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Lender jargon explained

Navigating the lending landscape can be overwhelming for anyone, but especially when you’re faced with unfamiliar jargon and complex terminology. To help you make better decisions for your business, we've put together a quick guide to some of the most common lender jargon you’re likely to come across.

Whether you're thinking about taking out a business loan, looking at lines of credit or simply want to know more about other types of financing solutions, read on!

Collateral: What it means for your loan application

Collateral is an asset or property that a borrower pledges to a lender as security for their loan. In the event the borrower defaults on the loan, the lender can seize and sell that collateral in order to recover the outstanding debt. Common forms of collateral in business lending include:

  • Real estate
  • Equipment
  • Inventory
  • Accounts receivable

Understanding what collateral is – and how it can affect your loan agreement – is essential as it can influence the terms and conditions of your loan, particularly the interest rate and final loan amount.

APR: Understanding the annual percentage rate

Annual percentage rate (APR) represents the total annual cost of borrowing, including both the interest rate and any additional fees associated with the loan. It’s essentially a standardised way to compare different loan offers. When evaluating various loans, pay attention to the APR rather than just the interest rate to get a more accurate picture of the overall cost of borrowing.

LVR: Loan-to-value ratio and its implications

In a commercial setting, loan-to-value ratio (LVR) is what lenders use to assess the risk associated with a loan. It represents the percentage of the loan amount compared to the value of the collateral. For example, if the collateral you provide to secure the loan is worth $750,000, and if the LVR is 75%, then the maximum you can borrow with that equity is $562,500. A higher LVR implies a higher risk for the lender, which may result in less favourable loan terms.

Debt service coverage ratio (DSCR): Assessing your repayment ability

The debt service coverage ratio (DSCR) is used to work out a borrower’s ability to repay a loan. It compares the borrower's net operating income with the total debt service (principal and interest payments) on an annual basis. A DSCR above 1 indicates the borrower's income is sufficient to cover their debt obligations, while a ratio below 1 suggests potential repayments will be difficult. Lenders often require a minimum DSCR to ensure loan repayment capability.

Balloon payment: Understanding lump-sum repayments

A balloon payment is a large, one-time payment that is due at the end of a loan term. This payment is often much larger than the regular installment repayments made throughout the course of the loan term. Balloon payments are common in commercial loans and they can actually be an attractive option if you expect a large cash flow or asset sale at the end of the loan term. However, make sure you plan ahead and ensure you have the financial means to make the balloon payment when it comes due.

Personal guarantee: Taking on additional liability

With many small business loans, lenders may require a personal guarantee from the business owner or director.

“A personal guarantee means that you are personally liable for the loan in case your business can’t repay its debt,” says David Crook, Managing Director at Nero Financial. “It allows the lender to pursue the personal assets of the guarantor to recover the outstanding debt. Before signing a personal guarantee, it's important to understand the implications and carefully assess your personal financial situation by speaking to an expert commercial broker.

Looking for lending support to grow your business or simply want to get to grips with more lender jargon? Speak to the experts today by contacting Nero Financial or call us on 1300 025 949.