Glossary of Commonly Used Loan Terms
The terms contained in this glossary are provided for general information purposes only and should not be relied upon for legal matters.
ACCOUNTING PERIOD
A period of time, (month, quarter, year), for which a financial statement is produced.
ACCOUNTS RECEIVABLE FINANCING
A loan gained by borrowing against receivables. Loans are paid down as receivables are collected.
ANNUAL FEE
The amount charged by the lender each year to cover the administrative costs of the loan/line.
BALANCE SHEET
Financial statement showing assets and liabilities at a specific point (snapshot) in time.
COLLATERAL
An asset that can be sold for cash and which has been pledged to a creditor to secure an obligation.
COMMERCIAL REAL ESTATE LOANS
Similar to residential mortgages, but collateral is business property. Interest rates are usually fixed; the length of the loan can range from 5-20 years with payments due monthly.
COMPOUND INTEREST
Interest earned on previously accumulated interest plus the original principal.
CREDIT RATING
A predictor of the ability to pay back a loan. The credit rating is a result of credit scoring.
CREDIT REPORT
A listing of an individual or company’s history of repaying past loans and other liabilities and supplied by a credit information company like Dun and Bradstreet, Equifax, Experian or TransUnion. Contains credit information on a business or an individual, including payment history of bank cards, store cards, mortgages, student loans, and trade payments.
CREDIT SCORING
The evaluation system used by lending institutions to determine relative credit riskiness of a business or consumer. When evaluating businesses, it generally considers factors such as credit payment history, new credit sought by owner of business, and financial strength and longevity of business.
DEBT FINANCING
This is financing in which you get a loan from someone and are obligated to repay the money at some predetermined interest rate and length of time.
DEPRECIATION
Decrease in the value of equipment over time.
DUN & BRADSTREET
Leading provider of business credit information.
EQUIFAX
One of three leading providers of personal and business credit information.
EQUIPMENT LEASING
Lease agreements allowing companies to purchase new equipment.
EQUITY FINANCING
This involves “selling” a portion of your company to an outside investor.
ESCROW
Temporary monetary deposit with an independent third party by agreement between two parties. The escrow money is released when certain agreed conditions have been met.
EXPERIAN
One of three leading providers of personal and business credit information.
FACTORING
The buying and selling of invoices or accounts receivables.
FIXED INTEREST RATE
An interest rate that is the same throughout the life of a loan.
GRACE PERIOD
Time allowed a debtor in which legal action will not be undertaken by the creditor when payment is late.
GUARANTEE
Pledge by a third party to repay a loan in the event that the borrower cannot.
INTEREST RATE
The amount charged by a lender for the money borrowed. It can be fixed or variable.
INVENTORY FINANCING
Money borrowed on the basis of finished inventory. The loan is paid as inventory is sold.
LIEN
Legal right to hold property of another party or to have it sold or applied in payment of a claim.
LINE OF CREDIT
An amount of money, which a business can borrow against. Often accessed by check, ATM or business card.
LOAN TERM
The length of time the borrower has to repay debt.
LONG TERM DEBT
Financing used typically to purchase or improve assets such as plant, facilities, large equipment and real estate.
MATURITY
A loan’s maturity is the life of the loan (how long you have to repay the loan).
PERSONAL GUARANTEE
A guarantee that the primary owner(s) will assume personal responsibility for repayment of the loan, should the company not repay the loan.
PRIME RATE
The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). The rate is almost always the same amongst major banks. Adjustments to the prime lending rate are made by banks at the same time; although, the prime rate does not adjust on any regular basis.
PROFIT & LOSS (P & L) STATEMENT
A listing of income, expenses, and the resulting net profit or loss. This is also called an income statement.
REVOLVING CREDIT
See line of credit.
SBA LOAN
Loans to small businesses unable to secure financing on reasonable terms through normal lending channels. The program operates through private-sector lenders that provide loans, which are guaranteed by the Small Business Administration (SBA).
SECURED LOAN
A loan secured by specific collateral. Creditors may foreclose and seize the specific property that is collateral to satisfy an unpaid secured loan.
SIMPLE INTEREST
Interest paid only on the principal of a loan.
TERM LOAN
A loan for a specific amount of money and term.
TRADE CREDIT
Trade credit is the generic term for a buyer’s purchase of supplies or goods from a seller (supplier) who finances the purchase by delaying the date at which the price is due, or allowing installment payments.
TRANSUNION
One of three leading providers of personal credit information.
UNSECURED LOAN
A loan granted upon the good credit of the borrower. No collateral involved.
VARIABLE RATE
An interest rate that changes during the life of the loan; typically ties to the prime rate.
