Lending Terms Small Business Owners Should Know

Lending Terms Small Business Owners Should Know

As a small business owner applying for a loan, you can easily feel bamboozled with some of the lending terms you hear from Lenders. We understand how confusing we might sound sometimes, so here’s an opportunity for you to get familiar with some of the lending terms you should know as a small business owner.

Lending Terms

Lending can be described as the act of allowing someone or an organization to use an amount of money under contract to pay at a later date. A loan can be described as the lending of an agreed sum of money from one party to a receiving party in business. The agreement is undertaken and is usually paid with interest on the debt until all is repaid.

As a small business owner, there are a variety of choices that you can make when in search of a loan. The various loans differ in terms of interest rates, duration of the loan, and repayment requirements. As you are stepping into the small business financing sphere, it is expedient to know the terms. Below is a list of business loan terms that will aid your loan seeking, and understanding of the processes –


The principal is the exact amount of money borrowed from the lender without interest or other fees. 


This term refers to repayment schedules that are made for the payment of the principal and interest. An amortized loan means that you pay the agreed sum at regular intervals to complete the loan’s payment before the maturity date.

Amortization term

This is described as the period that it takes an individual to pay off a loan entirely. You can also refer to the amortization term as the “Amortization Period.”

Working Capital

This is the total of funds available to a business to utilize for its daily running.

Fixed Interest Rate

This term refers to the interest rate that does not vary with the index or prime rate. There is only one interest rate amount paid for the duration of the loan period.


These are the valuables of monetary import that an individual or company owner can use as collateral, e.g., pieces of equipment, bonds, properties, etc.  


This is the process of evaluating the risk to be assumed by the lender before the loan is approved or denied.

Balloon Payment

This refers to a large chunk of money that the borrower has to pay the lender at the loan term’s expiry. Peradventure at the loan maturation date, if the loan has not been wholly amortized, the borrower must complete the payment with a large sum of money.


This is described as the loan term’s expiration when the borrower remits the concluding interests and principal.

Blanket Lien

If the borrower is incapable of completely paying the debt they owe, blanket lien gives the lender the right to seize the borrower’s asset.


When a debtor defaults in payment, a lien gives the lender legal standing to seize the said debtor’s collateral assets.

Annual Percentage Rate

The Annual Percentage Rate or APR for short is the amount of money you pay for every year of the loan.


This means merging different loans into one to prevent multiple interest rates and due maturation date. In general, consolidated loans allow for a single due date and likely reduced interest rates if the borrower qualifies.


EBITDA means “Earnings Before Interest, Taxes, Depreciation, and Amortization.” It refers to the summation and valuation of your business’s finances. EBITDA helps to check the financial status of a business.

Prime Rate

The interest rates that established commercial banks bill their most reliable and creditworthy borrowers.

Grace Period

When the loan maturates, the period that the borrower doesn’t garner penalty or debt is known as the “grace period.” Typically, this lasts for about 15 days.


A business is declared insolvent when it cannot pay debts due to monetary hardships or insufficient cash flow. Another word for insolvency is bankruptcy.

Revolving Line of Credit

This is a loan product that the lender may offer you for your business. This offer allows you to borrow and pay back the borrowed amount with interest recurrently while remaining within the credit limit. This option allows the borrower to access the borrower’s capital when needed, and interest is charged on each loan.

Loan-To-Value ratio

This is a calculation that lenders use to ascertain the monetary risk of giving secured loans to businesses.

Prepayment Penalty

This is a fee charged by the lender in the advent of the loan’s early repayment or lump sum deposit before the maturity. This is set to alleviate the loss of interest of the lender.


This occurs when a borrower receives a loan that has a better interest rate to pay off a prior loan, hence reducing monthly remittance.

Variable Interest Rate

This type of interest rate varies from time to time, depending on the market interest rate flux. It can also be called a floating interest rate, and it is dictated by the interest rate in the market at the time.

Important Cs of Lending


Character is essential for borrowers to have when applying for a loan. The lender needs to be satisfied that the borrower has integrity and is honest. The lender has to know that you, as the borrower, have the education, background, experience, and hands-on industry knowledge needed to run the business efficiently. Further requirements are licensing documents, and they may also request evidence of ownership or managerial experience. Precursors are usually examined also, like you and your guarantor’s credit history.


The business’s condition related to the industry and economy will need to be extrapolated by the lender. The prognosis of the business: the lender will understand the possibility of the business to improve, retrogress or remain at the status quo. The lender will also want to know the purpose of the loan and how it will be disbursed for the business. 


It is also known as cash flow. The lender will want to be assured of the ability of the business to pay back. Going through the business’s payment history will allow the lender to grasp how the cash flow supports the business expenses and debt. Cash flow also provides insight into the principal’s paycheck, along with personal debts and expenses. Crosschecking these payments histories of expenses and current loans will bespeak the borrower’s dependability.


The lender will inquire as to the borrower’s investment into the venture. If you invest capital and contribute assets to the business’s growth, it reduces the chance of default and shows that you are also willing to risk the business’s sake.


The lender will consider the value of the venture’s and guarantor’s assets as a substitute form of potential repayment. Collateral is the asset a borrower pledges the lender to help secure the loan, and it functions like risk management in case of default. The collateral’s importance may vary based on the type of loan, but it is necessary to evaluate.


In conclusion, I hope you have been able to grab and add one or two essential terms to your lending vocabulary. When you apply for loans, remember what you’ve learned from this article, and nobody will blindside you.

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