Glossary: Business loan terminology every business owner must know

Annual percentage rate (APR)

It represents the total annual cost of your business loan. It is expressed as a percentage of the business loan amount and includes the interest rate on the loan balance and other associated finance charges.

Amortization schedule

It is the visual representation of the monthly payments you’ll make for the business loan, including the number of years you’ll pay, and the amount of interest and principal you’ll pay each month over time.

Balloon payment

It is a lump sum one-time payment made at the end of a business loan term. The balloon payment is significantly larger than the series of monthly payments made during the loan period. 

Borrower

The person or business who is taking out a business loan. They are obligated to repay the loan according to the loan terms agreed upon.

Bridge loan

These are short-term loans used to provide temporary financing to a business until it can get its hands on long-term financing. 

Business line of credit

It is a flexible loan option for businesses that gives them access to money on an as-needed basis until they’ve reached their credit limit.

Loan term

It is the amount of time given by the lender to pay off the loan. The borrower is required to make regular payments to the lender during this period.

Co-borrower

A co-borrower is a person or business that agrees to be jointly responsible for repaying the loan.

Collateral

It is an asset, such as property or equipment, that can be used to secure a loan. In case the borrower defaults, the lender can seize the collateral and sell it to repay the debt.

Co-signer

A cosigner is someone, usually a friend or family member with good credit, who agrees to give a guarantee to help you qualify for a loan. While doing so, the co-signer also takes on repayment responsibility but usually doesn’t benefit from the proceeds of the loan.

Credit history

This refers to the record of a person’s or business’ credit transactions and credit score. The better your credit history, the more likely you are to qualify for a loan.

Credit report

It is a document that consists of information about your credit history, current credit situation and the status of your credit accounts.

Credit score

It is a number based on your credit history and is deemed to be one of the most important measures of your creditworthiness. It is used by lenders to determine your eligibility for the loan. Generally, the best interest rates and terms for loans go to borrowers with excellent credit scores.

Default

Default occurs when the borrower fails to make payments on the loan according to the terms agreed upon. This can result in late fees or even harm your credit score.

Existing business loan

It is a business loan that has already been approved by the lender and is currently in use.

Equipment financing

A type of business loan that provides businesses with the funds they need to purchase or lease equipment and machinery. 

Fixed interest rate

It is the interest rate that remains the same for the duration of the loan. Since this interest rate doesn’t change over time, the monthly payment also remains the same for the borrower.

Grace period

The period of time beyond the due date during which a borrower is allowed to make payments on their loan without being penalized.

Interest payments

It is the cost of borrowing money, that is the amount you are required to pay over and above the principal amount borrowed. They are typically calculated as a percentage of the loan amount and must be paid monthly.

Invoice financing

Also known as accounts receivable financing, it is a  type of business financing that allows you to borrow funds against outstanding customer invoices.

Loan agreement

It is a legal contract between you and the lender. It details out all the loan-related information including the loan duration, interest rate terms, repayment schedule, total repayment amount and late charge amount.

Principal

The amount of money that is being borrowed in a business loan. 

Secured loan

Such loans have collateral attached to them. If you default, the lender can seize the asset to recoup their losses.

Unsecured loan

A loan where the borrower is not required to put forth any collateral.

Variable interest rate

Also known as a floating interest rate, this type of interest rate can change over the loan term. It typically fluctuates based on a benchmark rate specified in the loan agreement. 

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