Finance terms are strength when it comes to small business loans and other forms of financing.
It gives you the opportunity to compare and make good lending decisions and improves your leverage while you’re at the lender’s negotiating table.
Here are 4 important finance terms those small business owners should understand thoroughly before pursuing funding.
1. Annual Percentage Rate (APR)
If you want to know what a loan really is going to cost you annually, look at the APR. This not only represents the interest rate on a loan but also the sum of the fees and other costs that you may have to pay.
Small business owners should use APR when choosing between various loan deals to determine how much each loan would actually cost.
2. Refinance
Refinancing involves repaying an old loan or mortgage with a new one, in order to get a better interest rate or other conditions.
For example, a small business owner with a 10 percent APR mortgage of $300,000 may choose to refinance into a new mortgage with a 6 percent APR to save on interest.
In addition, small business owners will consider the various charges typically associated with refinancing to see if interest savings are still worth it. Since terms and rates differ according to the lender, always shop around for the best price.
3. Cash Flow
Cash flow is the overall sum of money that comes through and will go out of your small company. Improving cash flow can mostly be done in two ways: improving revenue or reducing costs.
If you improve cash flow before applying for a loan, lenders are likely to see you as a lower-risk borrower. And then, offer better rates and terms on the loan. Positive cash flow shows you can cover all your regular expenses.
4. Line of Credit
A line of credit gives you the ability to borrow money up to a certain amount whenever you need it.
Lines of credit will provide small business owners with flexible access to working capital. Just keep in mind that they tend to come with a variable interest rate. In other words, it depends on market interest rates as well as other factors, your interest costs can rise or fall.
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