Small business finance can come with a new language that is very different from personal finance terms. Some of these terms might transfer, but even when they do, there might be some difference as it concerns business finance.
If you are making financial decisions for your small business, you need to know the language. With the following finance terms, you can know the basics and make better decisions for your business.
Term Loan
With this type of loan, the lender provides a lump sum to the borrower and it has to be paid back in installments over an agreed-upon period. It is one of the more straightforward options for borrowing and it can be used for a wide range of purposes. If you are a small business owner, you should consider SBA 7(a) loans if you are in the market for a loan.
Line of Credit
A line of credit provides you with a preset borrowing limit that can be used to take out working capital. The business can borrow up to the limit at any time and only has to pay interest on the amount taken out. It is a form of revolving credit, so the business can work on a cycle of borrowing and paying back as it needs.
Annual Percentage Rate (APR)
This is a figure that represents the actual cost of a loan per year. Instead of just looking at the interest rate charged by the lender, APR accounts for any fees or additional costs that may come with borrowing.
Prime Rate
The prime rate is a benchmark banks use to determine interest rates for different lending products they offer. It is based on the federal funds rate, which is the rate banks and other financial institutions charge each other for an overnight loan.
Collateral
This is something of value a borrower pledges to a lender in order to secure a loan. If the borrower fails to repay the loan, the lender can then seize the collateral to recover their losses.
Refinancing
Refinancing is the practice of paying off old debt with new debt. A borrower might do this to get a better interest rate and save money over time. As an example, if the borrower has an existing loan with a 7% APR, it would be to their advantage if they could replace it with a newer loan with an APR of 4%.
Equity Financing
Equity financing is a way to raise capital by selling shares of the company. This allows a business to raise capital without having to take on debt. However, you do have to sacrifice partial ownership of the company. For a more detailed look have a look at this tutorial on early-stage investing from Startup Junkie – https://www.youtube.com/watch?v=9TqHxOmY7Uw&t=19s
Maturity Date
This is the date by which principal and interest must be paid on a loan. This is a common feature of mortgages, lines of credit and adjustable-rate loans. As an example, if you have a line of credit, you may only be required to pay the interest for a time. However, when the maturity date arrives, you will need to repay any outstanding interest and the principle.
Origination Fee
This is a term for an upfront fee that is charged for a loan. This is usually to cover the processing and administrative costs that come with issuing the loan and the costs can often be taken out of the loan proceeds.
Cash Flow
This represents the total money coming in and going out of a business. Lenders are going to want to see positive cash flow before they approve a loan. If your business is experiencing negative cash flow, you are going to need to look for ways to cut costs or increase revenue.
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