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Top 10 Lending Terms You Need to Know

May 17, 2024

The process of getting a small business loan can be intimidating, especially when you are unfamiliar with the terms being used.

Whether you’re just beginning, in the middle, or nearing the end of your loan application, understanding these terms can help you feel more confident and ensure you have the necessary pieces in place to get the financing you need.

To help you through this new and unknown journey, we’ve created a lending terms guide listing some of the most common and important lending terms you may hear throughout the loan process. This guide breaks down and simplifies those unfamiliar financial terms, giving you the confidence to talk to loan officers and lenders and make informed decisions.

Here are the 10 of the top 30 lending terms you need to know:

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Assets

Items you own that have monetary value and can provide future benefits to your business. There are different types of assets, including:

  • Current Assets: Items you or your business own that can be converted to cash within a year.
  • Fixed Assets: Sometimes referred to as Physical Assets. Items that can’t immediately be turned into cash but are tangible items that a company owns and uses to generate long-term income. Examples include land, machinery, buildings, vehicles, furniture, electronics, and tools.
  • Intangible Assets: Non-physical items that are essential to a company, such as a trademark, patent, copyright, or franchise agreement or items that have no physical presence but do have monetary value such as accounts receivable or 401ks or stocks.

Capital

The money and assets that a business uses to fund its operations and generate revenue. Capital can be in the form of cash, equipment, property, or other long-term assets that have value. Capital can come from different sources…such as working capital, debt, or equity. Capital allows businesses to pay for their expenses and produce their products and services to earn a profit.

Cash Flow

Cash flow refers to the net balance of cash moving in and out of a business at a specific point in time. Cash flow represents revenue received (inflows) and expenses spent (outflows).  The total net balance over a specific accounting period is reported on a cash flow statement, which shows the sources and uses of cash.

Cash flow can help indicate the health of a business: Positive flow (more money moving in than out) can indicate solvency (ability of a company to meet its financial obligations, while a negative value (more money moving out than in) can show that business expenses are higher than profits.

Collateral

Something pledged as security for repayment of a loan. If the borrower defaults on (can’t pay back) their loan, this item would be forfeited to the lender so the lender can sell the collateral item to gain back the amount they lost on the borrower’s lack of payment. Items like a car, home, office equipment, inventory, etc. could all be pledged as collateral. The amount and type of collateral you need to pledge depends on the amount of your loan, type of loan, and other parameters set forth in your lender’s specific loan program.

Depreciation

The decrease in an asset’s value. It’s a term commonly used in accounting and shows how much of an asset’s value a business has used over a period of time.

A commonly known depreciating item is a vehicle. A vehicle loses its value over time due to age and wear. When you sell your vehicle a few years after you purchase it. It is worth less money than the price you originally paid for it.

Equity

The amount of money that belongs to the owners of a business after all assets and liabilities have been accounted for. Using the accounting equation, equity can be found by subtracting total liabilities from total assets.

Income Statement

A financial statement that summarizes a business’s income and expenses during a given period. An income statement is also sometimes referred to as a profit and loss (P&L) statement.

Lien

A legal right to maintain possession of a borrower’s asset until the debt has been repaid. A lender may place a lien against a piece of business or personal property to ensure the lender does not suffer a financial loss should the borrower fail to pay off their loan. The lien on the property is released once the debt has been paid in full.

Revenue

Total amount of money generated from business before expenses are taken out. Sometimes revenue is called gross sales or the top line because it is the first line of an income statement. It only indicates how effective a company is at generating sales. It does not take into consideration operating efficiencies which could have a dramatic effect on the bottom line (net income. Revenue can be generated by (but not limited to): sale of goods/services, advertising, licensing agreements, fees, rental income, etc.

  • Net Revenue: Total dollar amount gained from sales after subtracting expenses, which are usually operational in nature.

Working Capital

Money available for daily operation. This is the difference between a company’s current assets (cash, accounts receivable, and inventory) and current liabilities (accounts payable, debts). The working capital amount can help determine an organization’s operational efficiency and short-term debts while also funding day-to-day operations.

These are just a few examples of the terms you might come across during your loan application process. If you would like to take a deeper dive, you can download our full Lending Terms worksheet for an additional 30 terms commonly used in lending.

As always, don’t hesitate to reach out to a Dakota Business Lending loan officer in your area. Our team is happy to explain these terms in further detail and walk you through the loan application process.

Bonus! Are you ready to take the next step and ask your bank or lender for financing? Check out our article on “Preparing Your Ask” to prepare for that conversation and ensure your success.