Five Common Business Loan Terms You Need To Know

Entrepreneurs looking to grow their business must have two basic ingredients: capital and labour. While both are critical to run and expand the business, capital is, by far, the more important of the two, as even hiring a workforce would require access to funds.

A business loan comes in various forms but there are certain basic terms one needs to understand while availing a business loan.

Principal:

The amount that is borrowed is the principal of the business loan. The amount is disbursed as per the terms of the loan agreement and has to be returned in full in addition to other charges to close the loan.

Interest:

The lenders do not have their own money and they themselves lend against money saved and deposited by their account holders, in the case of banks, or borrowed from other banks, in the case of non-banking finance companies.

As a result, there is a cost attached to the money and someone availing a business loan needs to pay this in the form of interest. The interest rate charged is a mark-up or a little higher than the cost of capital for the lenders themselves. This interest rate at which a business loan is given is fixed at the beginning of the loan, unlike a floating rate that changes for a personal housing loan. It needs to be repaid along with principal to close the loan account.

Tenure:

This refers to the duration of the loan. In other words, this is the period in which the borrower intends to repay the amount availed as a business loan along with the total interest due and other associated charges. Depending on the type of loan and the needs of the entrepreneur, this can be a short- or a long-duration loan.

Collateral:

Business loans can basically be of two types depending upon whether they involve collateral. Unsecured loans are given without any security as a guarantee and, therefore, come with additional risk and higher interest rates. A secured loan is given against a collateral.

Depending on the asset base, intended use of the loan and other factors such as urgency of the requirement, an entrepreneur can take a business loan against a collateral or without it. A collateral-backed loan can be against the mortgage of one’s office or plant building, machinery and so on.

Charges:

One small but important factor attached with all types of business loans is the associated charges. These cover loan approval and processing charges, as also other fees levied for valuing the collateral and for pre-payments.

Conclusion

Business loans help an entrepreneur scale their operations. Taking a business loan need not be a complex affair.

However, a borrower needs to keep certain basic elements in mind before taking the plunge, like the principal amount borrowed, the interest rate charged, duration of the loan, the option to choose from secured or collateral-free loan, and the processing charges.