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5 Business Lending Terms You Should Know

Business Icons and LaptopGetting financing for your business can feel daunting, and when lenders speak in technical jargon that you don’t understand, it can seem utterly overwhelming. Having a solid grasp on the necessary financial lingo before you begin the lending process can give you peace of mind and allow you to make the best possible decision about what type of loan is right for your business needs.

At the Cumberland Area Economic Development Corporation (CAEDC), we’re here to answer all your questions about securing a loan in Pennsylvania, including confusing terms you’ll likely encounter during the lending process. Here are some of the key business terms to know the next time you need to apply for a loan.

1. Annual Percentage Rate (APR)

As the most exact measurement concerning how much a loan will cost your business, the APR is perhaps the most important number to look at when securing a loan. Because the APR is quoted as a percentage like an interest rate, many people think the two terms are synonymous. However, while the APR does factor into your interest rate, it also accounts for far more — including closing costs, documentation fees and any other charges that will occur throughout the lending process.

The APR will vary depending on the lender, and a lower number is always better. Use the APR to compare loan offers and calculate precisely how much you’ll be paying every year before moving ahead with any loan.

2. Term Loan

A term loan is a lump sum paid upfront that you can borrow from a lender and pay back, with interest, in installments over a fixed period. Term loans are best suited for people who know exactly how much they’ll need to invest in their business. Because these loans often require a significant amount of credit, younger companies or companies with poor credit scores may find it difficult to secure a term loan.

Numerous loans are available for established businesses and offer various terms and rates, including Pennsylvania state loans provided by CAEDC that give companies low-interest financing options for construction and other projects.

3. Collateral

Collateral describes any asset that you pledge to a lender to secure your term loan, including machinery and equipment, real estate, inventory or anything else that lenders can take as a form of reimbursement if you fail to repay a loan. Many small business loans and other secured loans require collateral to lower the risk of giving you money.

4. SBA Loan

Small Business Administration (SBA) loans were created specifically to help small business owners grow their business through more affordable financing options. These loans typically offer lower costs and longer terms than traditional term loans because of the fact that they come partially guaranteed by the United States government. While significantly more accessible to obtain than conventional loans, SBA loans come with a lengthy approval process and extensive paperwork.

The SBA offers three types of loans — SBA Express, SBA 7(a) and SBA 504. CAEDC provides a long-term, low-equity injection, fixed-rate SBA 504 loan program for businesses with 100 or fewer full-time employees. The loan applies for various purposes, including building construction, acquisition and renovation, machinery purchases and more.

5. Line of Credit

A popular loan option that many lenders provide is a business line of credit. This solution works similarly to a credit card in that it gives you the opportunity to borrow money up to a specified maximum amount — called a credit limit — whenever you need it. Unlike traditional small business loans, you can take out funds as required, and you’ll only need to pay interest on the money you actually use.

Lines of credit are better suited for handling unexpected finances, and they can provide you with the greatest amount of flexibility in how you spend your funds.

Reach out to CAEDC for More Information About Financing Programs for Small Businesses

While this information is in no way an exhaustive list of business lending terms, we hope it provided you with a solid foundation so that you can start the lending process.

At CAEDC, we’re the trusted source of financing programs and options throughout Cumberland County, PA. We’re ready to help your Cumberland County business flourish. View our extensive list of business financing programs on our website, and contact us for more information.

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