Small Business Loans Explained

Beginner: Loan Words, Defined

What a loan actually is

A loan is money a lender gives you now that you agree to pay back later, usually in monthly pieces. The amount you borrow is the principal.

Because the lender is taking a risk and giving up the use of their money, they charge interest. Interest is the cost of borrowing, and it is why you always pay back more than you took.

Term, payment, and collateral

The term is how long you have to pay it back. A longer term usually means a smaller monthly payment but more interest paid overall. A shorter term means bigger payments and less total interest.

Collateral is something of value the lender can take if you do not pay, like equipment or property. A loan backed by collateral is secured. One with no collateral is unsecured and is usually harder to get.

Loan versus line of credit

A loan gives you a lump sum once, and you pay it down on a set schedule. Good for a known, one-time cost.

A line of credit is more like a reusable limit. You borrow what you need, pay interest only on what you used, and it frees back up as you repay. Good for uneven cash flow and surprises.