As a new business owner, you’ll most likely find yourself in need of financing at some point of your business, whether it's at the planning and startup phase or whether things are already up and running. Applying for a loan can be overwhelming, especially since there’s so much to research and understand.
To make your first borrowing experience easier, we’ve compiled a list of essential terms and phrases that will help you understand the various concepts in business financing.
Loan tenor/tenure: The period of time in which you, the borrower will have to repay your loan in instalments, usually on a monthly basis. A typical loan tenor can last anywhere from a few months to several years or even two or three decades.
Principal: This refers to the amount borrowed, excluding fees or the interest associated with the loan.
Floating interest rate: Interests rates that change over the lifespan of your loan tenor, depending on economic performance and other factors. In Singapore, floating interest rates are tied to SORA (the Singapore Overnight Rate Average).
Fixed interest rate: Interest rates that do not change or fluctuate within a predetermined period by the lender, known as the ‘lock-in’ rate. After this period, the interest usually reverts to a floating rate.
Cost of borrowing: This term refers to the total expenses incurred when taking out a loan, usually a sum of the interest paid, as well as any fees and charges associated with the loan. These include legal fees, stamping fees, administrative fees and so on.
Default: To default on a loan means to be unable to pay it. Lenders will usually assess your risk of defaulting during the application process.
Business term loan: The most common type of business loan offered, where a fixed amount of money is disbursed to you. It then has to be repaid over a predetermined period in instalments, with predetermined interest rate and fees.
Business line of credit: This type of business financing functions like a credit card. Businesses are able to take a loan of any amount (within their credit limit) and must repay it in the following months. Withdrawal of a loan (called a draw down) and subsequent repayments can occur repeatedly as long as the line of credit remains active and available, which renews every year. This is quite different from a overdraft as your account will not go into a negative balane.
Working capital loan: A type of term loan that is specifically designed to cover day-to-day operations of businesses, including covering payrolls, inventory maintenance, rent, utilities and the like. It helps when businesses are facing cashflow problems.
Invoice financing: A type of financing whereby companies sell unpaid invoices owed to them to a financier. The financier then disburses up to 90% of the invoice value and takes over the responsibility of claiming the unpaid invoices from their clients.
Property-backed loan: A type of loan that allows you to cash out the value of a property, including residential, commercial and industrial real estate. Borrowers can obtain up to 85% of their property value.
Commercial property loans: This is a type of property loan especially meant for financing the purchase of commercial real estate, including factories, retail space, shophouses, office units and more.
Refinancing: The act of paying off your current loan with a new one from a different lender that offers better interest rates, more affordable repayments, shorter tenors or other more favourable terms and conditions.
Loan to Value (LTV) ratio: In commercial property loans, this refers to the percentage of property’s value or purchase price that the lender is willing to loan to you. In Singapore, the LTV ratio for commercial properties is capped at 80%.
Secured loans: Secured loans are loans which are guaranteed by a valuable asset, such as property, vehicles, business shares and so on. These guarantees are known as collateral and will be seized by the lender in cases where borrowers default on their loan. Securing loans with collateral allows borrowers access to higher loan quantums.
Unsecured loans: These are loans that do not need any asset or collateral to back them.
Collateral: Assets that can be used to secure a loan, including real estate, vehicles, jewellery, equipment, business shares, stocks and more. For loans secured with collateral, defaulting will result in the collateral being seized by the lender as payment for the loan.
Guarantor: A guarantor is an individual who agrees to step in and be responsible for repaying a loan when the primary borrower of that loan defaults.
Knowing the terminologies and concepts involved in business loan borrowing is an essential step in your journey, and we’re glad to be of help. If you would like further guidance and information on the loan application process, you can reach out to our Lendingpot experts and they will be happy to clear up any confusion you may have.
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Lina heads up all things marketing and branding at Lendingpot. With a keen aesthetic eye, she believes in the use of design to communicate with our SME community and aspires to turn Lendingpot into a household name. Out of work, she is an avid camper and appreciator of nature’s best works.
