Posted April 21st, 2023
Are you a business owner looking to take out a loan or secure business funding to help grow your startup? Before you sign on the dotted line, it's important to understand the essential terms that come with borrowing money.
In this article, we'll explore five key terms that every business owner should know when it comes to borrowing money for small business start up loans or other financing options. By the end, you'll have a better understanding of what to look out for and be equipped to make informed decisions when it comes to securing funding for your business.
- Interest rate: The interest rate is the cost of borrowing money from a lender. It is usually expressed as a percentage of the total loan amount and is charged by the lender for the use of their money. Interest rates are determined by several factors, including the borrower's credit score, the loan amount, and the length of the loan term. The lender will also consider their own costs of lending, such as administrative costs and the risk of default.
- Collateral: Collateral is an asset that the borrower pledges as security for the loan. This can include physical assets like real estate, vehicles, or equipment, or intangible assets like stocks or bonds. For instance, if a business owner takes out a loan to purchase a new piece of equipment, they may pledge that equipment as collateral. In the event that they are unable to repay the loan, the lender can seize the equipment to recoup their losses. Collateral can help businesses secure lower interest rates and higher loan amounts, but it's important to only pledge assets that the business can afford to lose in case of default.
- Credit score: A credit score is a numerical representation of a borrower's creditworthiness based on their credit history, including their payment history, credit utilization, length of credit history, and other factors. A good credit score can help businesses secure lower interest rates and higher loan amounts, while a poor credit score can result in higher interest rates and fewer loan options.
- Loan term: The loan term refers to the length of time that the borrower has to repay the loan. The loan term can range from a few months to several years, depending on the type of loan. A longer loan term may result in lower monthly payments but can also result in paying more in interest over the life of the loan.
- Fees: In addition to interest, lenders may charge fees for borrowing money, such as application fees, origination fees, and prepayment penalties. Application fees are usually small, ranging from $25 to $50, and cover the cost of processing the loan application. Origination fees, which are charged by some lenders for the cost of underwriting the loan, can be as high as 5% of the loan amount. Prepayment penalties are fees charged for paying off the loan early, and can range from a few months' worth of interest to a percentage of the total loan amount.
When it comes to securing startup business loans, business funding, or small business start up loans, MCS Capital is a trustworthy and reliable choice for businesses of all sizes. With a wide range of financing options, including equipment financing, commercial/investment real estate financing, and working capital loans, they can help businesses find the right funding solution to meet their unique needs. With a focus on transparent fees and competitive rates, MCS Capital is committed to helping businesses succeed. Contact them today to learn more about how they can help your business grow.