interest, and the number of payments. 

Prepayment Penalty 

Lenders charge this fee if the borrower pays all or large portions of the loan amount. Lenders charge this to cover the loss of interest they have otherwise lost. 

How can Nucleus Help Small Businesses?

Nucleus can support you through their unique offerings like Nucleus Business Loan (NBL) and Revenue-Based Loans (RBL). These are not ordinary financial products; in fact, they have been specially tailored for SMEs.

First, there is NBL, which is flexible and doesn’t require collateral. NBL is perfect for SMEs across hospitality, healthcare, and more sectors, offering from £5k to £500k. You can tweak the repayment terms to fit your cash flow, whether it’s for repairs, upgrades, or boosting working capital.

RBL is great for businesses with fluctuating incomes ranging from £3k to £350k. You can two times your monthly revenue and flexibly according to your monthly revenues. They help with cash flow management so that you can invest in marketing activities or new equipment. These facilities are designed to be quick and easy-to-apply options so that you can get back to running your business.

Summary

Information is valuable. As you review the choices available, keep in mind what Benjamin Franklin said: “An investment in knowledge pays the best interest.”

Understanding loans and money helps you make better choices for your business. New ideas, like those from Nucleus, can also help your company grow. Look at your options carefully and pick the ones that fit your business goals. This way, you can better manage your company’s money in the future.

Keep learning, keep growing, and may your business flourish!