20 Business Loan Terminologies That You Must Know as an Entrepreneur

As an entrepreneur, you may feel the need of borrowing cash for your business at a time. Now, approaching banks and NBFCs for the same could be the most credible choice. However, to understand a business loan offer at its best, you need to be aware of the relevant terminologies. There terminologies can be related to company financials, amount you wish to borrow, the repayment cycle, the total cost of borrowing, repercussions in case you cannot repay the loan, and a lot more.

Below-mentioned are the top 20 business loan terminologies that you must know:

Cash Flow

Cash-flow is basically movement of funds within and outside the business. In layman’s terms, it is the total amount of money which is transferred out and into the business on a day-to-day basis or that over a specific tenure.

Net Income

Net income of a business is its total income left after subtracting from cash receipts the taxes, cost of goods, and other expenses.

Gross Profit

When the total costs of goods is taken away from the total revenue, then the amount or cash left over can be said as the gross profit.

Profit and Loss Statement (P&L)

It is a financial statement or report that companies maintain to show its income after deduction of expenses.

Principal Borrowed

The principal amount borrowed is the original loan amount taken excluding any fee, charge, and interest payment.

Total Cost of Capital (TCC)

TCC is the total interest amount including any fees that you have to mandatorily pay on the loan. The total cost of capital does not include charges and fees which you can avoid, such as fee on cheque bounce or late payments, etc.

Default

Every loan comes with a tenure over which you have to complete the entire payment. If you fail to do so, then it is counted as a default. A loan default can adversely affect your credit score and creditworthiness of your company, making it difficult to obtain funds for the future.

Assets

An asset is a resource that a business owns. It has an economic value, which can be used as collateral to get funds. There are two types of assets, current assets and fixed assets. The former includes accounts receivable, cash and cash equivalents, inventory, etc. The latter includes equipment, plant, property, etc. Then there are financial assets such as corporate bonds, stocks, preferred equity, sovereign bonds, hybrid securities, etc.

Secured Loan

Here, the amount of loan is determined based on the pledged asset. On loan default, it is the pledged asset that can be auctioned to recover outstanding due.

Unsecured Loan

This is a type of loan where you do not have to put forth any collateral to borrow funds.

Term Loan

In a term loan, you have to regularly pay the EMI based on the repayment schedule till end of tenure. The term of the loan can depend on the nature of loan, bank/NBFC, and could vary between 3 months and several years, usually up to 5.

Current Liabilities

If a company has any debt obligation within a time frame of 12 months or over an operating loan cycle, then it is accounted as a current liability. These liabilities show up on the balance sheet, and include aspects such as accrued liabilities, short-term debt, and accounts payable or similar debts.

Line of Credit

A business line of credit is a form of revolving loan. It offers a fixed capital amount, which you can use as per need. It means you can borrow an amount from time to time as per requirement, and the interest has to be paid on only the borrowed amount. Minimum payments on a monthly basis are expected in such kind of borrowing.

Merchant Cash Advance (MCA)

A cash advance is provided based on the organization’s daily credit card receipts. This advance amount is deposited in the company’s credit card merchant account.

Holdback

In the context of MCA, hold back is basically a percentage of debt card receipt or daily credit that are held back every day by the fund-provider in order to pay back the amount.

Overdraft

Many banks offer overdraft facility to avail cash when need arises. Here, your current across is deposited with an amount, which you can withdraw as per need, and pay interest only on the amount utilized over a period of time.

Annual Percentage Rate (APR)

When you borrow money or earn from an investment, an annual percentage rate applicable is the yearly rate charged for the earnings on investment or borrowing. It is expressed as a percentage. APR represents the actual annual cost of funds to the term of the loan. The cost includes all the fees and charges associated with the transaction. But these costs are not compounded into account.

Thus, APR calculates the percentage of principal to be paid per year, taking into account all the monthly payments, fees, upfront charges, etc. As loans vary in terms of transaction fees, interest rate structure, late penalties, etc, Annual Percentage Rate gives a standard computation of all these costs, so that you can easily compare the best loan offers across lenders.

Balloon Payment

There could be different types of repayment options on a business loan, out of which balloon payment is one. Here, the unpaid balance that is left at the tenure’s end is paid in full.

Interest-Only Payments

During the entire tenure of loan, you will have to pay the interest component only. This is why; the repayment schedule is only as interest-payment only. However at the end of tenure, you have to repay the entire borrowed principal amount in lump sum.

Average Monthly Payment Obligation

You have to pay an average amount every month towards the loan. The frequency of this payment could be monthly, weekly, or daily. This amount does not include charges and fees you can do without, such as fee for returned checks or late payment.

To Conclude

The above-mentioned are the most common business loan terminologies that you will come across. Your fund-provider may use a few more, which you may want to get familiar with, but the given list is a good material to read up for the start.