If you're applying for a small-business loan, it's easy to get confused by some of the jargon and acronyms that are unique to this process. Understanding a few key terms before you do your research can help you make a more informed decision about your loan. Here a seven important definitions to know before you jump into the world of small-business lending.
- 5 C’s of Credit
This phrase refers to the five criteria that banks use to make credit decisions regarding potential borrowers. The five C’ are: character, collateral, capital, conditions, and capacity. Examining these characteristics allows the bank to gauge the risk of default. - 504 Loan
This type of loan allows small-business borrowers to acquire fixed assets such as commercial property. The intent behind 504 loans is to small businesses invest in fixed assets at a cost lower than conventional loans. These loans are financed partially by conventional lenders and partly by Certified Development Companies, which are nonprofit entities set up to encourage local economic growth. - SBA
The Small Business Association (SBA) is a government agency dedicated to supporting the economy by assisting small businesses. The agency offers counseling and support to small businesses; it also partners with banks and other lenders to provide SBA loans. - 7(a) Loan
This is the most common type of loan administered by the Small Business Administration. A 7(a) loan allows both new and existing small businesses to obtain financing for a variety of purposes. - Equity Financing
With this type of financing, a company receives money in return for issuing shares of its stock. By providing investors with equity in the firm, a small business can avoid taking on debt. Venture capital is a popular form of equity financing for start-up companies. - Prime Rate
This is the rate against which SBA loans are quoted. The prime rate is determined by the federal funds rate, which is the short-term rate used among banks for overnight loans. - SBIC
A Small Business Investment Company (SBIC) is a private company licensed by the SBA that provides financing to small businesses. Some small start-ups use SBICs to gain funding as an alternative to venture capital.
Securing a small-business loan is a critical investment in your business. Doing your homework before committing to a loan is essential. With these definitions in mind, it will be easier to wade through the complex aspects of small-business lending to obtain the loan that's right for you.
