Understanding 7 Essential Financial Terms for Making an Informed Financing Decisions

Knowledge is the real power when you want to pick the right financing option for your small business. Knowing a few things here and there helps you make smart choices when comparing different loans. If you know the most common terms used in the finance industry, you can also get something better than usual while bargaining with lenders.

Below, we have rolled down 7 essential finance terms you should know as a small business owner.

Annual Percentage Rate (APR)

APR can find the answer to what a loan will cost you on a yearly basis. Apart from the interest rate, it reflects all the other charges including but not limited to the cost of fees.

Line of Credit

A line of credit can provide you with instant capital whenever required. Mostly similar to traditional credit cards, a line of credit offers you flexible access to working capital where you only pay interest on the amount you borrow. This amount can be equal to or less than the credit limit set for your business.

Term Loan

Unlike credit cards or a line of credit, term loan gives you access to a big amount upfront and the lender sets a term with you in which you have to repay the debt in installments. These installments can range from daily to weekly, monthly, or yearly. Small business owners often prefer term loans to get expansion capital for their business.

Equity Financing

This term comes into play when you are raising money for your new business and you sell a part of the ownership to raise some amount. Suppose you have a business valued at $1 million and you want $200,000. In this case, you can opt for equity financing and sell 20% of your 100% ownership to someone providing you the desired amount.

Refinance

Refinancing allows you to repay existing loans or debts by taking another loan. This can be done to switch to a better interest rate or there are other benefits available in the new financing option.

Collateral

The property that the borrower commits to a lender as a protection in case of loan repayment failure is called collateral. For instance, in case you take a loan to buy a home, you will keep your home as collateral. If you failed to repay the loan, the lender can recover the losses by taking over your home.

Cash flow

The total amount of money coming in and going out is the cash flow of your business. Small business owners often look to improve their cash flow by expanding their business, boosting sales, and cutting costs.

Final Word

Financing is an integral part of any startup or business. Businessmen from varying industries should be aware of all these terms. To explore funding options as per your requirement, get in touch with professionals from REIL Capital now.