Educate Yourself on the Most Common Commercial Lending Terms
At some point, nearly every business will need to secure financing. Entrepreneurs need capital for startups. Established businesses sometimes require an influx of cash for upgrades, remodels, or to cover unexpected shortfalls. If you’re planning to seek financing for your company, it’s critical that you understand these small business lending terms.
Business Credit Score
Your company’s business credit score is the foundation of its bankability. Like a personal credit score, it is the key factor in determining creditworthiness and will dictate the terms, rates, and types of loans you may receive. Unlike a personal credit score, business credit scores range from 0 to 100, and they are available publicly.
An income statement is a map of your businesses finances. It is also known as a profit and loss statement and includes income, revenue, and expenses over a quarterly or annual period. Income statements are helpful because they tell the story of your business’ viability and financial responsibility. This is especially helpful for new companies that haven’t built up a significant business credit history and need small business lending.
Line of Credit
For many companies, a business line of credit is a good alternative to a traditional loan. Essentially, you are approved to borrow up to a certain amount, but you can borrow it incrementally when you need it, and only pay interest on the amount you use. This is an effective way to build a good business credit history.
A business term loan is similar to a personal loan like a mortgage. You receive the money and pay it back over the course of 1 to 5 years with interest. Payments are generally weekly or monthly at a fixed amount. They are best for established businesses as they usually require extensive documentation.
As the name would suggest, an equipment loan is financing specifically acquired for the purchase or a new piece of business equipment. Lenders recognize the return on investment on this type of small business lending, so they are fairly easy to obtain.
An SBA loan is partially guaranteed by the U.S. Government’s Small Business Administration. The SBA works with lenders to assume some of the risks to businesses that are having trouble securing traditional financing. It essentially helps you establish better bankability in the future.
Small business lending can seem like an overwhelming concept, but knowing these terms can help you develop your plans and seek out the resources that can help you.