By taking out a business loan, small businesses can quickly and easily gain access to some much-needed funding. Many lenders even offer unsecured business loans, which don’t require you to put up a collateral.
Another major advantage is that the funds that you get via a business loan have no restrictions with respect to their usage. You can use it to start your own business, expand it further, purchase a new asset, or even pay salaries to your employees.
If you’re thinking of applying for a business loan, it is crucial for you to first be aware of the various business loan terminology. This will help you understand the nuances of a business loan in a much better manner.
Here’s a quick look at some of the most important business loan terms that you need to know before you go ahead with your application.
Say that you opt for a business loan of about ₹1 Lakh for a tenure of about 12 months at an interest rate of 12% per annum. In this case, to repay your loan, you would be required to make a monthly equated instalment of ₹9,333 each month for a period of 12 months.
This process of repayment of a loan through regular equated instalments over a specific period of time is what is termed as amortisation.
In some types of business loans, the borrowers will be required to only pay the interest component of their loan throughout the tenure. And at maturity, the principal loan amount will have to be repaid through a single lump sum payment. This lump sum repayment of the principal loan amount is referred to as a bullet payment or a balloon payment.
Some lenders even allow borrowers to pay the entire loan amount with the interest at the end of the loan tenure through a bullet payment or a balloon payment. In such cases, the borrower will not have to make any repayments throughout the loan tenure.
These are two of the most important business loan terminology that you should be aware of. Also known as current liabilities, accounts payable is a term that’s used to refer to a business’ short-term liabilities or debt. Since the term represents what the business owes to others, it has to be repaid as and when required. Amounts that a business owes to its suppliers of raw materials are a good example of accounts payable.
Also known as current assets, accounts receivable is a term that’s used to refer to amounts that a business is owed by others. These are generally credit sales that a business makes and will become receivable in the near future.
This is one of the more simpler business loan terms. Debt financing is the term that’s used to refer to a situation where a business gains access to funds by taking out a loan. When a business finances itself through debt, it is required to repay the principal loan amount along with interest over a period of time.
EBITDA is an abbreviation that stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It refers to the amount of revenue that a business generates through its operations before accounting for other expenses like interest on loans, taxes, and depreciation.
EBITDA is a very important financial metric that lenders and investors use to evaluate a business. The higher the EBITDA, the better since it basically denotes that the company’s revenue-generating potential is high.
The grace period refers to a specific period of time beyond the due date for payment of your loan EMI. As long as you pay your loan EMIs within the grace period, you will not incur any penalty or late fees.
This is another crucial business loan terminology that you should absolutely know about. A fixed interest rate is when the rate of interest on your business loan remains the same during the entire tenure. Even if the RBI changes the interest rates during your loan tenure, the rate of interest on your loan will continue to remain the same.
A floating interest rate is when the rate of interest on business loan varies from time to time during your loan tenure. However, if the RBI changes the interest rates during your loan tenure, the rate of interest on your loan will also change accordingly.
Line of credit is a facility that many lending institutions offer to businesses. This facility works more like a credit card, wherein the business can withdraw funds as and when it needs it. Lines of credit usually come with a maximum limit. Businesses will have to pay interest and the principal only for the amount that it uses up.
Now that you’re aware of the key business loan terminology, you can go ahead and apply for one right away. If you’re ever unsure of what a particular business term refers to or represents, you can simply go online and find out what it is. Alternatively, you can also get in touch with your lender for some clarification too. For more information regarding the different business loan options available in India, visit the Bajaj Markets website. You can compare multiple business loan offers and opt for the one that suits your requirements.