Common Business Loan Terms: What You Need to Know
Common Business Loan Terms: What You Need to Know
Within the context of business loans, the word “terms” typically refers to the amount of time you have to repay the debt you take on. Common business loan terms can be as quick as a few weeks or stretch on as long as 25 years. That said, many business owners will want to know common business loan terminology too, which is just as useful to familiarize yourself with if you’re about to sign on to a loan agreement.
We’ll dive into the details of both business loan terms and business loan terminology with this guide to make sure you fund with the best business loan possible. So, whether you want to know how long you’ll have to repay your business loan, or you want to understand the lingo your potential lender is using, read our guide to common business loan terms and terminology:
Common Business Loan Repayment Terms
To start, let’s take a look at the repayment term lengths of the most common business loans out there. As a reminder, business loan terms, in this context, are defined as the amount of time the borrow has to repay their loan, plus interest, to their lender.
Let’s take a look at the business loan terms attached to the ten most common business loans:
1. SBA Loans: < 6 Years - 25 Years
SBA loans offer some of the longest terms on the market. The actual business loan term attached to any given SBA loan will depend on which SBA loan program it’s lent through. The three most popular SBA loan programs will come with the following repayment term lengths:
- SBA 7(a) Loan Program: 5 – 25 years
- SBA CDC/504 Loan Program: 10 – 25 years
- SBA Microloan Program: Less than 6 years
2. Traditional Bank Loans: 3 -10 Years
Behind SBA loans, traditional bank loans will offer up the longest terms. They’ll start at three years and go all the way up to ten years. That said, traditional bank loans will be difficult to qualify for, so these ideal business loan term lengths won’t be available for many small business owners.
3. Medium-Term Business Loans: > 1 Year - 5 Years
Another form of funding that offers relatively lengthy business loan terms is medium-term business loans. Though acquired through alternative lenders, medium-term loans typically function much like traditional bank loans. With terms of more than a year to up to five years, they’ll offer longer repayment terms than many other online business loan options.
4. Business Lines of Credit: 6 Months - 5 Years
Business lines of credit can be either short-term or medium-term in nature. As a result, the common business loan term you’ll see attached to business lines of credit will vary widely from six months to five years.
5. Invoice Financing: 3 - 6 Months
Invoice financing is an extremely short-term solution for businesses. And because invoice financing allows businesses to access funding secured by their outstanding invoices, the business loan term will ultimately rely on how long the invoiced customer takes to fulfill the invoice. That said, invoice financing companies like Fundbox will accept outstanding invoices that are three to six weeks outstanding.
6. Equipment Financing: 2 - 5 Years
Because equipment financing is always secured by the equipment purchased with the financing, common business loan terms for this funding option will be much longer. The built-in collateral means that lenders take on less risk with equipment financing, so lenders often offer repayment terms from two to five years long.
7. Short-Term Business Loans: 3 - 18 Months
Short-term loans offer quicker time-to-fund, smaller loan amounts, and lower cost of capital—but all of these features are all thanks to shorter business loan terms that commonly come with short-term business loans. Technically speaking, short-term loans are defined by their repayment terms of a year or less. But, in reality, lenders offer short-term loans with repayment terms of three to eighteen months.
8. Merchant Cash Advance: Undetermined
Due to the unique nature of merchant cash advance repayment, there’s really no business loan term attached to them. Merchant cash advances are repaid through a daily percentage of a business’s card revenues. This daily percentage will be claimed by the merchant cash advance company until the business’s total debt is repaid in full. Because this daily payment will fluctuate, there’s no telling how long repaying a merchant cash advance will take. Nonetheless, because the daily payments are so frequent, the terms attached to merchant cash advances are some of the shortest in the industry—most borrowers will pay down merchant cash advance debt in four to 18 months.
Common Business Loan Terminology
Now that we’ve covered common business loans terms—repayment terms, that is—let’s move on to address the other side of the situation, common business loan terminology.
During the process of finding the right loan for your business, you’ll come across a lot of complicated language. For a business owner who has yet to come across the jargon, even the most common terms can cause confusion. Plus, sometimes small business loan terms can seem to be straightforward in meaning but can mean something hyper-specific within the context of business loans.
It’s crucial to do your due diligence in making sure that you fully understand all the words that your lender uses in conversation and in writing in your business loan agreement. Once you’ve combed through all the lingo, you can rest easy knowing you’re fully aware of exactly what you’re getting yourself into when you sign the dotted line.
In this section of our guide, we’ll uncover and define the most common business loan terminology:
Common Business Loan Terms: The “A’s”
For simple organization, here are the small business loan terms that start with “A.”
Accounts Payable
Also often referred to as “current liability,” accounts payable is a business loan term that refer to short-term debt that you’ll need to pay off soon. Essentially, accounts payable denotes what your business owes.
Accounts Receivable
On the other hand, accounts receivable refers to payments that you’re owed. Accounts receivable are basically just outstanding invoices, so this term essentially means what your business is owed.
Amortization
Within the business loan terms vocabulary, amortization refers to the way in which a borrower pays off a business loan.
If a loan is amortized, then the borrower will make regular, scheduled payments that are of equal amount every time until the principal sum plus interest is paid off.
APR
APR stands for Annual Percentage Rate and it is the most precise measurement of how expensive borrowing money will be.
More than interest, APR will take into account extraneous fees to measure how much a business loan will cost every year.
In order to capture the true cost of borrowing, you have to convert interest rate into APR.
Common Business Loan Terms: The “B’s”
Here are the small business loan terms that start with the letter “B.”
Blanket Lien
The term blanket lien is an important one to know.
If you sign on to a loan with a blanket lien, you’re agreeing to give the lender the right to seize almost any form of you or your business’s property if you’re not able to pay off your debt.
Common Business Loan Terms: The “C’s”
Here are the small business loan terms that begin with the letter “C.”
Cash Flow Statement
When you prepare a cash flow statement, you take note of all cash inflows and outflows that your business performs during a certain period of time.
So, if you prepare a cash flow statement for last month, you denote how much income your business took along with all of the expenses your business had to pay.
Collateral
If you need to secure a loan, you can do it with collateral. Collateral is simply something valuable that you or your business owns (like real estate, vehicles, equipment, financial accounts, and so on). The term collateral refers to any property that you offer up for a lender to seize if you’re unable to pay off your debt.
Sounds scary? Well, it might be worth it.
With collateral, you’re more likely to qualify for funding and to secure better business loan terms when you do.
Consolidation
When you consolidate your debts, you pay off multiple loans with funds that you acquire from a single loan.
Consolidating your debt can not only save you the hassle of paying off multiple loans, it can also save you money in avoided interest, as well.
Credit Card Receivables
The term credit card receivables, also referred to as credit card factoring, essentially means the money your business will earn from future credit card sales.
Many alternative, short-term lenders consider your business’s future credit card sales an asset. As such, they’ll lend to you and factor your repayment as a percentage of your business’s daily credit card sales.
This common business loan term could come up if you’re signing the dotted line on a merchant cash advance agreement.
Common Business Loan Terms: The “D’s”
Here are common small business loan terms that begin with the letter “D.”
Debt Financing
Debt financing is another of the many fancy business loan terms that have a simple meaning. It’s essentially a loan, or any way of financing your business that will require you to repay a principal amount plus interest over time.
It’s essentially the process of taking out a business loan to grow your company.
DSCR
This acronym stands for debt service coverage ratio is a way to express whether a business has the cash available to service a debt.
If your DCSR is above 1, then it indicates that your business has enough cash to pay off its current debt.
Common Business Loan Terms: The “E’s”
Here are the common small business loan terms that begin with “E.”
EBITDA
Another common business loan acronym EBITDA stands for Earnings Before Interest, Taxes, Debt, and Amortization. This is yet another way of indicating your business’s financial health, and measures your income without taking into account accounting decisions.
Entity Type
Your business’s entity type indicates what category it falls under legally. Whatever entity type you choose and declare will affect how your business operates within the law. From sole proprietorships to C-corps, every business, no matter how big or small, needs an entity type.
Common Business Loan Terms: The “F’s”
Get to know the small business loan terms that begin with “F.”
Factor Rate
If you’re shopping for short-term financing, then you’ve probably encountered this term. Many short-term loan options’ costs are expressed through factor rates.
Unlike APR’s (which are percentages), factor rates are decimal numbers that you multiply your principal debt by in order to see how much you’re ultimately paying off.
Getting a merchant cash advance of $100,000 at a factor rate of 1.18? Then you’ll ultimately be paying $118,000 back.
Five C’s of Credit
The 5 C’s of Credit is a punchy list of criteria that lenders look at when deciding whether to lend to you.
When you apply for funding, a lender will look at your character, capacity,capital, conditions, and collateral to underwrite the risk of lending to you.
Fixed Interest Rate
As opposed to a variable interest rate, a fixed interest rate stays the same during the entire life of a loan.
Common Business Loan Terms: The “G’s”
Here are the common small business loan terms that start with “G.”
Grace Period
A grace period is a pre-determined amount of time following a payment’s due date in which you’ll be able to make due on your payment without incurring late fees.
Common Business Loan Terms: The “I’s”
Be sure to know the small business loan terms in the “I’s.”
Insolvency
Insolvency is a business loan term that refers to the state of being unable to repay debts.
Common Business Loan Terms: The “L’s”
Here are the small business loan terms that start with “L.”
Lien
The business loan term lien refers to the act of using ownership of something as a guarantee for an obligation—in this case, repaying a loan.
If a lender takes a lien on your property when you sign on for a loan, and you’re unable to pay your loan, then the lender will have the right to seize that property.
Line of Credit
A line of credit is a business funding option that functions a lot like a credit card. You’ll be extended a line of credit from which you’ll be able to spend up to your credit limit. You’ll only have to pay off what you spend.
Loan Agreement
When you sign on to take on debt, you’ll have to sign a contract called a loan agreement. This agreement will delineate the terms of your loan.
Long-Term
In the context of business loans, long-term refers to any debt that will be paid back in more than a year.
LTV Ratio
A lender will consider the LTV ratio, or loan-to-value ratio, when you’re applying for a loan to purchase a specific thing.
For instance, if you’re looking to get a loan to get a new piece of equipment, the LTV ratio will indicate how much of the equipment’s worth the loan amount will cover.
Common Business Loan Terms: The “M’s”
Here are small business loan terms in the “M’s.”
Maturity
A loan reaches maturity on the day that you make your last loan payment.
That is, once you pay off the principal and the interest on a loan, it has reached full maturity.
Merchant Cash Advance
A merchant cash advance is a short-term business financing option that is repaid through a daily percentage of your business’s credit card receivables.
Merchant cash advances are easy to secure but often end up being the most expensive financing option.
Common Business Loan Terms: The “P’s”
Be sure to know the small business loan terms in the “P’s.”
Prepayment Penalty
Prepayment penalty is a crucial business loan term for you to understand.
Lenders with prepayment penalties, sometimes referred to neutrally as prepayment fees, will charge you for paying your loan off early.
Principal
Within the context of business loan terms, principal refers to the original size of your loan.
If your business borrows $100,000, then your principal is $100,000.
Prime Rate
The business loan term prime rate indicates the interest rate at which the most creditworthy borrower can borrow.
This is the rate what determines all other rates, as well. All less creditworthy borrowers will borrow at an interest rate that is often determined at “Prime Rate + X” with x being an interest rate determined by your own creditworthiness.
Profit and Loss Statement
A profit and loss statement, or a P&L or income statement, is a document that shows your business’s income and expense over a specific amount of time.
Many businesses will need a P&L in order to apply for business financing.
Proprietorship
A proprietorship, or sole proprietorship, is a business entity-type for unincorporated businesses that consist of one individual.
Common Business Loan Terms: The “R’s”
Don’t miss these common small business loan terms that start with “R.”
Refinancing
When you refinance your debt, you pay off your debt with a new, better loan.
By refinancing debt, you could save your business tons of money in avoided interest.
Revolving Line of Credit
The business loan term “revolving” denotes credit that can be used repeatedly.
As such, a revolving line of credit is a line of credit that a business can spend on repeatedly up to the credit line, as long as they pay off their previous spending.
Common Business Loan Terms: The “S’s”
Here are the common loan terms that start with “S.”
Second Lien Debt
This business loan term refers to any loan you take on that’s more subordinate to a more senior loan.
In other words, if you have another debt that you need to pay off first, and you take on a second loan, this second loan will be referred to as a second lien debt.
Secured
When used as a small business loan term, secured refers to debt that is taken on with a lien to any of your assets.
So, if a loan requires collateral, then that loan is a secured loan.
Short-Term
Short-term, when referring to debt, means anything that will be paid back in a short amount of time. Literally, short-term refers to debt paid off within a year. However, some short-term lenders still use the term for loans with repayment periods of up to 2 years.
As an almost universal rule, short-term financing is easier to secure, quicker to fund, and more expensive than long-term financing.
Subprime Borrower
A subprime borrower refers to a borrower who is considered higher risk.
Essentially, if you’re less qualified by traditional standards—i.e. you have a lower credit score—then you’ll be considered a subprime borrower.
Common Business Loan Terms: The “T’s”
Learn the small business loan terms that begin with “T.”
Term
This business loan term can be confusing, because it’s, well, “term.”
Lenders often use this word to refer to the amount of time you’ll be repaying your loan for. Loan terms can last as short as 3 months, and as long as 25 years—depending on the kind of financing you’re working with.
Common Business Loan Terms: The “U’s”
Here are the small business loan terms you should know that begin with “U.”
Underwriting
When a lender underwrites your application, they are accessing the risk they would take on by lending to you.
The results of the underwriting process are the decisions of whether or not you qualify for a loan along with the exact terms of your loan if you qualify.
Unsecured
When used as a business loan term, unsecured refers to debt that doesn’t have collateral backing it.
Unsecured debt is more risky for the lender and, as result, often more expensive for the borrower. Unsecured loans can also be harder to qualify for due to the fact that there isn’t much security in lending to your business. If you can’t pay back your unsecured business loan, the lender doesn’t have an easy means to recoup their losses like they do with security business loans.
Common Business Loan Terms: The “V’s”
Here are the business loan terms that begin with “V.”
Variable Interest Rate
As opposed to a fixed interest rate, variable interest rate is an interest rate that will vary with market interest rates over the life of a business loan.
Common Business Loan Terms: The “W’s”
Learn the small business financing terms that begin with “W.”
Working Capital
We’ve covered what the business loan term capital refers to, but what is working capital?
Well, working capital is all of your capital that your business uses in it day-to-day transactions.
Essentially, it’s how much money your business has, minus the debt it has.
Understanding Common Business Loan Terms: The Bottom Line
There you have it—the typical business loan terms—whether they’re repayment terms or terminology—you’ll come across while you search for funding for your business.
You’ve got the world at your fingertips, so never hesitate to do a bit of research if you’re even a little bit unsure of details you encounter in your business funding search.
