Common Terms to Know When Getting a Business Loan
- Community Futures Howe Sound
- 1 day ago
- 3 min read
Understanding the language used around business loans can make the borrowing process far less intimidating. Whether you are applying for your first loan or comparing funding options for business growth, knowing these common terms will help you make more confident decisions and avoid surprises.
Below are some of the most important business loan terms explained in plain language.
What is a business loan?
A business loan is money borrowed specifically for business purposes and repaid over an agreed period of time, usually with interest. These loans can be used for expenses such as equipment, inventory, renovations, expansion, or managing cash flow. Small business loans can come from banks, credit unions, or alternative lenders such as Community Futures Howe Sound.
What is the interest rate?
The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. It determines how much extra you will pay on top of the amount borrowed. Interest rates can be fixed, meaning they stay the same, or variable, meaning they can change over time.
What is prime rate?
The prime rate is a benchmark interest rate used by lenders to set pricing for many business loans. It is influenced by central bank rates and overall economic conditions. Lenders often advertise loans as prime plus a certain percentage, which reflects the borrower’s risk profile.
What is the loan term?
The loan term refers to the length of time you have to repay the loan. Shorter terms usually mean higher monthly payments but less interest paid overall. Longer terms lower monthly payments but increase the total cost of borrowing.
What is business loan collateral?
Collateral is an asset pledged to secure a business loan. Common examples include property, equipment, or vehicles. If the borrower cannot repay the loan, the lender may have the right to seize the collateral to recover their losses.
What is a secured business loan?
A secured business loan is backed by collateral. Because the lender has an asset to fall back on, these loans often have lower interest rates and higher borrowing limits. They are commonly used for larger purchases or long-term investments.
What is an unsecured business loan?
An unsecured business loan does not require collateral. Approval is usually based on credit history, cash flow, and business performance. These loans are faster to obtain but often come with higher interest rates due to increased lender risk.
What is credit score?
A credit score is a numerical measure of creditworthiness based on past borrowing behaviour. Lenders use it to assess risk when approving business loans. A higher credit score can improve approval chances and lead to better loan terms.
However, a low credit score can make it difficult or impossible for borrowers to get approved for a traditional small business loan from a bank. In these cases, Community Futures may be able to help with our character-based business loans.
What are character-based business loans?
Character-based business loans focus more on the borrower’s personal reputation, experience, drive, and reliability rather than just financial metrics. These loans are often offered by community lenders or non-profit organizations and can be helpful for startups or businesses with limited (or even poor) credit history.
As with a Community Futures Howe Sound business loan, this can be an option for entrepreneurs who have been turned down at the bank.
What is debt service coverage ratio?
The debt service coverage ratio, often called DSCR, measures a business’s ability to repay its debts. It compares available cash flow to loan repayment obligations. Lenders use this ratio to assess whether a business can comfortably handle new debt.
What is amortization?
Amortization is the process of spreading loan repayments over time through regular instalments. Each payment typically includes both principal and interest, with the balance gradually reducing until the loan is fully repaid.
Accessing a small business loan with Community Futures Howe Sound
Knowing these common business loan terms can help you ask better questions, compare offers accurately, and choose financing that supports your business goals. A clear understanding upfront often leads to better outcomes and fewer surprises down the line.
If you’re interested in a business loan from Community Futures Howe Sound. Please read our page about small business loans to get a good understanding of what we offer, then make a free, no-strings-attached appointment with us to chat about your needs.
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