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Commonly Used Terms in Lending |
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Below is a list of commonly used terms that you will come across as you seek to obtain a business LOC.
Annual Percentage Rate (APR) – This is the annualized interest rate that will be applied to any drawn down balance on your business line of credit. This interest rate is typically applied on a monthly basis and is based on your average daily balance.
Balance Sheet – This is a measure of a business (or person’s) assets versus their liabilities and other debts.
Business Plan – This is a document that showcases your business operations, you intent regarding a business line of credit or loan, and the anticipated financial statements for your business over the next three to five years.
Cash Flow Analysis – This document showcases the incoming cash of a business, how this cash is used, and cash distributions to shareholders. While similar to a profit and loss statement, the results of this document can vary drastically depending on whether or not you extend credit to your customers or whether you consistently have outstanding balances with vendors.
Capital Markets – This refers to the general lending environment, banks, and finance companies that extend business lines of credit and loans.
Collateral – In the event that you apply for a secured line of credit, the collateral represents any asset that you have pledged as security for the facility. As discussed earlier, this can include your home, vehicles, business equipment, other real estate, or any other saleable (and usually tangible) asset.
Credit Line Covenants – These are the terms of the credit facility granted to you by a financial institution. This is a wide sweeping term and it can encompass the amount of positive cash flow your business must consistently produce, collateral, and personal credit requirements.
Credit Term – This is often referred to as the length of time of which the credit line will be active and available for use.
Debt Service – This is the amount of money that you are required to pay on a periodic (usually monthly) basis for any financial credit extended to a business or individual.
Due Diligence – In regards to lending, this is the process of when a lender assesses a business’ or individuals’ ability to repay borrowed funds, their income, and their assets.
Guarantee – This term, when discussed in lending, discusses the guarantees that will be made by a business or an individual regarding their business LOC or other business debts.
Intermediaries – This term refers to firms or individuals that secure financing on behalf of their clients.
Principal – The underlying capital received by a business in the form of credit that is required to be repaid over a specified period of time.
Profit and Loss Statement – This a formal financial document that showcases a business’ actual or expected income, expenses, and net profits/losses/
Receivables – In regards to lending, this can refer to either the credit owed by a borrower to a financial institution or money owed by a customer to a business.
Senior Debt – In organizations that use several forms of credit, senior debt is the first debt to be repaid in the event of business liquidation.
Working Capital – This is capital to be used by the business for day to day operations. This is the most common usage of a business LOC. |
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