There are dozens of ways to acquire money to start a business these days. One can crowdfund, find angel investors, or go a more traditional route and get a small business loan.
When it comes to getting a business loan, there’s a lot you need to know ahead of time. This is why it is essential to take your time and do the research before you get started. By doing this prep work beforehand, you’re ensuring that you will have the ability to make an informed decision when the time comes.
With that in mind, here are some basic business loan terms you should know about.
Accounts Payable/Accounts Receivable
When discussing accounts payable and receivable, you are talking about two sides of the same business. Accounts payable is the side of a company responsible for paying vendors and debt. Accounts receivable are responsible for collecting money that is owed to the business.
Amortization
When a bank and business come together to decide how much is due for each period, they discuss amortization. In other words, they decide how much money the company will have to pay to begin paying off the loan. This will include interest and the principal loan amount.
Borrower Default
Borrower default occurs when the borrower (in this case, a business) fails to repay the loan as agreed upon. Depending on the terms of the loan, they may or may not be a grace period. If the borrower defaults, the loan will likely be sent to collections.
Collateral
Collateral refers to items of value or assets that a person or business may offer as security for the loan. Generally, these items are only at risk should the borrower default on the loan.
Grace Period
A grace period is intended to the extent of the payment due date. This is done to give the borrower more time to come up with the funds. There are generally no penalties in a grace period. In other words, lenders won’t (or can’t) apply late fees, increased interest, or any additional charges.
Loan Limit
Like a credit card, there are strict limits on loans. This is called a loan limit. When applying for a loan, the borrower will be informed of the maximum amount the lender is willing to give them.
Secured and Unsecured Loan
Secured and unsecured loans are essentially two different ways of obtaining a loan. A secured loan has collateral on the line (see above). This means the lenders have something to seize if the borrower defaults. Alternatively, an unsecured loan has no collateral, putting the risk on the lenders.