What are the important things to think about when getting funding from friends and family? Number, one: always keep it formal.
Words can weapons – “the pen is mightier than the sword,” as they say. Sometimes through confusing financial jargon, certain words can lead to uninformed consumer decisions. When banks or financial institutions make their funding options hard to understand, they create a disadvantage to their customers. They throw around terms and concepts without ever explaining what they mean, and not everyone has an MBA or the time to research it all.
If you’re trying to get a business loan or receive any sort of funding for your business, all of the financial jargon and literature can get overwhelming. There are terms you hear over and over again, but never actually see defined. There are words that mean multiple things when used in different ways. Not to mention the words that sound complicated but actually mean simple things. We’re here to break down some of these complicated terms in an understandable way.
Here’s our glossary of some common financial jargon:
Accounts payable vs. accounts receivable:
Accounts payable are the debts that your business owes to vendors or creditors, while accounts receivable are the money owed to your business by your customers. This type of credit is done through invoicing and is always short-term.
APR stands for the annual percentage rate, and it’s the total rate charged for borrowing money from a lender. It includes the interest rate and all fees associated with borrowing. It’s expressed as a percentage that represents the annual cost of funds over a loan term. It does not, however, take into account compounding interest.
((Fees + Interest/Principal)/Number of days in a loan term) x 365) x 100
A broker is a middle man within any type of sale. For houses, a broker is a real estate agent – they sell the product on behalf of another person or entity. Brokers facilitate sales for a client or investor, and they often charge a commission on the things they’re selling.
Cash flow is the money your business is bringing in. the ability of a business to create value is determined by its ability to create a positive cash flow, and this is reported on a cash flow statement. Cash flow is used to access a company’s overall financial performance.
Collateral is what you use to secure a loan, and you pledge it as security of repayment. Not every lender needs collateral, but often when they do, they’ll require things such as investments, property, cars or savings deposits. If you don’t pay your loan, they’ll seize your collateral as payment.
Compounding interest is the calculated interest from the principal amount along with the accumulated interest of a loan. It can be compounded after various periods of time – annually, semi-annually, monthly, quarterly – and will make the sum of your loan grow at a faster rate than simple interest, which is just calculated from the principal amount. If you compound a $10,000 loan quarterly at 5%, you’ll be paying not only on the $10,000, but also the 5% interest it accumulated after every quarter.
Credit is borrowed money that you use to purchase things. Loans are credit, and credit cards give you access to credit. As opposed to cash, credit is money you don’t actually possess, but pay back at a later time.
Your credit score is a statistic that evaluates how worthy you are of credit based on your history with it. They range from 300 – 800, with a score of 700 and up considered “good.” Credit is your ability to buy things before you use actual cash. Your credit score takes into account all of the loans and credit cards taken out in your name and scores you based on how well you pay on them. They also score based on how intelligently you use them – such as if you pay more than the minimum. This score is what other credit and loan providers use to decide if they’re going to give you money. If you have a good score, they know you’re more likely to pay them back.
Fixed assets are a tangible property that businesses use in operation. Fixed assets generate income for a company, and aren’t expected to be used or sold for cash within a year. Fixed assets include things like buildings, computer hardware or vehicles.
A guarantor is a person who guarantees something will be paid. For loans, it’s a person who co-signs with you in order to assure the lender they’ll be paid. In the event that you are unable to make a payment, your guarantor takes on the responsibility. They pledge their own assets in case you cannot pay what you’re obligated to by the lender.
A loan term is the period of time your business has to pay off a loan. During a loan term, the payments are set up to be paid however often the loan is designed for. For example, if you get a $10,000 loan, your loan term might be 24 months paid monthly, so you’ll be paying about $417 per month during your loan term of two years.
The prime rate is the interest rate that commercial banks charge their customers with the best credit. It’s largely determined by the federal funds rate set by the government. It serves as a base to determine most interest rates for borrowers.
Your principal amount is the starting amount of your loan, and id usually the amount of money you receive.
Working Capital is the difference between a company’s current assets (cash, accounts receivables, inventories, etc) and their expenses or liabilities. It’s the amount of capital a business is operating on, and if its assets are less than its liabilities, the business has a working capital deficit.
Assets – liabilities = working capital
An underwriter determines if a business gets a loan. The underwriting process is what a business goes through to get a loan. An underwriter assesses the risk a business may be to a financial institution and determines whether or not they are worth lending to or not, based largely on their credit history and financial health.
Unsecured vs. secured loan:
Secured loans require collateral in order to receive them. Unsecured loans do not require collateral, but will often require a better credit history.
FaaSfunds helps you out with all this complex information, and shows you all the things you need to know when it comes to getting a loan. Reach out to us today to learn about the best funding options for your business. Don’t let the banks confuse you – get FaaSfunds.
If you like the Harry Potter universe, think to the beginning of the spin-off film Fantastic Beasts and Where to Find Them. In 1920s New York City, An ambitious Muggle named Jacob Kowalski pitches his bakery business to a banker in hopes of getting a loan. He’s passionate and driven by a valid business plan, but he’s very quickly denied due to various reasons. Most of these reasons are due to the time period, but nevertheless, this fictional instance illustrates the frustrations that come with getting a bank loan. For most of modern history, getting a loan has required business owners to go through the strict vetting and application process from a bank. Often, this required going to a bank, sitting across from a banker and pleading that your business was worth funding. This took a significant amount of time, and the majority of applicants were denied. This is what led to the creation of the lending marketplace.
Banks have been the gatekeepers of loan financing until recently. The internet has managed to change the nature of getting a business loan, and you – the businesses – are the ones who benefit from the new idea of a “lending marketplace.” This disruption of traditional loan sources was created, in part, by public trends (trust in online transactions, demands for immediacy, and proliferation of public data, according to a report by Deolitte), and part from the 2008 financial crisis. Businesses trying to start, or restart, after the crisis kept getting denied for funding because the stakes were higher and businesses were in worse financial shape than before. The online lending marketplace was a response to the strictness of banks, as a way for businesses to get funded in an easier way.
A lending marketplace, as defined by the U.S. Treasury Department, is “the segment of the financial services industry that uses investment capital and data-driven online platforms to lend either directly or indirectly to consumers and small businesses.” Basically, this means that the “lending marketplace” is just the plethora of online lenders that provide loans to individuals and businesses via an online platform. You don’t have to go to a bank or search through piles of business documents. In the same way Uber disrupted the old-fashion taxi industry, online lenders disrupted the loan industry. Lending marketplaces popped up as a way to finance businesses that banks denied.
Originally called “peer-to-peer lending,” as the industry grew, so did its investor base. There are a lot of different lenders within the online lending marketplace, but they all have key similarities:
- You’re more likely to get approved than at a bank because they make their money solely from lending money.
- The process to get funded is much quicker because they use technology-enabled underwriting – meaning they automate the process of determining credit risk and identity.
In fact, according to the U.S. Treasury Department, businesses that apply to the online lending marketplace for funding get approved 70% of the time. They streamline the application process and cut the barriers to entry because they’re designed only for lending money. Because they’re online, they take less time and resources to figure out, making them an attractive option for businesses looking to get funded in less time.
The lending marketplace is packed full of loan options – hence the “marketplace” side of it. No matter what type of funding you’re looking for, chances are there’s a loan that fits your needs. Here are the most popular business-funding options from online lending marketplaces:
- Lines of credit
- SBA loans
- Short term loans
- Business term loans
- Merchant cash advances
- Business credit cards
- Equimentment loans
The Disruption Factor
As the online lending marketplace expands and further disrupts the loan business, so does the need for greater consumer knowledge surrounding their offerings. America’s competitive business nature often means that consumers can get bogged down with decisions with very little discretion as to which is the best one. This is what FaaSfunds does, we take out all the variables of getting funded and automatically show you what works best so you can be fully informed. Like the marketplace lenders, FaaSfunds uses data technology to analyze your finances, but instead of getting you a loan directly, we take that data and use it to figure out which loan fits best with your financial situation. The process is entirely transparent, and the goal is to keep you informed so you can make the best decisions.
There are also products that create loan-specific comparisons for your business finances, and break down the costs and payoffs of certain loans, like the SMART Box Capital Comparison Tool.
What’s the Catch?
You can receive student loans, consumer loans and an array of business loans online, with the interest rates being the main difference from banks. Since marketplace lenders take on higher credit risks, they charge higher interest rats. If your credit is bad, unfortunately, this means you’ll be considered a “high risk” client. Lenders take the chance of losing the money they’re owed, so they compensate for this with high rates. Banks also have access to “cheaper money” through their many other sources of revenue – banks don’t operate solely to lend money, but the marketplace lenders do. Also, the Federal Reserve (the bank for the banks) lends money to banks at very low rates. Online marketplace lenders receive their funds from alternate sources – venture capital firms, investors, and hedge funds – who don’t have the government’s blessing.
Is the Lending Marketplace Better?
The discretion of what’s better or worse for borrowers depends entirely on their financial situation. The basic tenets for what would make turning to the online lending marketplace appealing depends on your experience with getting loans in the past or your credit health. If you’ve had trouble getting approved for business loans from a bank in the past, then the lending marketplace offers a solution for that. Mistakes happen, as well, and sometimes less-than-ideal situations result in hits to your business credit. Marketplace lenders are there for businesses that don’t meet high bank standards – because sometimes high standards don’t necessarily determine worthiness.
The best advice is to really understand your business’s needs and finances – FaaSfunds can help with this – and be aware of the tradeoffs for each different type of loan. FaaSfunds will help you sort through all the options within the online lending marketplace, and help you figure out not only what you qualify for, but also what will fit best with your business needs.