Getting a business loan can be tough. You know the ins and outs of your own business, but you might not know how to get the funding you need. To make matters worse, small business lending is full of confusing bank lingo that you may not understand. If you need a crash course in business lending lingo, here’s a quick rundown of five confusing small business loan terms.
You see APR everywhere when applying for financing, but you might not remember everything that goes into calculating the APR for different types of financing.
APR stands for Annual Percentage Rate, and it estimates the overall annual cost of a loan including fees and compounding interest. This means that when looking for business financing and credit cards, an APR is often a better point of comparison than the interest rate alone. If your loan doesn’t give you an estimated APR, you can always use an APR calculator to get an idea of how much your loan will cost.
Term loans are loans with a set repayment period and either a fixed or variable interest rate. Term loans are often associated with online lenders, but some banks offer term loans. They work a lot like traditional bank loans, but they aren’t quite the same. Usually, term loans are easier to get approved for than bank loans, but they also come with higher interest rates or fees.
Line of Credit
A line of credit is sort of like a mix between a loan and a credit card. A line of credit lets you borrow money from a lender whenever you need it. The lender sets a cap on how much money you can borrow and how long you have to make payments on the borrowed funds. Lines of credit may come with a monthly or yearly fee, or you might only need to pay interest on money you borrow.
Factoring sounds like the math that goes into small business financing, but it’s actually its own type of business financing. Factoring is when you sell your outstanding invoices to lenders for between 50-80% of their value. Factoring can be a fast easy way to get cash, but it can be more expensive than other financing options. Also once you sell your invoices, you might not get a say in how the lender collects on your invoices, so you’ll want to make sure that factoring won’t damage any customer relationships.
Merchant Cash Advance
A merchant cash advance is a type of financing where you get a sum of cash now in exchange for a percentage of your credit card sales in the future. They’re different from a traditional loan because the lender collects directly from your merchant processing sales. Merchant cash advances tend to have higher interest rates than other loans, but they are also easier to get.
An Standard Industrial Classification Code or SIC Code is a four digit number that refers to the industry sector your business is in. Lenders and credit bureaus use your SIC or code to determine what type of business you run and rate your creditworthiness. Six digit NAISC codes are sometimes used in place of SIC Codes, but they both refer to your industry sector. Some sectors, like real estate, are considered more risky to lenders, so you want to make sure your SIC code is correct when you apply for financing.
This article was originally written on August 10, 2018 and updated on June 25, 2020.