Five Common Business Loan Terms You Need to Know

by | Jul 12, 2022 | Insights To Business

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When you own a business, you need to understand the language when it comes to working with banks. Business loan terms can be confusing unless you know what each word or phrase means. Before you make the decision to borrow money, do your research so that you know what a lender is talking about when they ask for certain documents. You will be working with banks throughout the life of your business. Start to learn their language now so you are fully prepared if you ever need a loan for working capital.

Accounts Payable

Accounts payable is the money you on account. This can mean any monies you have borrowed or any money owed for any items you have received on credit. Accounts receivable is any monies that are owed to you. This includes any credit you have extended to other companies or clients that buy from you on a regular basis. Both accounts should be monitored closely so that you have an accurate picture of your business’s financial health.

Blanket Lien

Collateral is any property you own that you use as proof of payment. A blanket lien gives a lender the right to seize not only the collateral but any or all of your business property if you would happen to default. In most cases, only the collateral will be seized. If the collateral has depreciated or has not held its value, other property may be seized to make up the difference.

Cash Flow Statement

Cash flow statements are used to track your income and expenses for a specific period of time. Balance sheets compare both and account for profits or losses that bring both income and expenses into balance. This shows a generalized picture of your financial health for the year. Cash flow statements show more recent fluctuations in your financial health and are often produced on a monthly basis and used to adjust your overall budget.

Sub-prime Borrower

A sub-prime borrower is an entity that carries a much higher risk. Borrowers with good credit and excellent financial health will have no problem borrowing the working capital they need. A sub-prime borrower may be having financial difficulties due to a business slowdown or possibly a shutdown due to an illness or other event. Although they are a higher risk, it doesn’t mean they can’t get a loan. It just means that their criteria and requirements will be different than for someone with exceptional credit.

Working Capital

Working capital is the amount a business has to work with. This is normally the total amount of money it has at its disposal minus any debt that it owes. When profits dip and business is slow, the amount of working capital a business has to work with may not be sufficient to maintain daily operations. Applying for a working capital loan when the business is financially stable will ensure that the loan is approved. Setting the money aside and allowing it to grow interest is the best way to prepare for the future. Knowing business loan terms will help you stay ahead of the game when dealing with your company’s financial health and stability. When you need to make changes within your business, be proactive. Apply for a working capital loan before you need so you have the funds you need at the right time.