3 Confusing Business Loan Terms Explained
Every new business endeavor you want to embark on needs money to get it started. Unless you happen to be sitting on a large pile of cash, you’re going to need a way to get your hands on some working capital, long before you begin profiting from your sales. More often than not, new business owners opt for taking out a small business loan to get those first few thousands of dollars needed to get their businesses up and running.
While it’s relatively easy to take out a small business loan, there are a lot of terms and phrases that are part of loan jargon which might be new, and a bit confusing, for new business owners. But before you become too intimidated by the new language, we’ve picked up a handful of some terminology that you may find confusing and explained them in more simple and easy-to-understand terms.
The payment term of your loan is kind of like a rental agreement on an apartment, or the terms of service when you enter into a contract with someone. Just like the agreement you make with your landlord about how much to pay, when to pay it, and what happens if something goes wrong, the payment terms on your loan determine everything you need to know about it. These terms will tell you what type of interest rate you’ll have (we’ll get to this later), how high the interest rate will be, what your minimum payment will be (weekly, monthly, annually, etc.), and how long you have to pay off your loan in full.
Variably VS. Fixed Interest Rate
Unless you’ve borrowed money from a dear friend, most likely the institution lending you funds will charge you a fee for the duration of the time you are using their money. This is what an interest rate is. The rate will be done as a percentage and will be charged according to the terms of your loan (many times it accumulates monthly). If your lender gives you a fixed interest rate (let’s say of 3.5%), then you will pay 3.5% of your principal balance every time your interest is accrued, until you’ve completely paid back your small business loan. If you’ve been given a variable interest rate, that means that the percentage will fluctuate, according to the market benchmark that month. There are pros and cons to both types of interest rates, so you’ll want to do your research before choosing the best small loan for you.
APR stands for Annual Percentage Rate, and it’s basically an overall figure of how much your loan will cost you for the year. This includes any fees the lender may charge and all of the interest compounded over the year. This snapshot will tell you if the loan is worth it, and how much money you’ll need to be able to pay it back in full.
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