The world of lending is, in essence, simpler than it may seem. At its core, it is an industry where one entity loans a sum of money to meet the needs of another entity for a fee – normally an interest rate. In reality, however, it is an incredibly complex business with a myriad of different factors that must be considered before a financially viable set of terms can be agreed upon. This means that the lending industry is brimming with jargon that is going to sound like a foreign language to someone who is new to borrowing and lending.
Since understanding this language is necessary to meeting your financial needs, here are 10 important lending terms simplified:
Financing
This is the term that ties the industry together. It’s the very reason why you have come to the lending institution in the first place. Financing is new funding provided to a business, in this case via loans, to help it grow and become profitable. This is done because the business has potential but perhaps not enough funds to grow and reach its potential.
Interest rate
This is perhaps the most important term. When money is lent, it is done so for a fee. The loan interest rate is simply the percentage of the loan that is repaid to the lending institution on top of the principal, which is the amount borrowed.
Fixed-rate loan
A fixed-rate loan is one that has a single, unchanging interest rate throughout the life of the loan. This means that it will never increase or decrease. There are many situations where having this kind of agreement is mutually beneficial.
Variable-rate loan
In contrast to a fixed-rate loan, a variable-rate loan is one in which the interest rate changes based on the market. For example, the rate might rise or fall depending on the market interest rates. This means that your payments will differ across the life of the loan.
Assets
This is a word that we are familiar with in daily life that has a roughly similar meaning in the lending world. Your assets are the things that you possess that have value. The way it differs in the lending world is that we evaluate them based on their value in terms of securing your business loan. They could be your business, home, car, or other thing of value.
Business plan
A business plan is simply detailed documentation comprehensively explaining how a business is going to operate and make money: who the clientele will be, how the product or service will be provided, prices, and so on. A proper plan is necessary to build a business with great cash flow and a good reputation, and should therefore be in place before any borrowing activity.
Cash flow
Cash flow is simply the money moving in and out of your business. Money is paid to you from customers, and you use that money as part of your day-to-day business to pay employees, pay bills, and keep the operation running.
Credit rating
The credit rating for your business is a grade assigned to you to assess your business’ viability for a loan. It takes into account your credit history as well as your ability to repay at present. To find out more, read our article on understanding credit scores in Canada.
Amortization period
One of the most important terms in the industry, the amortization period is simply the length of your loan, or how long it will take you to repay it. This is normally for a set amount of months or years, with payments made monthly. Lendified offers term lengths of between three and twelve months. We know that as a small business owner, time and money are of the essence. That’s why we also offer same-day approval to get you funded quickly.
Collateral
In the lending industry, collateral is anything you can use to secure your loan. This means anything that you have of value (e.g. your home) that can be put up as a guarantee of repayment of the debt. Although this is a common concept in the industry, Lendified does things differently. We offer uncollateralized loans, which means you don’t have to put up anything of value against the loan. It streamlines the process and makes things a lot easier for you, especially as a small business owner.
The Bottom Line
Here at Lendified, we are dedicated to helping your Canadian small business reach its full potential. We do this by providing small business loans that are fair to both sides and that meet your specific needs. In order for you to reach your goals, you are going to need to understand the ins and outs of the lending industry. These 10 lending terms are a great start.
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