Navigating financial jargon gives even the most educated of us a headache. Unfortunately, loans are something we will all need to deal with; from the 80 million people who had car loans in 2012 to the small businesses just getting on their feet, both personal and business loans allow us to buy things and begin things that we otherwise never would have had the chance to own or do. If you already have your business checking accounts set up and are simply trying to nail down the banking jargon that commonly accompanies business loans, this post is for you. Let’s get started.
- DSCR: This term stands for Debt-Service Coverage Ratio (sometimes referred to as the Debt Coverage Ratio). It shows the cash a business has available to service its debt; as such, it is an important indicator of your business’s financial health and is something that a lender will look at to determine if lending to your business is a wise investment.
- EBITDA: EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization. Generally speaking, it’s a measure of your company’s operating performance without factoring in tax environments, financing obligations, or accounting decisions.
- LTV Ratio: This term describes the Loan-to-Value Ratio, which determines the level of financial risk; the loan amount is compared to the value of the asset that the loan is being used to acquire, creating a percentage. When borrowers request a loan for an amount that is the same or close to the asset’s value (creating a higher LTV ratio), lenders know that there is a greater chance it will go into default.
- Bridge Loan: Commercial bridge loans function the same as normal business loans. They are typically short-term loans that a borrower can use while waiting for another type of funding (usually in larger amounts, lower interest rates, etc.), earning its name as a “bridge” between the two.
The more well-versed you are in the financial and legal lingo involved in business loans, the better your chances of finding one that works best for you. Understanding can make a big difference, especially if you’re a small business, so be sure to do your research ahead of time.