When you want to borrow money from any type of money lender you will have to sign a loan agreement as per the federal rule. However, singing any contract blindly will lead to unwanted surprises and situations that may make your financial situation even worse. It will always payoff well if you know the loan terminology and jargons that are often used by the money lenders.
Acronyms and loan terminologies
The money lending industry uses several acronyms and difficult to understand loan terminology which will leave you in the dark if you are not careful and have never shopped for loans before. Such knowledge will help you in comparing different loan offers and most importantly in signing the agreement. You will be able to relate the loan terms with your financial situations and needs.
DSCR: This stands for Debt Service Coverage Ratio also sometimes referred to as Debt Coverage Ratio.
- This is a financial ratio that shows the cash available to service the debt which means to cover the principal, interest, and lease of the loan.
- To calculate it, the cash flow or the net operating income in case of a business is divided by the debt service payments or payments of the loan and lease.
- The ratio can be less than 1, equal to 1 or more than 1.
The reason you should pay attention to this loan terminology is to find out whether or not taking on the loan is a smart idea given your financial conditions.
EBITDA: This is one of the most confusing loan terminologies. It stands for Earnings Before Interest, Tax, Depreciation, and Amortization. Typically, this measures the operating performance of a business especially.
- This is done to calculate the performance of the company without factoring in the tax environments, accounting decisions as well as financing obligations. This loan terminology will come into play to adjudge the profitability of the business.
- To calculate EBITDA, the money lenders looks into the annual revenue, net operating income, net income, cash flow, and other areas such as EBIT or Earnings Before Interest and Tax. EBIT which is the same as operating income factors in all the costs such as the cost of goods sold, utilities, rent and depreciation. These costs are subtracted from the revenue.
- You can visit money lending sites such as https://www.libertylending.com/ or visit a bank to know how they calculate EBIT in one of two ways. They can take your net income figure as per your income statement and add the interest and taxes or subtract the operating expenses from the revenue.
- With the EBIT depreciation and amortization is added to get the “DA” part of the acronym and make it a complete calculation of the Net Income + Interest + Taxes + Depreciation + Amortization.
This term is equally important because the coverage ratio will compare the liabilities—such other debt and lease payments to reflect your affordability to take and repay the loan you wish for, given your current financial condition. The most desired ration is 2 or even higher because a ratio of 1 means you will barely be able to pay off the debt.
The LTV ratio is spelled out as Loan To Value ratio. This measure of financial risk is usually used for mortgage loans and compares the loan amount with the value of the asset for which the loan will be used to acquire.
- The percentage is obtained by dividing the loan amount by the value of the asset.
- Higher LTV ratio will mean that the loan amount is the same or close to the asset value and therefore have a higher chance of going into default. This is because you will have very little equity in your purchase, the major of part of which is financed by the money lender.
You must be careful of this term because you will need to ensure that you have a lower LTV ration especially if you have a poor credit history to get financing to offset the financial risk created by your poor credit history.
Second position: This loan terminology relates you to the money lender you are working with and especially applies to small business lenders. Usually, the lender is in the second position if you already have a debt.
This is also an important loan terminology to consider because it will determine whether or not you are eligible to be approved for a loan. In most of the times, money lenders do not want to be in the second position. This is because the lender in the first position will have the first right to recoup their money in case your business runs into a loss.
Blanket lien: This is another important type of loan terminology which is a specific type of lien. It protects the money lenders with a security in the event you default or cannot repay them. With such lien the money lender will be able to sell your assets in order to collect their money.
Therefore, it is important to know what kind of lien the lender is putting on your loan agreement as all of these liens come with variable seriousness. If you have a strong potential to repay you should not worry about this lien but in case you struggle with your finance then a blanket lien can be very dangerous to you.
Bridge loan: This is a terminology used in commercial loan agreements and is typically a short-term loan. This bridges the gap between a the financing options of the borrower and help you stay afloat while you raise rounds of venture capital or wait for any other type of loan to get approved covering your waiting period.
Lastly, consider the APR or the Annual Percentage Rate to know what amount you will have to repay every month.
These jargons are easy to understand by the money lenders but very confusing for the consumers which is why you are recommended to read the fine print carefully, especially if you are entering into this confusing world of financing for the first time.