Have you ever noticed that once you start talking to a professional about your business’s financing options that you immediately get lost in a sea of confusing terms and phrases? Dealing with a banker or any finance professional can leave you feeling as if you need a dictionary that can translate English to banker for you. Instead of trying to learn a second language, all that you need to do is use this helpful guide to understanding the finance lingo that can seem so confusing and esoteric.
There are different types of loans that you could consider when you need financing. It will be key for you to know what those types of loans are and what they could mean for your business. Here are some of the lending options that you could have before you as a business.
- The short-term loan is a loan that will only last a few weeks or months before it is paid back in full. These loans usually do not last any more than a year. A good example of a short-term loan would be an SBA-approved loan.
- The full-term loan is one that provides a larger amount of money at once and it will last up to 10 or 20 years before full repayment.
- A line of credit is less like a loan and more like a way to pay for things along the way. Businesses often get a line of credit when they will be doing renovations and construction work.
When you borrow money for your business, another thing that will happen is that you will be presented with the terms of that loan. These can vary depending on the lending type. However, some of the common terms you will hear include the following:
- Accrued interest is a type of interest that adds up over time. You will not pay the interest all at once. Instead, it will be wrapped up in your loan payments or it will be paid at the end of the loan term.
- Capitalization is a term that has to do with the amount of interest you will pay as you pay that loan back. Often, you will be presented with something called an amortization table that will show how your loan will be capitalized.
- Interest rate is the amount you will be paying in interest and it is based on a percentage of how much you owe in the business loan. There are two types: fixed and variable.
- Prime rate is the rate that is considered the best interest rate available on a given day. This rate can change from day to day but it is considered the base of any loan, including business loans.
Of course, there are other terms that have to do with general finance in your business. You will likely know most of these, but it never hurts to get a refresher course on them.
- Accounts payable would be all of the people you owe money to. This could include lenders, utilities, supply companies, and warehouses.
- Accounts receivable would include everyone that owes money to you. In other words, this is your customer base.
- Overhead would refer to how many expenses you have to run your business. A lower overhead means lower operating costs.
Whether you are interested in pursuing a career in finance or you are just trying to understand business finance for your small business, knowing these terms will make it easier for you to communicate with financial officers and bankers that you could come in contact with on a regular basis.