5 Finance Terms You Must Know
In business, words are powerful – but only for those who know the meanings behind the phrases they encounter. Take control of your company’s future by understanding key terms you’ll come across when applying for funding for your small business.
Here are several important terms you need to know…
Collateral. This is used as a guarantee to the lender that you will provide something valuable – and is only given if you fail to repay your loan. It shows the lender that you are trustworthy since you are putting an asset on the line. The collateral you pledge can either be monetary or something physical of value.
Secured/Unsecured Loan. When offering collateral, the loan becomes a secure loan. An unsecured loan does not require collateral – instead, these are given based on credit history. Typically, an unsecured loan has higher interest rates due to the lack of a guarantee of collateral in the event you can’t repay.
Fixed/Variable Interest Rate Loan. When seeking a loan, the term you most likely know very well is “interest.” However, there are two forms of interest you will see: Fixed and variable. A fixed interest rate loan remains the same over the course of the loan term. A variable interest rate loan, on the other hand, changes along with the market. Usually, if the interest rate is variable, it will start out lower than a fixed rate.
APR. This stands for “annual percentage rate.” The APR is the actual cost of receiving the loan – representing the interest rate annually, rather than monthly. When determining how much the loan will cost you beyond what you are borrowing, this is the term you need to understand.
Factor Rates. Factor rates are different from APR financing, in that at the beginning of the life of the loan or advance, the lender calculates all of the interest due and works it into your scheduled payments. With APR, financing interest accrues on the depreciating principal amount so your interest payments get smaller and smaller as you make more payments.
There are many other terms you should be aware of, so make sure you do your research before signing any agreements. Want assistance? Let us guide you through the funding process – keeping you informed to make knowledgeable decisions along the way.