If you are new in business and looking for finance to grow and expand, there are specific financial terms that you should understand to avoid making mistakes. These terms can be commonly found, communicated and used during your line of duty, so you should look to recognise and familiarise yourself with it.
Here are 6 lending terms that you should understand and know about with regards to the business industry.
Term loan is the amount of loan you borrow and pay back with interest over a given period. Compared to short-term loans, term loans offer a more extended payment period and lower monthly payments rather than short-term loans. A perfect example of a term loan is a consolidation loan. To secure a term loan, trust is required between yourself and the banking institute. Young businesses or businesses with poor credit record will find it difficult to obtain a term loan.
An income statement essentially indicates your net business income, expenses for a given period, and your revenue. You are most likely to come across this term when making your loan application. The lender will use your income statement to illustrate your business’s financial health and strength. As you may be new to such terms, you should seek help from an accountant when preparing the first income statement for your business.
When taking out a quick loan, a personal guarantee is usually agreed between the borrower and the lender. This means that the lender has the right to seize your assets in the case of default payment. Some of the most common assets used as personal guarantees are the borrower’s car, retirement funds, house, or any other asset in your possession.
With a limited personal guarantee, there is a limit on how much the lender can take from you. An unlimited personal guarantee, on the other hand, allows the lender to pursue your assets until the debt is fully paid off.
SBA loans, which stands for Small, Business Administration (SBA), have loans terms that are suited towards new business owners. Compared to ordinary monthly installment loans, SBA loans offer a much longer payment time with lower monthly costs. The loan is designed to give small business owners an excellent financing option as they look to grow their business. However, if you are looking to apply for this type of loan, you should brace yourself for a lengthy application process.
Line of Credit
Another popular term that you may come across is line of credit. It is a type of loan where the borrower provides a financing option, allowing you to borrow and pay back the amount while staying within the minimum as required with a credit card.
Unlike other ordinary loans, a line of credit provides capital. That means you will need to pay interest only on the amount that you have chosen to withdraw.
Any asset you pledge to help you secure a loan is referred to as collateral. Often, licensed moneylenders will look at anything that is of the same value of the loan that you receive so that they can liquidate in the case of a default. Most borrowers in Singapore use real estate, inventory, accounts receivables, and any other asset that may be in their possession. If you are taking a secure loan, you should expect the lender to demand collateral as security for the loan.
While there are many other terms that you should seek to familiarise yourself with, the terms listed above are some of the most common. It is easy to make a mistake if you are not familiar with these terms. Thus, before committing yourself to any financing option, you should do your research and understand what all these terms stand for.