Understanding business funding language and financial jargon can mean the difference between securing a financial solution that’s perfectly designed to help you reach your business needs and goals or taking on more financial risks/costs than you intend. While the breadth of funding solutions that now exist from traditional financial institutions, government sources and alternative financial providers means more opportunity for business owners to find the right financial partner, it can be difficult to determine the details associated with different types of funding, or how much costs and risk you’ll absorb with each.
Here’s a simple guide to understanding business funding terms, regardless of the type of business you own or the funding solution you seek.
Common terms associated with modern business funding solutions include:
Installment loans. A business is issued the total funds approved (regardless of whether the entire amount will be used), and agrees to make monthly payments until the amount is repaid in full based on the loan term. Some funding solutions allow borrowers to pay more than the monthly payment amount without penalty, but not all do.
Term. Duration of time a funding solution (and repayments) will span. Typically, this ranges from:
- Three to 10 years at traditional financial institutions (banks and credit unions)
- Five to 25 years with SBA loans
- Three to 24 months with short-term online funding partners, or one to five years through long-term online funding partners
- Three to 18 months through merchant cash advance funding partners
- Monthly with online invoice factoring funding partners
- Two to 10 years with equipment financing partners
Minimum and maximum funding amount. For many traditional financial institutions, minimum loan amounts start at $50,000. Small business administration (SBA loans) minimum loan amounts often start at $10,000. Maximum loan amounts often span from $350,000 to $500,000, depending on the lender. Alternative financing partners may offer funding amounts as small as a few hundred dollars.
APR (annual percentage rate). The amount of interest associated with the loan or line of credit, usually based on the business’s credit history, sales performance, and in some cases, the funding type and amount of funds borrowed. If the rate is variable, it could increase at any time. If it is fixed, it likely will not increase (but could if you violate the terms of the funding agreement).
Revolving credit line. As the amounts borrowed are repaid, the line of credit will increase (up to the original credit limit). Common examples of this type of funding include small business credit cards, merchant cash advances, invoice factoring solutions, and other types of credit issued by alterative online financing partners.
Secured loan (or) line of credit. Funding solution (and terms of it) is issued based on other assets a business may be able to use as collateral, of sorts, to “back” the amount of funding eligible to access. The type of asset used to secure the funding may include equipment, outstanding invoices, and future sales potential based on past performance.
Credit card receivable funding. Commonly referred to as a merchant cash advance, it’s a lump sum or line of credit a business can access in exchange for repayment based on future sales. Businesses may have control over how much of the advance they access, when, and how aggressively it is repaid.