6 Confusing Small Business Loan Terms Defined

Getting a business loan can be tough. You know the ins and outs of your own business, but you might not know how to get the funding you need. To make matters worse, small business lending is full of confusing bank lingo that you may not understand. If you need a crash course in business lending lingo, here’s a quick rundown of six confusing small business loan terms.


You see APR everywhere when applying for financing, but you might not remember everything that goes into calculating the APR for different types of financing.

APR stands for Annual Percentage Rate, and it estimates the overall annual cost of a loan including fees and compounding interest. This means that when looking for business financing and credit cards, an APR is often a better point of comparison than the interest rate alone. If your loan doesn’t give you an estimated APR, you can always use an APR calculator to get an idea of how much your loan will cost.

Term loans

Term loans are loans with a set repayment period and either a fixed or variable interest rate. Term loans are often associated with online lenders, but some banks offer term loans. They work a lot like traditional bank loans, but they aren’t quite the same. Usually, term loans are easier to get approved for than bank loans, but they also come with higher interest rates or fees.

Line of credit

A line of credit is sort of like a mix between a loan and a credit card. A line of credit lets you borrow money from a lender whenever you need it. The lender sets a cap on how much money you can borrow and how long you have to make payments on the borrowed funds. Lines of credit may come with a monthly or yearly fee, or you might only need to pay interest on money you borrow.


Factoring sounds like the math that goes into small business financing, but it’s actually its own type of business financing. Factoring is when you sell your outstanding invoices to lenders for between 50 percent to 80 percent of their value. Factoring can be a fast easy way to get cash, but it can be more expensive than other financing options. Also once you sell your invoices, you might not get a say in how the lender collects on your invoices, so you’ll want to make sure that factoring won’t damage any customer relationships.

Merchant cash advance

A merchant cash advance is a type of financing where you get a sum of cash now in exchange for a percentage of your credit card sales in the future. They’re different from a traditional loan because the lender collects directly from your merchant processing sales. Merchant cash advances tend to have higher interest rates than other loans, but they are also easier to get.

Sign Up: Receive the StartupNation newsletter!

SIC codes

A Standard Industrial Classification Code, or SIC Code, is a four digit number that refers to the industry sector your business is in. Lenders and credit bureaus use your SIC code to determine what type of business you run and rate your creditworthiness. Six digit NAISC codes are sometimes used in place of SIC Codes, but they both refer to your industry sector. Some sectors, like real estate, are considered more risky to lenders, so you want to make sure your SIC code is correct when you apply for financing.  

This article originally appeared on by Megan Tyler.

Previous Article

Sharpening Your Strategic Focus: How to Take Your Startup to the Next Level

Next Article

Automation Has Clear Benefits for E-Commerce: Here’s Why

Related Posts
Read More

WJR Business Beat: We’re Spending Even More Time Online (Episode 411)

In today's Business Beat, Jeff tells us consumers are spending more time online and explains what businesses need to do to reach them. Tune in below for more details on how digital use has changed with the pandemic:   Tune in to News/Talk 760 AM WJR weekday mornings at 7:11 a.m. for the WJR Business...
Read More

WJR Business Beat: Win $10,000 Grant Through Verizon Program (Episode 410)

On today's Business Beat, Jeff provides details of the Verizon Small Business Digital Ready program, including free resources, coaching and $10,000 grants to get your small business up and running. Tune in below for more details:     Tune in to News/Talk 760 AM WJR weekday mornings at 7:11 a.m. for the WJR Business Beat....
pitch your business idea
Read More

How to Pitch Your Business Idea to Startup Investors

Securing funding, whether for a startup or an established business, is not an easy task. A strong startup concept won’t be enough when approaching investors; you'll also need an exceptional pitch to sell it. Let's look at what defines a startup pitch, a few different types, and how to create a fantastic one for your...
home-based businesses
Read More

The Value of Home-Based Businesses to Economic Recovery

The challenge of America’s economic recovery, in the wake of the COVID-19 pandemic, is to spread it to every community – and especially those that have been historically excluded. The key to meeting that challenge is to appreciate the civic and economic value of an overlooked resource: home-based businesses. There are about 16 million home-based...