Thibaut Dupuy

12 Loan Terms Explained

Thibaut Dupuy
12 Loan Terms Explained

Making financing decisions for your business is no easy feat. With countless options and endless fine print, transparency in lending can be hard to come across. At The Credit Junction, we pride ourselves on our direct, hands-on approach to partnering with businesses across the country. To help ensure that you are on the same page as your lenders, we’ve compiled a short list of some terms you may encounter.

Term Loan: A term loan is a loan that is repaid in regular payments over a set period. Lenders often offer companies term loans to help them finance a purchase of fixed assets, such as equipment, which they can repay over time. Many term loans follow a fixed amortization schedule, meaning that the business pays a combination of principal and interest to the lender in fixed amounts and intervals.

Line of Credit: A line of credit offers a business access to a specified amount of money that it can utilize as needed. Each time a business borrows money from their line, they will be charged interest that they must repay over time. Businesses have flexible access to a line amount, but do not have to use it all. In some cases, a bank will charge a fee on the unused amount of the line.

Interest-Only: An interest-only loan allows a business to solely pay the interest on the loan for its term. This gives them more flexibility, as they are not required to make payments towards principal during the term of the loan. 

Working Capital: Defined as current assets minus current liabilities, a company’s working capital refers to the funds available to a business for day-to-day operations. A working capital loan is typically a line of credit and can be made to ensure that a firm can run its operations. 

FCCR: The Fixed-Charge Coverage Ratio (FCCR) is a measure of a firm’s ability to pay fixed charges, such as rent or loan payments, with operating income. Lenders use the FCCR to determine whether a company has sufficient cash flow to be able to repay a fixed charge, like an interest payment. 

Collateral: Collateral can be defined as an asset that a company offers a lender as a security in a loan. A lien grants a lender a legal right to the asset in the event of a loan default. Once a loan is paid off by a borrower, the lender forfeits all rights to the asset.

Asset Based: An asset-based loan is a loan secured by collateral, such as inventory, accounts receivable or machinery & equipment. This secured loan is most often used to help companies build and manage cash flow.

Refinancing: Refinancing refers to a lender paying off an existing loan made to a company and replacing it with a new facility. Refinancing can be a useful option for a company looking to consolidate existing financing relationships and replace them with more optimal financing.

Cash to Cash Cycle: The cash to cash cycle is the length of time that it takes a company to convert outflows of resources into inflows of cash. It measures the amount of time that each dollar is tied up in production and sales before it can be converted into cash.

Business to Business (B2B): A B2B transaction is one conducted between two businesses, rather than between one business and one individual, final consumer (B2C).

Guarantee: A guarantee is a promise by an individual or an institution to cover a loss if a borrower is unable to pay a loan. If a company needs financing to buy new equipment, for example, a lender may request a letter of credit to ensure that a bank covers loan payments if the borrower cannot. A personal guarantee requires the individual to personally pay any outstanding debts.

Deposit Account Control Agreement (DACA): A DACA is a document granting a lender access to funds held in a debtor’s bank account. This agreement enables the secured party to access funds held in the account without the consent of the debtor.  

*Definitions supported by Investopedia