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You don’t need to be a financial expert to find the right financing for your small business, but understanding what you do need to know starts with a few vocabulary terms.

The following 25 terms and phrases will help you understand the language of small business lending and likely make the conversation you have with a loan officer less intimidating.

  1. ACH Payments: The Automatic Clearing House (ACH) is a network for processing electronic credit and debit transactions in the United States. An ACH payment (or ACH debit transfer) occurs when you explicitly allow a third party (a vendor, merchant or a lender) to have direct access to your business checking account to withdraw funds agreed upon by you.
  2. Annual Percentage Rate (APR): The cost of the loan, including total interest and other fees, expressed as a yearly rate. APR takes into account the amount and timing of capital you receive, fees you pay, and the periodic payments you make. It is not used to calculate the interest expense.
  3. Assets: An asset is something of value, which is owned by the borrower, that can be used as collateral on a small business loan. Traditional lenders like banks and credit unions require some form of collateral to secure a business loan. An SBA-guaranteed loan will also require collateral.
  4. Average Monthly Payment Obligation: This is the average monthly repayment amount of the loan, which does not include fees and other charges you can avoid, such as late payment fees and returned check fees. The actual repayment frequency could be daily, weekly or monthly.
  5. Balloon Payment: The unpaid balance due at the end of a term loan (for loan types that don’t fully amortize over the term of the loan). A balloon payment, or the payment of that unpaid balance, is due at the end of the loan term to pay the balance in full.
  6. Cash Flow: The total amount of money transferred into and out of a business that is used to pay for day-to-day expenses.
  7. Cents on the Dollar: This is the total amount of interest paid per dollar borrowed. This amount is exclusive of fees.
  8. Collateral: An asset, or assets, a borrower offers to a lender to secure a loan. The lender can acquire these assets if the borrower defaults on the loan.
  9. Current Liabilities: Debt obligations owned by a business to creditors within a 12-month timeframe or normal operating cycle. Current liabilities appear on your balance sheet and will include things like short-term debt, accounts payable, accrued liabilities and other similar debt.
  10. Default: Failure to make agreed-upon periodic payments on a loan.
  11. Fixed Assets: A “tangible” asset, like property or equipment that can be used as collateral.
  12. Gross Profit: The cash left over when the total cost of goods is subtracted from the total revenue.
  13. Holdback: Within the context of a Merchant Cash Advance, the holdback is the percentage of the daily credit and debit card receipts that are withheld every day by the provider to pay back the advance.
  14. Interest-Only Payments: Making only interest payments on a loan without paying anything on the principal. At the end of the term, the borrower will either need to refinance or pay back the principal in a lump sum.
  15. Liabilities: A business’ debts or obligations that can be resolved in the form of periodic payments or the transfer of goods or services.
  16. Line of Credit: A business line of credit is a revolving loan that provides a fixed amount of capital that can be used, repaid, and then used again as needed over the term of the credit line.
  17. Merchant Cash Advance (MCA): An advance based upon a company’s daily credit card receipts into its credit card merchant account.
  18. Net Income: A business’ total income after deducting the costs of goods, taxes and other expenses from the business’ cash receipts.
  19. Overdraft: A deficit caused by the withdrawal of more money from an account than the account currently holds.
  20. Principal: The amount of money being borrowed excluding interest payments and fees.
  21. Profit and Loss Statement (P&L): A report maintained by a business that shows the business’ income minus expenses.
  22. Secured Loan: A loan where the borrower puts forth collateral in the event the business defaults on the loan.
  23. Term Loan: A loan that is repaid in regular periodic payments over a specified period of time. Terms can vary depending upon the nature of the loan or the lender and could be as short as three months to several years.
  24. Total Cost of Capital (TCC): This is the total amount of interest and other fees for the loan. The amount does not include fees and other charges you can avoid, such as late payment fees and returned payment fees.
  25. Unsecured Loan: A loan where the borrower is not required to put forth specific collateral to secure the loan.

Although there may be other terms a loan officer could use when talking to you about a small business loan, this is a good place to start. With that in mind, if you hear a term referenced that you aren’t familiar with, ask for clarification. Like any specialized industry, it’s easy to forget that people outside the industry might be unfamiliar with the jargon. Most loan officers will be happy to explain anything you might not understand.

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About the Author(s)

Ty Kiisel headhot

Ty is the author of "Getting a Business Loan: Financing Your Main Street Business" as well as a contributing editor for OnDeck, an online platform where millions of small businesses can obtain affordable loans with a fraction of the time and effort that it takes through traditional channels.

Contributing Editor, OnDeck
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