Every industry has its own jargon to make things easier to communicate, but it can make it seem confusing and uninviting to people from outside of that industry.
Many people get incredibly intimidated when it comes to financial terminology, in part because you’re usually confronted with it when you’re applying for some kind of loan or financing. The last thing most people want to do in that situation is to ask questions that will make them risk sounding stupid.
But just because someone doesn’t deal with these terms every day and doesn’t understand what they mean doesn’t make them stupid. And more than that, while someone might understand the basics of what a business loan is, understanding how it’s different than a line of credit or asset based financing is a whole other issue.
At Capital Hands, it’s important to us that our clients and customers know exactly what they’re getting. We listen to our customers’ needs to develop the best solution for them and want our customers to understand their options. Understanding the terminology is empowering and can put you in a better position to decide how to choose a financing company that will work in your best interests.
In this post, we explain what common terms used in financing mean. We’ll go over the meaning of terms used for different financial products and their differences.
Financing is the raising or providing of funds for various business activities, purchases or investing that will be repaid in the future according to agreed-upon terms. Financial institutions provide capital to businesses, consumers and investors which helps them achieve their goals.
Business and consumer financing are usually used for large purchases, like equipment, vehicles, home or business improvements or even dental work.
Refinancing is the revising or replacing of terms on an existing financing agreement. When a borrower wants a loan or mortgage refinancing, they are usually trying to make favourable changes to their credit agreement, such as with the payment schedule, interest rate, or other terms.
Refinancing is a common strategy when significant changes to interest rates occur, and creating a new agreement can produce considerable savings on debt payments. Refinancing is also often used as a way to consolidate debts to help lower interest rates, provide tax relief and generate operating capital.
With term loans, the borrower has access to the funds only one time, and it is usually granted for a specific purpose. What this means is that the borrower takes out the term loan from the financial institution and then has to make principal and interest payments until the debt is paid off.
Term loans are one-time lump sums paid off over a period of months or years. Once you make payments towards it, you can’t use it again like you would a credit card.
A line of credit is different from a loan in that the borrower receives a pre-set credit limit, similar to a credit card, and they make regular payments on it that include the principal amount and interest. However, unlike a loan, the borrower can continue to access the line of credit while it’s active. The funds also don’t need to be used for a set purpose.
So, for instance, if a borrower opens a line of credit for business or personal use and uses it to make a large purchase. They begin making payments towards the line of credit, but then something else breaks down and they need to make repairs or replace it. They can also use the line of credit for that cost as long as it’s within the line of credit limit. A line of credit can be an excellent option for businesses with limited cash flow.
Whereas traditional business loans are usually approved based on income, cash flow, and credit history, asset based lending is when a loan is provided based on the value of assets the borrower offers as collateral. These assets can include accounts receivable, property, equipment, or even inventory.
The service an asset based lending company provides is to allow a company to access the working capital in the assets they own right away.
It’s important to understand what different types of financial products are out there so you can know which ones will work best for you. At Capital Hands, we will work with you to identify the best solutions for your business. Call us today to discuss your options, and we’ll be happy to help.