10 Lending Terms Every Business Owner Needs to Know
Applying for a small business loan can be intimidating. Lending language can seem more complicated than setting up a business. However, it is critical to understand the fine print on your business loans. To cut through the confusion, here are 10 of the most important lending terms you need to know.
- Fixed Rate
Fixed rate is the fixed interest rate you’ll pay throughout your loan period. A fixed-rate loan won’t increase during the life of your loan.
- Default Interest
If you default on your loan, you’ll be charged default interest. The interest rate charged will be listed in your loan terms.
- Variable Rate
The exact opposite of a Fixed Rate loan, a variable interest rate loan means that your monthly payments will change based on the market. Most business loans are fixed-rate, but variable rates typically don’t have a time-limit.
Some loan agreements come with covenants that require you to meet outlined conditions. One example might be that you have to use the lending bank for all your business accounts.
- Debt Service
Your debt service is the periodic payments required to pay for the principal and the interest on your loan.
- Personal Guarantee
A personal guarantee requires you to be personally responsible for the debt if you default. This is different from collateral because a lender can seize your personal assets if you don’t or can’t pay back your business loan.
- Debt-service Coverage Ratio
Your debt-service coverage ratio is the amount of cash your business has and how much is available to service your debt. It is based on your business’s cash flow.
Amortization is the process of paying back your principle and interest charges through on-time payments.
- Balloon Payment
A balloon payment is a large principle payment. Typically, business loans require this at the end of your loan term.
- Environmental Risk
Environmental Risk is the loss of collateral value as a result of hazardous materials being found on your property.