The Sunday Mail
Personal Guarantee
If you’re seeking financing for a very new business and don’t have a high value asset to offer as collateral, you may be asked by the lender to sign a statement of personal guarantee. In effect, this statement affirms that you as an individual will act as guarantor for the business’s debt, making you personally liable for the balance of the loan even in the event that your business fails.
Principal
Any loan instrument is made of three parts — the principal, the interest, and the fees. The principal is a business finance key term and is the original amount that is borrowed or the outstanding balance to be repaid less interest. It is used to calculate the total interest and fees charged.
Revolving Line of Credit
This business finance term and definition is a funding option is similar to a standard line of credit. However, the agreement is to lend a specific amount of money, and once that sum is repaid, it can be borrowed again.
Secured Loan
Many lenders will require some form of security when loaning money. When this happens, this business finance term and definition is a secured loan. The asset being used as collateral for the loan is said to be “securing” the loan. In the event that your small business defaults on the loan, the lender can then claim the collateral and use its fair-market value to offset the unpaid balance.
Term Loan
These are debt financing tools used to raise needed funds for your small business. Term loans provide the business with a lump sum of cash up front in exchange for a promise to repay the principal and interest at specified intervals over a set period of time.
These are typically longer term, one-time loans for start-up expenses or costs for established business expansion.
Unsecured Loans
Loans that are not backed by collateral are called unsecured loans. These types of loans represent a higher risk for the lender, so you can expect to pay higher interest rates and have shorter repayment time frames. Credit cards are an excellent example of unsecured loans that are a good option for small business funding when combined with other financing options.
CD – Certificate of Deposit
Interest bearing note offered by banks, savings and loans, and credit unions. CDs are FDIC insured and provide interest on the investor’s money that is locked in for a certain term (usually three months to six years).
Compound Interest
Interest that is calculated not just on the initial principal but also on the accumulated interest from previous periods. As interest is added back to the principal, the rate of return applies to the entire balance, making the balance grow even faster than simple interest (simple interest is when the interest is applied only the initial principal, not the accumulated interest as well).
Loan-to-value
The ratio of the fair market value of the asset to the value of the loan used to purchase the asset. This shows the lender that potential losses may be recouped by selling the asset.
Prime Rate
Determined by the federal funds rate (the overnight rate at which banks lend to one another) the prime rate is the best rate available to a bank’s most credit-worthy customer.
