Compare Small Business Loans
If you’re thinking about taking out a small business loan soon, it’s good to know common business loan terms and definitions. There are a lot of different financing options available to small business owners from traditional bank loans to invoice factoring, so getting a sense of common terms associated with each can help you decide which type is best for your business. We’ve also compiled a list of common business loan definitions you’ll need to know once you start applying and receiving loan offers.
Typical Business Loan Terms
Before you take out a loan, it’s helpful to know what common terms and features are of different loan products. In the table below, we break down the typical loan maturities, amounts, interest rates and funding times for a variety of loans.
|Loan Type||Terms||Amounts||APR Range||Funding Time (Days)|
|Bank loan||1 - 25 years||$10,000 - $5 million||5.75% - 13%||7 - 60|
|Bank line of credit||1 - 5 years||$5,000 - $100,000||5.75% - 13%||7 - 60|
|SBA loan||1 - 25 years||$5,000 - $5 million||4% - 13%||14 - 90|
|Online loan||3 - 36 months||$5,000 - $500,000||7.3% - 98.4%||1 - 2|
|Online line of credit||6 - 12 months||$5,000 - $100,000||7.77% - 80%||1 - 2|
|Invoice factoring||1 - 3 months||$20,000 - $2 million||17% - 70%||1 - 5|
|Merchant cash advance||3 - 24 months||$5,000 - $2 million||15% - 100%||1 - 2|
Common Business Loan and Finance Definitions
If you’re planning on taking out a small business loan, there are a lot of terms and concepts that will come up over the course of the application process. We list some of the definitions of some of the most common business loan terms below.
Amortization: If a loan is amortized, it means that there is a fixed repayment schedule with each payment being the same dollar amount over the life of the loan. For example, an amortized loan might have a monthly payment of $200, and this would never change over the life of the loan.
Annual Percentage Rate: The annual percentage rate (APR) shows the total annual cost of a loan to the borrower, inclusive of the interest rate and fees charged, such as origination, packaging or referral fees. For example, a $10,000 three-year loan with a 10% interest rate and a $300 origination fee would have an APR of 12.04%.
Business Entity Types:
- B Corporation: A B corporation is a for-profit company that must meet social accountability and transparency standards, by striving to create a positive impact on workers, communities, society and the environment.
- C Corporation: A C corporation is a for-profit company that is taxed separately from its owners. Most major companies are C corporations.
- Limited Liability Company (LLC): A limited liability company (LLC) is a private company with the pass-through tax properties of a partnership or sole proprietorship, but the limited liability protection of a corporation for its owners.
- Partnership: A partnership is a business that is owned by two or more people. There are three types of partnerships generally recognized in the U.S.: general partnerships, limited liability partnerships and joint ventures.
- S Corporation: An S corporation is a for-profit company that does not pay any federal income taxes and instead passes its income and losses to its shareholders.
- Sole Proprietorship: A sole proprietorship is a business owned and run by one person. There is no legal distinction between the owner and the business in a sole proprietorship.
Business Lien: When you agree to a lien, you give your creditor a legal right to your property. In the event that you cannot repay your debt, your creditor has the right to seize the property that was specified in the lien.
Business Plan: A business plan is a formal document outlining the mission, goals and feasibility of a business idea or concept. Business plans include industry and market analysis, projected financial information and organizational information.
Cash Flow: Cash flow tracks the net amount of cash (and other "cash equivalents") going into and out of a business. If a business has positive cash flow, that means there is more cash coming in than going out. Similarly, businesses with negative cash flow have more cash leaving than coming in.
Collateral: When you apply for a business loan, lenders will often ask you to put up collateral to secure the loan. Collateral will be specific property, such as real estate or equipment, that the lender can seize if you cannot repay the debt.
D-U-N-S Number: Created by Dun & Bradstreet, a D-U-N-S number is a unique identifier assigned to businesses. Most government agencies will require your business to have a D-U-N-S number in order to bid on government contracts and proposals. You have to sign up for a number through Dun & Bradstreet.
Debt Service: Debt service simply refers to the total principal and interest payments required on a loan over a specific period of time. For example, if your monthly loan payments are $100, then your annual debt service on that loan would be $1,200.
Debt Service Coverage Ratio: Debt service coverage ratio (DSCR) is a measure of your business' ability to repay any debt obligations over the course of a year -- it shows how much cash your business has relative to its debt. It's calculated by dividing a business' net operating income by its total debt service. If your business' net operating income is $100,000 and your total debt service is $50,000, your debt service coverage ratio would be 2. In general, lenders look for businesses with DSCR of at least 1.2 to 1.5.
Debt-to-Income Ratio: Debt-to-income ratio (DTI) is a measure of your ability to make your loan payments every month. It shows how much debt you carry relative to your income on a monthly basis. For example, if your monthly income is $4,000 and your loan payments are $1,000, your debt-to-income ratio would be 25%.
EBITDA: EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It's a measure of a company's net earnings before interest expenses, taxes, depreciation and amortization are subtracted. A negative EBITDA means a company has issues with profitability and cash flow.
Loan Maturity: A loan's maturity refers to a loan’s final payment date. For instance, if you take out a loan with a maturity of three years, you will pay back the loan over those three years, with your final payment being three years from taking out the loan.
Net Operating Income: Net operating income is a measure of a company's profit. It is calculated by subtracting operating expenses from revenue. It does not include any interest or income tax expenses.
Origination Fee: An origination fee comes attached to most business loans, and it is usually subtracted from the loan amount before you receive funds. It is either expressed as a dollar amount or as a percentage of the loan amount. On business loans, origination fees range from 1% to 6% of the loan amount.
Personal Guarantee: A personal guarantee is a written, legal promise that a borrower (normally the business owner) will repay business debts in the event that the business cannot. It makes you personally responsible for your business's debts.
Prepayment Penalty: Prepayment penalties are sometimes charged if you pay your loan balance early. Lenders may charge such penalties as a way to compensate for the loss of interest from you prepaying your loan. It’s best to look for business loans that don’t come with prepayment penalties, as it’s always nice to be able to save on interest if you can afford extra payments.
Prime Rate: The prime rate is the interest rate that banks charge their most creditworthy customers. When people refer to the prime rate, they typically mean the prime rate published in the Wall Street Journal. As of March 2017, the prime rate was 4%.
SBA Guarantee Fee: This is a fee charged by the Small Business Administration for all 7(a) loans it guarantees. All SBA lenders are required to pay this fee, but have the option of passing it on to their borrowers. The fee is between 0% to 3.75% of the guaranteed portion of the loan.
UCC Filing: A Uniform Commercial Code-1 (UCC) filing is a legal form that your creditor may fill out to create a lien against assets that are being used to secure a loan. It is filed with the secretary of state and is a publicly available record.
Working Capital: Working capital refers to a company's available capital for daily operations at any given time. It's calculated by subtracting your current liabilities from your current assets. Assets include cash, accounts receivable, inventory, supplies, real estate and equipment. Liabilities include financial debt obligations, accounts payable, salaries or wages payable, and income tax payable.