As an SME owner, taking out a loan can be a great way to get your business started or increase its momentum. But entering the world of business loans can be very confusing, in part due to the complex terminology which is used by loan providers. Whether you’re comparing offers, assessing your options or signing a deal, understanding loan terminology is essential. This blog will explain some of the most commonly used terms so that you have the right knowledge when it comes to financing your business.
The annual percentage rate is an annual rate charged for borrowing funds. This is shown as a percentage which represents the actual yearly cost of funds. When comparing loans, the APR must be taken into account as this affects how expensive the loan is.
An unsecured loan is a type of loan which doesn’t require any kind of collateral. However, the lender might ask for a personal guarantee instead. Interest rates are usually higher with this type of loan.
A secured loan uses collateral to guarantee that the loan will be paid. This mitigates the risk for the lender.
Debt service coverage ratio shows whether a business has enough cash to cover a loan’s principal, leases and interest.
The loan-to-value ratio is a measure of financial risk. It compares the loan amount to the value of the asset that the loan is being used to get. This is worked out by dividing the loan amount by the asset value amount.
Factor rate is how the lender quotes the price of the loan. This is different from an APR or interest rate and is usually associated with short-term loans.
This is a legal promise that is made when repaying credit. If the business is unable to repay the debt, then the person who made the personal guarantee must personally repay the loan.
Fixed interest rate
This is an interest rate which is first quoted when taking out a loan and remains the same.
Adjustable interest rate
This rate can change during the life of the loan and is decided by the market prime rate.
Understanding loan terminology
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