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Small Business Loan Lingo: Terms You Need To Know

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by Jocelyn Baird, NextAdvisor

It can be daunting for young or new small business owners to consider taking out a loan, especially if they haven’t had much experience with this type of financial transaction. You probably wouldn’t try and open up a new credit card or take on a mortgage without learning the terminology specific to those financial products are. The same goes for taking out a loan – the more research you do on what the various words and phrases mean, the better you can navigate the loan process.

When it’s all boiled down, there are four basic concepts every potential borrower should understand before applying for a loan:

Origination fee.

An origination fee is essentially a processing cost charged by lenders to cover the expenses of processing your application and disbursing your loan. While some small business loan services charge all customers the same flat-rate fee, others will give borrowers a rate based on their qualifications or approved APR. That said, on average you can expect to pay an origination fee between 1% and 5% of the total amount you are receiving – so if you’re borrowing $100,000 with an origination fee of 3%, your lender will take $3,000, leaving you with $97,000. It’s important to factor the origination fee in when you request a loan, because the last thing you want is to come up short when it’s time to put the money to use.

Secured vs. unsecured.

You might often hear loans described as either secured or unsecured. The difference between these two terms is quite simple; a secured loan requires collateral, such as a vehicle or property, as security to ensure repayment of the loan. As you might have guessed, an unsecured loan does not require collateral — although that generally means the APRs are going to be higher to account for the added risk taken by the lender.

Personal guarantee.

Often a small business lender will require borrowers to sign a personal guarantee, which is an agreement that makes you personally responsible for the loan in the event that it goes into default. Not only will the lender be able to go after your business assets, but it would also be able to recoup your personal assets in order to cover the debt. Personal guarantees are most often required for businesses that are just getting started or aren’t well-known, since it’s more likely that the business may fail and therefore be unable to pay back the loan. Small business owners should consider the potential impact on their personal finances if a personal guarantee is required to take out a loan. And since personal guarantees don’t need to be signed by the business owner, if you are considering co-signing for a loan with a business it’s important to make sure you are fully aware of its entire financial situation before signing any kind of personal guarantee.

UCC lien.

This is another document you may be asked to sign when a lender requires collateral. In the U.S., the Uniform Commercial Code is a collection of laws on the contracting and trade of goods that has been adopted by most states (keep in mind, some states, like California, have adopted their own UCC laws). Also known as a UCC-1 financing statement, a UCC lien is essentially a document that lays claim on the tangible assets owned by a business. It is used in the event the loan can’t be paid back to help recover some or all of the costs.

When you’ve signed a UCC lien against your business assets, you can’t sell or get rid of them without having paid off your loan in full – which is intended to guarantee that you will honor your debt. The good news is, UCC liens only cover your business assets; they don’t apply to your personal property or assets. However, if you sign a personal guarantee as well, then your non-business assets will be at risk from that if your business should go under before your debt is paid off.

While the lingo of small business loans and other similar business finance products can be daunting at first approach, the better you understand, the better your chance of making the smartest decisions for your business. You can learn more about small business loans and many other topics small business owners need to know by visiting www.nextadvisor.com.

 

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Jocelyn Baird writes for NextAdvisor on topics such as identity theft, credit monitoring, Internet security software, small business and personal loans, payday loans and photo card services. Her writing has been featured in publications including The Huffington Post, and she has been a guest on several radio shows nationwide. She is a graduate of Syracuse University with a dual degree in Writing and Rhetorical Studies and Anthropology. 

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