If you are opening a practice or financing an expansion, you're likely working through the financing opportunities and the various terms – or vocabulary – that come with it. Here are some of the basic terms to understand when securing a loan.
by Nicole Ingrando, D.C. in Get Financing on Tuesday, November 3, 2015
First, you’ll probably be asked if you are interested in an intermediary or a long-term loan. First, you need to understand that "term" is actually a type of loan. It means that your loan will be for a set amount over a set period of time.
An alternative to a term loan is a balloon payment. Think big loan = big lump payment at the end of the loan. In other words, you’ll pay a set amount each month, but it will be based on paying a large amount at the end of the loan agreement.
As for the term "intermediary," this is a loan that lasts three years or less. While the bank will take time to conduct their due diligence, the actual requirements to take out this type of loan are often fewer than a long-term loan.
A long-term loan is typically for a period of 10 - 20 years. Because of the risk implications of this lengthy commitment, your financial institution will look closely at your collateral, and may restrict the amount of additional debt your practice takes on.
Instead of a term or balloon loan, you may be considering opening a line of credit. The traditional line of credit is one issued based on your financials, personal and business tax returns, bank statements and other financial and legal business documentation. This type of loan is open for a period of time for a set amount and a set rate, although the rate may be adjusted from time to time.
If you don’t borrow against the line of credit, then you don’t pay anything – it is available when you need it. Access to a line of credit is often as simple as writing a check directly from the account or transferring money from the loan to your checking account. Ultimately, having this available can help with cash flow, small projects, etc.
Another loan alternative is the unsecured line of credit such as a credit card. The difference between this and a traditional line of credit is that you aren’t putting up something as collateral against it. Another difference may be a lower line of credit or a higher rate. As you well know, this is a flexible loan that can help you in lean times like the line of credit. Approval is less onerous than a traditional line of credit or a loan.
So now that you have figured out the type of loan you may be considering, there are other terms you should also understand:
- Working capital: also known as liquidity. This financial term takes your current assets minus your current liabilities to determine your liquid assets. It can be a consideration in determining whether or not you receive a loan, as well as your interest rate.
- Capital: The assets you own that can be easily turned into cash. It can be stocks, bonds and property.
- Credit capacity: This is the maximum amount of credit a creditor will extend based on a full analysis of your personal and business finances.
- Collateral: In case of default, this is something you have put up as security against your loan.
- Fixed rate: The interest rate remains the same for the duration of your loan
- Adjustable rate: The rate on your loan can be adjusted periodically. You’ll need to check with your financial institution on how the rate is calculated and when it can be adjusted.
Now that you understand the lingo, financing doesn’t have to be difficult – especially if you know your options. Check out your financial institution's website and look at what they have listed. Compare and contrast your options and go in ready to ask questions.
Your checkbook will thank you for it.