With so many new lending companies popping up left and right, how are you supposed to know which option is best? How are you even supposed to know where to start? We’ve created a list of common terms that you’ll see on websites offering funding for small businesses. Although this list is not exhaustive of all lending terminology, it is a list of the terms that can be added tools in your tool belt to help you as a business owner advocate for yourself and your business.
Secured/Unsecured: A secured loan is a loan that is issued by a lender and is secured by some form of collateral (an asset of an individual or of a business). An unsecured loan is a loan that does not have the added security of collateral.
Personal Guarantee: A personal guarantee is a contracted promise that the individual who is borrowing a loan on behalf of a business will personally pay back the loan with their assets should the business fail to do so. This part of the contract is designed to protect the lender in the worse case scenario. Should the business fail to pay off the debt, this is an added guarantee that the money will be repaid to the lender in full. Business loans that have a personal guarantee are typically unsecured business loans - that is, you can still have an unsecured business loan, but with a personal guarantee against your own things! A personal guarantee is a way to “secure” a business loan without actually calling it a secure loan.
Interest Rate: The interest rate associated with a loan, is a percent of the total dollar amount borrowed that is charged by a lender for the use of the total dollar amount borrowed.
APR: APR stands for Annualized Percentage Rate and is the total annualized cost of borrowing. Depending on who you’re borrowing from, APRs will typically include all fees associated with the loan (servicing and origination) . APR differs from interest rate in that it is the annualized cost of the borrowed sum, while interest rates are monthly costs associated with repayment of the borrowed sum.
Flat Fee: A flat fee is the fee associated with borrowing and can be looked at as a percentage, or as a dollar amount. For example, if you were to borrow $10,000 at a 10% flat rate fee, you would owe back $1,000. The cost of borrowing does not change based on how quickly or slowly the loan is repaid.
Origination Fee: An origination fee is the fee that is charged by a lender to cover the cost of processing a loan for a borrower.
Servicing Fee: A servicing fee is the fee that is charged by a lender to cover the servicing costs of a loan for a borrower. Servicing costs can include keeping records of payments, making payments on a loan and other services provided by the lender.
0% Down: 0% down means that a borrower doesn’t have to pay anything up front for the money that they’re borrowing. Often times we’ll see 0% down in advertisements for car purchases - this means that someone who purchases a car can drive it right off the lot with no additional cost that day. However, it usually also means that the monthly payment on the car (or the loan) is higher, or the interest rate is higher. Be sure to check terms if you see 0% down - sometimes it’s too good to be true!
Term Length: A term length is how long it takes a borrower to pay back their loan. There are all different term lengths associated with all different types of loans. Typically but not always, the shorter the term length, the higher the APR or the total cost of borrowing. Be sure to compare your term length to the total amount owed to ensure you understand your cost of borrowing over time.
Pre-Qualified: Pre-qualified is a tricky term. This term is often mistaken for pre-approved. If you’re pre-qualified for a loan offer, it means you still have to apply. Likely a lender has taken bits of information they have on you (like the dollar amount that is in your bank account) and pre-qualified you for a loan amount without the full picture of you as a borrower. Pre-qualified means you could possibly borrow money, but does not guarantee funding.
Pre-Approved: Pre-approved does not mean what you think it means. Although it implies that you're already approved for some sort of funding, what it really means is more literal. In the lending industry, pre-approved literally means "before the stage of approval." Don't confuse this with "already been approved!"
Collateral: Collateral is any asset of an individual or a business given by a borrower to a lender in the event that the borrower cannot repay the loan. If a loan is secured, it means that there is some form of collateral guaranteed should repayment terms not be met.
Invoice Factoring - Invoice Factoring is the sale of existing invoices that are currently outstanding to a business. This provides near immediate financing for the business selling the invoices, and means that all future invoice repayment for those invoices included in the sale goes to the company that purchased the outstanding invoices. Invoice factoring is not considered a loan but rather an advancement on existing/invoice receivables.
Have a term you think we should add to this post? Let us know by emailing us at firstname.lastname@example.org and we’ll add it!