Small businesses need working capital to grow. When it comes to financing, the good news is there are a variety of lenders to help meet the needs of small business owners at every stage of their companies’ development. However, Summit Financial Resources believes it is critical for our clients to have a solid understanding of how financing works in order to make smart choices that address both their short and long-term goals.

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So you are prepared to make decisions that will best serve your small business today and down the road, here are a few of the essential terms you should know before meeting with lenders to discuss your challenges and objectives:

Annual Percentage Rate (APR): Your APR is a reflection of your true borrowing cost. It includes the interest rate on a loan as well as the fees and other charges you will have to pay. When deciding between different loan offers, use APR to compare how much each loan will actually cost.

Credit Facility: The credit facility is the credit limit that a lender is willing to provide to you and is generally based on the amount of collateral you have. For example, if you apply for a million dollar loan but you only have $100,000 in collateral, then the lender will likely only give you a $100,000 credit facility.

Interest Rate: Fixed and variable rates are the two means by which interest can be figured on a monetary loan. A variable interest rate means that the interest you are charged changes according to the index your loan is based on such as the prime lending rate. Depending on the terms of your loan, the rate could change as often as monthly or even daily. With a fixed interest rate, the rate you will be charged over the term of your loan remains unchanged no matter how high or how low the market drives interest rates. A variable rate loan can result in a lower payment in the short term but carries a risk that the rate could rise, which could result in significantly higher payments. With a fixed rate, you will always know the exact amount of your loan payment, but if interest rates drop significantly, you will continue to pay the higher rate.

Line of Credit: Lines of credit can provide small business owners with flexible access to working capital, allowing them to borrow money up to a certain amount whenever they need it. With revolving credit, the borrower is given a maximum credit line by the lender. The borrower can make purchases at any time and the funds are free to be borrowed again once payments are made. Lines of credit typically come with a variable interest rate, which means your interest costs can rise or fall depending on market interest rates and other factors. Many small businesses use revolving credit to safeguard against cash flow issues. With a non-revolving line of credit, the available credit does not replenish, and the account closes after it is paid down.

Term Loan: Unlike a line of credit, a term loan provides small businesses with a lump sum that is repaid in regular installments over a set period of time, or term. A term loan typically has a fixed interest rate, which means each payment will be the same until the loan is fully repaid. This type of business loan is suited to covering the cost of planned capital investments such as expanding your facility or purchasing inventory, while a line of credit is ideal for handling unexpected cash flow challenges. Summit Financial Resources can help clients increase their cash flow by adding an equipment term loan to your core loan.

Underwriting: At Summit Financial Resources, underwriting is our due diligence: the process of gathering information and analyzing your financials to make sure we determine the best way to lend you the most money possible while minimizing or offsetting risk. We focus on the value of your assets or collateral when structuring the loan’s terms and conditions, whereas bank underwriting guidelines generally involve a much closer scrutiny of credit worthiness, debt-to-equity ratios, working capital, and other criteria.

Working Capital: Also called current capital, working capital is the cash available to a business for its day-to-day operations. Your working capital is what is left over once you subtract your current liabilities from your current assets, and it can be a positive or negative amount. It is a common measure of a company’s efficiency, liquidity, and overall health.

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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.