If you operate a small business and are seeking a loan, one unexpected item you’ll need is a solid understanding of common business loan terms. That’s because, if you’ve never applied for a business loan, the technical terms lenders use can be very bewildering.
Consider the possibility of selecting a more costly loan due to a lack of comprehension regarding the distinction between interest rate and annual percentage rate (APR). If you choose a loan with a slightly cheaper interest rate without factoring in origination fees and finance charges, you can pay more than you would have otherwise.
Therefore, receiving the best loan possible for your company requires knowing business loan terms, which may appear like jargon at first. Of course, the holy grail of every business owner is reducing expenses.
You should familiarize yourself thoroughly with the following phrases before requesting a small business loan:
1. Preserve a Good Credit Score
A person’s or company’s creditworthiness is represented by a credit score. The individual’s or company’s payment history is used to determine it. As a result, the various organizations that keep track of payments contribute to a person’s or company’s personal credit score. A company’s ability to secure a loan may hinge on these documents.
Maintaining a strong credit score with on-time installment payments shows that you are responsible for your money and won’t miss any payments. Having a higher credit score will make you more credible to lenders, albeit this differs from one lender to another. As a business individual, you have to keep the small business loan terms in check before factoring anything.
2. Keep the Company’s Cash Flow Adequate
Lenders look at historical and projected company cash flow when they approve a small business loan application. The suitability of the loan amount you request depends on your ability to maintain a sufficient cash flow. To assess your ability to repay the loan promptly, we will look at your current and past debts and your credit score. Keep the company’s cash flow sufficient to guarantee loan approval.
3. Retain the necessary documents for the loan application.
Having all the required paperwork is a crucial first step in the business loan application process. If you and the lender have all the necessary paperwork in order ahead of time, the procedure will go more smoothly.
Here is the complete set of documents that need to be verified:
- Evidence of identity
- Validation of company
- Bank records (personal and business, six months ago)
- Records of both individual and business tax returns Financial statements of the business
- Franchise agreements and commercial leases are examples of business legal contracts.
4. Being Well-Prepared Increases Your Approval Chances
Do not just go up to a bank and hope for the best; instead, prepare for the application process just like you would for a job interview. As the representative of your company, you will be arguing with the lender for a loan.
You will need to put in some time preparing for this. A well-thought-out strategy for your company and an exhaustive account of how you intend to spend the funds are necessities. You could also mention how this funding would increase your company’s yearly income. Loan providers will be more likely to work with you if they believe in your ability to repay the loan.
If they ask for an online loan application, dress properly and hone your pitch both verbally and in writing. Although the banking industry’s upper echelons are numbers people (on the whole), they are nonetheless receptive to charisma and persuasive arguments. It may be necessary to hone your negotiating abilities to secure your required financing.
Putting your best foot forward and backing up your statements with hard data is smart business practice.
5. Collateral
You can put up collateral to lessen the financial risk associated with lending money to your company. In the event that you are unable to repay the loan, the lender has the right to confiscate the collateral you pledged to recover the value of the loan. Properties, machinery, vehicles, money, etc., owned by a company can be collateral. A “blanket lien” gives lenders the green light to take anything they want in the event of a default.
Collateral is an inherent part of some loans, such as those for equipment or invoice finance. If the borrower defaults on the loan, the lender could take possession of the very item that the loan is being used to finance.
Although it may be nerve-wracking to put up physical assets as security for a loan, doing so increases your chances of getting a better deal. Indeed, banks and other lending institutions often require collateral to provide traditional term loans.
6. Factor Ratio
If you need money quickly, you might have to deal with a factor rate. A factor rate is expressed as a numerical value, not a percentage. Typically, factor rates range from 1.1 to 1.5.
Multiplying your principal debt by your factor rate will provide you with the entire amount you’ll need to repay for your company finances. You can determine the total amount that needs to be repaid using that. To illustrate, the total amount that needs to be repaid would be $60,000 if you borrow $50,000 with a factor rate of 1.2.
You should determine the annual percentage rate (APR) before getting a factor rate or short-term loan (such as a merchant cash advance). The interest you pay back can add up quickly if the short-term loan you took out has a high rate.
In the end!
Due to insufficient funding, some startups are forced to shut down. However, a business loan guarantees your company’s market sustainability. Business loans with low interest rates are available through several government programs. When looking for a small company loan, examine the principles outlined above.
