Business Loan Financing Terms (10 you need to know)
Small Business Loans
Whether you are getting a small business loan or thinking about getting one, there are many financing terms that are important to understand.
When making a financial commitment or learning about one, it’s important to understand the details and get clarity. Lucky for you, you don’t need to be an expert to learn about what the terms mean and how they can be applied. You can always reference this guide that we have created featuring the top 10 financing terms you need to know.
This guide is designed to empower and support those who are looking to get a loan and help them make smart financial decisions.
This process can seem intimidating, but once you have a hold on these financing terms and understand what they mean, it will put you ahead of the game.
The 10 Financing Terms to know:
1. Debt service coverage ratio (DSCR)
The amount of cash flow left over after the business has paid all its expenses. 1:1 means the business has $1.00 of net cash flow for every $1.00 of debt (existing and requested). Click to view DSCR video.
2. Loan to value (LTV)
The value of the collateral compared to the value of the loan and usually expressed as a %. Calculated by taking the loan amount divided by the net value of the assets.
3. Business Entity
This is the legal structure of your business. Common business entities include sole proprietorships, Limited Liability Corporations (LLC) or Corporations among others. Your choice in business entity may dictate what type of tax forms you fill out and what types of legal documents you may need to provide for your loan.
Cash funds taken from business paid to owners/shareholders. Many business owners may use this as a way to pay themselves, however this is not to be confused with payroll.
5. Debt to credit or credit utilization ratio
Total debt being used as a percentage of the total credit available. Click to view the 5 C’s of Credit video.
Assets pledged to lender as security on the loan.
7. Personal Guaranty
The business owner’s individual commitment to pay the business loan
8. Equity Injection
Down payment or cash contribution by borrower towards the total project costs. Click to view the Down Payments video.
9. FICO / Credit Score
A numerical rating of your credit history, typically between 300-850 and based on your credit history. A stronger score is typically 670 or higher.
10. Directed Payment / Controlled Disbursement
Loan funds are paid directly to vendors when possible or to the business owner according to the budget.
Why Understanding Financing Terms Matters
Knowing these terms will help you understand small business financing language and help the conversations with your loan officer be productive.
As you learn about your loan options, you will have get a better grasp on the requirements and terms which will help you ask more relevant questions.
It’s important to fully understand your loan requirements and commitment, so, if you find yourself unfamiliar with additional financing terms – don’t hesitate to ask your loan officer. Loan officers are happy to take the time to explain everything so that it is clear to you..
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