Key Terms to Know About Small Business Loans

Despite the many options for funding now available, business loans remain a popular way to finance expansion plans and other business investments. With more providers in the marketplace than ever before, it is crucial that you understand how business loans work in order to navigate complicated fee structures and get the best deal.

Here, we provide a useful list of key terms that will ensure you ask the right questions of your bank or alternative lender, understand the terms of your business loan, and don’t get caught out by hidden charges.

Secured Business Loan

A secured business loan means the borrower offers an asset as collateral, which the lender can seize if the loan is not replayed as agreed. This lowers the risk to the bank, which can therefore offer a more favourable rate on the loan or lend to businesses which may otherwise not have enough credit history. Many business owners offer their own homes as collateral in order to access secured loans, but this means exposing themselves and their families to considerable extra risk should their company get into trouble. 

Unsecured Business Loan

Unsecured business loans are when the bank or alternative lender provides a lump sum of money solely on the basis of an agreement that it will be repaid with interest at a later date. Obviously, this arrangement is still not without risk to the business, because the lender still has legal recourses to recover its money, but at least the owner’s personal assets should be safe. On the other hand, unsecured loans are typically more expensive than secured loans, and a business generally needs a good credit record to access one.

Payment Term

This is the length of time you have to re-pay the loan. A business will typically have a regular re-payment schedule over the term of the loan, until all the capital and interest is paid back.

Fixed Interest Rate

Under a fixed interest agreement, you will know exactly what your repayments will be over the term of the loan, because you have agreed an interest rate in advance. 

Variable Interest Rate

It is also possible to get a loan where the interest charged varies according to economic factors, and/or the base rate set by the central bank. This means your repayment amounts can go up or down over the course of the loan term.

Dishonour Fee

Sometimes called a late-payment fee, or failed payment fee, these terms all refer to a fixed penalty that you will automatically have to pay to the bank or lender if you miss a re-payment deadline, even if you quickly catch up on your obligations. Re-payments can be a real drain on cash flow and businesses are well advised not to underestimate the possibility that payments will occasionally be missed.

Prepayment Penalty

If business is good and the cash is flowing in, you may decide to pay off a loan early in order to avoid incurring further interest. However, most lenders have a fee for this too.

Origination Fee

This is just one of several possible fees, sometimes also labelled as application fees or processing fees, that many lenders charge for issuing a loan to a customer, who must then pay interest on the capital. Some even charge an exit fee for customers who have paid off their business loan as agreed. Business owners should read the small print of any loan and add up all these fees, alongside the interest to be paid, in order to properly understand the cost of each loan and compare prices effectively.

Alternative Lender

It used to be just banks that offered business loans, but over the last couple of decades a series of non-bank lenders have emerged, many trading over the Internet. They typically offer a faster application system and some will lend on less stringent credit criteria – at a price. They are known as alternative lenders, but their product is still essentially the business loan banks have been offering for centuries.

Cash Flow Finance

Real alternatives to business loans do exist, however: cash flow finance is also an age-old business funding method, but it’s been given a new lease of life by smart fintech providers like OptiPay. OptiPay specialises in a form of cash flow finance called invoice discounting, which allows you to access the money tied up in your unpaid invoices instead of waiting 30, 60 or even 90 days for the customer to settle. For more details of how this can be a low-risk, cost-effective alternative to a business loan, visit our dedicated pages or give us a call.

“Get tomorrow’s cash flow today”.