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Fundamentals of Small Business Loans

New and seasoned small business owners alike need to understand the fundamentals of small business loans if they wish to run a successful small business. There are plenty of reasons to venture into owning a small business, but entrepreneurs who do not understand loans have a decreased chance of maintaining profitability. In the world of business to business transactions, business owners have different options when it comes to applying for and receiving loans. Loan options such as accounts receivable financing and invoice factoring are great assets for small business owners.

What is a Small Business Loan?

If you own a business, and you borrow money with a promise to pay it back, you just received a small business loan. Of course, with such a wide definition, there is great opportunity for nuance and specificity. Indeed, there are many different types of small business loans, such as business credit funding and export funding. As a business owner, you will have a greater need to be familiar with some terms and types of lending than with others.

Lending Terms to Know as a Small Business Owner

Let’s take a look at some of the more commonly used terms in the world of small business loans, and what they mean:

  • Borrower:A borrower is a business that is borrowing money from another entity, such as a direct lender, with a promise of repaying the full amount, plus interest.
  • Lender: A lender is an individual or an institution that offers the borrower funds, with an expectation of being repaid, plus interest.
  • Collateral: Collateral is a valuable asset offered by the borrower as a means of guaranteeing payment of the loan to the lender. If the loan is not paid in full, the lender can take the collateral asset instead.
  • Factor Fee: A factor fee is a different way of expressing interest associated with a loan. It is most commonly associated with short-term loans and is based on a flat percentage of the amount of money that is borrowed, rather than a compounding total.

What is Invoice Financing?

If you own a small business that invoices other businesses for products or services offered, you need to know what invoice financing is. In short, invoice financing is a type of loan that allows businesses to obtain cash advances from lenders, based on outstanding invoices that are owed to the business. Did you know that nearly 60% of all invoices are paid late? With such a high percentage of late invoices, it is no wonder why small businesses often rely on invoice financing to get the cash they need to operate the business immediately, as they wait on invoices to be paid.