Many small businesses and startups need loans. For instance, you may need funds to purchase a location or to buy inventory and equipment. The process of getting a loan can be bewildering, with unfamiliar words and phrases popping up more often than you would like. Whether you have already begun the process or are in the preliminary stages, it helps to acquaint yourself with a glossary of typical loan documents and terms. Here are the top 13 words you need to know.
Amortization occurs when you pay down your loan or debt over a set period of time. You will usually pay monthly on the principal plus interest.
2. Annual Interest Rate
This type of interest rate is a simplified rate and typically does not indicate the true costs of a loan.
3. Annual Percentage Rate
This is the rate that does typically reflect the true cost of a loan. It factors in fees and compounding interest.
4. Asset-Based Financing
Some businesses secure their loans with assets such as real estate and equipment. Such a loan is called asset-based financing.
5. Bridge Loan
A bridge loan is one that you take out for the short term to “bridge” the gap to the time when you can take out a longer-term loan or have the money to pay back the loan. This type of loan is also called an interim loan and tends to come with more fees and higher interest rates.
6. Business Line of Credit
A business line of credit provides a credit line on standby for your business to draw upon when it needs working capital.
Collateral helps secure a loan. For example, if you put up your equipment as collateral, lenders see that as incentive for you to repay the loan. If you do not, the lender can take the items you put up as collateral.
8. Commercial Real Estate Appraisal
A commercial real estate appraisal occurs when an official, licensed appraiser analyzes the market value of your real estate. The three approaches to appraisal are sales comparison (comparing sales of similar area properties), the cost approach (how much the land is worth and how much the building and improvements cost), and the income approach (the income history and income potential of the property). An appraiser tends to use all three approaches to come up with a fair idea of how much a property is worth.
9. Compound Interest
Compound interest occurs when interest due is added to the principal, and that amount also generates interest.
10. Conventional Loan
A conventional loan carries a mortgage and is often specific to uses such as mixed use-industrial and mixed use-commercial.
11. Origination Fee
Many lenders charge origination fees for the processing of a loan, and an origination fee is typically a percentage of the total loan. For example, a 1% origination fee on a $100,000 loan would be $1,000.
12. Permanent Mortgage Loan
A permanent mortgage loan is usually for at least five years and is often repaid in full according to regularly scheduled debt payments. It is also possible to get a balloon payment schedule where interest is paid up front, with a large lump sum due at the end.
13. Promissory Note
A promissory note is the contract that governs the terms, conditions and payment schedule of your loan. An unsecured promissory note means that the lender has decided that your cash flow and profits should be sufficient to repay the loan. A secured promissory note means that if you cannot repay the loan, your lender can seize the collateral you put up.This list of 13 terms is only a basic glossary. You should always understand the meaning of words in contracts and how they apply to your situation before signing anything.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.