Common Small Business Financing Terms

Posted in Lending Articles By Sajhyadri Chattopadhyay-
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challenges borrowers face while taking a business loan

Whether you're looking to boost your business or tackle temporary cash hiccups, small business loans can be your trusted sidekick to keeping your business sailing through turbulent waters. But before you lift anchor, remember that knowing the lay of the land is essential for success. When it comes to browsing finance options, doing your own research and knowing about some key financial jargon can help you demystify the world of small business loans.

Basic Financial Terms for Business Owners

Curious to know more about the nitty gritty of funding your business? Being well-versed with the following financial jargons can be a good starting point – 

 

1. Collateral: 

Collateral is an asset pledged to secure a loan. It provides a lender with a form of guarantee, reducing the risk. In business finance, collateral could be real estate, inventory, or equipment, serving as a safety net for the lender in case of default. 

 

2. Credit Score: 

A credit score is a numerical representation of a borrower's creditworthiness. In the context of a business loan, a higher credit score enhances the chances of approval and may result in more favourable terms, reflecting the borrower's ability to manage debt responsibly. 

 

3. Interest Rate: 

The interest rate is the cost of borrowing money, expressed as a percentage. In business finance, the interest rate significantly influences the overall loan cost. Lower rates mean less expensive financing, positively impacting a company's financial health. 

 

4. Maturity Date: 

The maturity date is the date when a loan must be repaid in full. For businesses, understanding the maturity date is essential for planning and ensuring sufficient funds are available to meet the repayment obligation. 

 

5. Term: 

Term refers to the duration of a loan agreement. In business finance, loan terms vary, and selecting an appropriate term is crucial. Shorter terms may have higher payments but lower overall costs, while longer terms provide more flexibility but may accrue more interest. 

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Advanced Finance Terms for Business Owners

 

Annual Percentage Rate (APR): 

 

APR represents the total cost of borrowing on an annual basis, including the interest and other charges. It provides borrowers with a standardized measure to compare loan offers. Understanding the APR is crucial to assess the true cost incurred from a business loan over time. 

 

Amortization: 

 

Amortization refers to the gradual repayment of a loan through scheduled, periodic payments. It calculates both principal and interest as paid over the loan tenure. For businesses, understanding amortization helps in budgeting and planning for consistent loan repayments. 

 

Cash Flow: 

 

Cash flow represents the movement of money in and out of a business. Lenders often assess a company's cash flow to evaluate its ability to stick to loan obligations. A positive cash flow indicates good financial health and enhances the prospects of a loan approval for your business. 

 

Co-Signer: 

 

A co-signer is an individual who agrees to be responsible for a loan if the primary borrower defaults. In business loans, having a co-signer can strengthen your application. This is even more helpful if the business has limited credit history or financial standing. 

 

Debt-to-Equity Ratio: 

 

The debt-to-equity ratio measures a company's proportion of debt to equity. Lenders use this ratio to assess risk. Although it varies across industries, a balanced ratio of less than 2.0 is essential for a healthy financial structure when seeking a business loan. Try to avoid excessive debt as it may indicate financial strain. 

 

Equity Financing: 

 

Equity financing involves raising capital by selling ownership stakes in a company. For business loans, having a healthy equity position can positively impact loan approval and terms, since it highlights the business's financial stability. 

 

FICO Score: 

 

The FICO score is a credit scoring system commonly used by lenders. For business loans, a higher FICO score indicates lower credit risk and vice versa. Maintaining a good FICO score is essential for obtaining favourable loan terms and interest rates. 

 

Loan Origination Fee: 

 

This fee includes the administrative costs of processing a loan application. For businesses, understanding the loan origination fee is crucial as it adds to one’s overall cost of borrowing. This, in turn, affects the effective interest and total repayment amount. 

 

Balance Sheet: 

 

A balance sheet provides a summary of a company's financial position, showing assets, liabilities, and equity. Lenders tend to review balance sheets to assess a business's financial health when considering a loan application. 

 

Line of Credit: 

 

A line of credit is a flexible borrowing arrangement that allows a business to access funds up to a predetermined limit, thus benefiting from financial flexibility. Businesses use it to manage cash flow fluctuations and address short-term financing needs. 

 

Profit and Loss Statement (P&L): 

 

A P&L statement summarizes a company's revenues, costs, and expenses over a specific period. Lenders review P&L statements to assess a business's profitability and financial performance when evaluating loan applications. 

 

Term Loans: 

 

Term loans are a common type of business loan with a fixed repayment schedule. Businesses use term loans for various purposes, from capital expansion to buying equipment. The fixed terms make budgeting and financial planning more predictable for borrowers. 

 

Now that you're acquainted with these fundamental financial terms, the next step is to find a trustworthy lender for your business journey. Look no beyond the business loans available on Bajaj Markets! These loans offer amounts up to ₹50 Lakhs, with easy EMI options and tenures spanning up to 72 months. As a bonus, you can apply with minimal paperwork and without any collateral. Launch yourself closer to your business goals with a Business Loan on Bajaj Markets!  

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