Applying for a business loan can be confusing, especially with all the financial terms involved. As an MSME (Micro, Small, or Medium Enterprise) owner, understanding some basic loan terms can help you make smarter decisions and find the right loan for your business.
In this blog, we’ll break down key loan terms that you should know before applying for a business loan. This will help you choose the right loan and negotiate better terms with confidence.
Key Terms Every MSME Owner Should Know Before Applying for a Business Loan
- Amortization:
Amortization is the process of gradually paying off a loan through regular, scheduled payments. Each payment covers both the interest and part of the principal (the original loan amount).
- Collateral:
Collateral is an asset (such as property or equipment) you pledge to secure the loan. If you cannot repay the loan, the lender has the right to claim the collateral. Having collateral can also help you qualify for larger loans or better interest rates, as it reduces the lender’s risk. However, with platforms like OPEN Capital, you can access collateral-free loans at affordable interest rates, making it easier for businesses to secure funding without risking valuable assets.
- Credit Score:
A credit score reflects your creditworthiness. A higher credit score increases your chances of securing loans with better interest rates and favorable terms, while a lower score may limit your options or lead to higher costs. In India, a CIBIL Score, which ranges from 300 to 900, is crucial. A score above 750 is considered good and can help you secure loans more easily and at lower rates. Maintaining a good credit score is key to getting financial support when needed.
- Working Capital:
Working capital is the money available to cover day-to-day business operations. It is essential for maintaining smooth cash flow, ensuring the business can meet its immediate financial needs without interruptions.
- Interest Rate:
The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. It affects how much extra you’ll need to repay along with the loan. A higher interest rate means you’ll pay more, while a lower rate makes the loan cheaper.
- APR (Annual Percentage Rate):
APR represents the total yearly cost of a loan, including interest and fees. It helps you see the true cost of the loan. A low interest rate with high annual fees can end up costing more than a higher rate with fewer annual fees. For example, if Loan A has a 5% interest rate but includes high annual fees, and Loan B has a 7% interest rate with low annual fees, Loan A might end up costing more. Comparing their APRs helps you figure out which one is truly cheaper over time.
- Credit Line:
A credit line is a flexible loan that lets you borrow up to a limit and only pay interest on the amount utilized. So, you only pay interest on the amount you use, making it a useful option for businesses with varying cash flow needs. Facilities such as overdraft loan comes with a limit. Let’s say, a business has a credit limit of INR 10 lakhs but has only used 6 lakhs; then the bank will charge interest only on the 6 lakh and not on the entire limit.
- Principal:
The principal is the original amount of the loan that you must repay, excluding interest. When you repay a loan, each payment reduces the principal, and as the principal decreases, so does the amount of interest you owe.
- Interest:
Interest is the cost you pay to borrow money, charged as a percentage of the principal. The lower the interest rate, the less you’ll pay over the life of the loan. Fixed interest rates remain constant, while variable rates change based on market conditions.
How Understanding These Terms Can Help You Get Better Loan Terms?
Knowing these terms can help you make smarter decisions when applying for a loan. When you know what to look for, you can negotiate for better interest rates and choose the loan type that fits your needs best. This knowledge helps you secure loans with favorable terms, which means lower costs and easier repayment options. By being informed, you can find loans that support your business goals and help you manage your finances better.
Open Capital’s Simplified Loan Process
At Open Capital, we simplify the loan process for MSMEs by offering a straightforward application, clear communication, and competitive interest rates. Open capital is dedicated to helping small and medium-sized enterprises (MSMEs) with innovative solutions. You’ll get a loan with:
- Quick and Easy Application Process: Complete your loan application in just 5 minutes with minimal documentation, ensuring a hassle-free experience.
- Affordable Interest rates: We offer competitive interest rates that won’t put a strain on your business, making borrowing both affordable and manageable.
- Flexible Repayment Plans: We offer a variety of repayment options customized to your business needs, ensuring you can repay your loan on your terms, without any financial strain.
- Unsecured Loan options: Need a loan without collateral? We provide unsecured loans at affordable interest rates, giving you flexibility without added risk.
Apply now on Open.capital and get a business loan of up to 30 lakhs!
