4 More Small Business Loan Terms You Should KnowWhen you’re deciding on a loan for your small business, it’s smart to know exactly what you’re getting into. However, that can be difficult when borrower agreements are filled with technical words and phrases that aren’t always easy to understand. We’ve written about small business loan terms you should know before, but there’s so much to cover that we decided to return to the subject by explaining four more terms that you should understand when you’re searching for a small business lender.

Know these small business loan terms before you apply

Annual Percentage Rate

This is one of those business loan terms that many people think they know, but a lot of people get annual percentage rate, or APR, confused with annual interest rate since they’re both expressed as percentages. Annual interest rate is the percentage of the money you borrow that the lender charges you as interest every year. APR includes the annual interest rate, plus any other fees or discounts involved in taking out the loan, such as origination fees. Lenders are required by law to disclose APR on their loans because, compared to an interest rate, APR provides a more realistic picture of what the loan will actually cost you once it’s all paid off. A loan with a low annual interest rate and a high APR means the lender is charging higher fees for the loan in comparison to its interest, which could result in you paying a lot of money upfront or at the end of the loan to cover those fees.

Prepayment Penalties

If you can afford to, it’s usually a good idea for you to make early payments on your loan. Since you pay interest on your loan for as long as that loan still has a balance, paying the loan back early can reduce the total amount of money you have to pay your lender. While this is great for you, it’s not so great for your lender because they won’t make as much money from your loan as they expected. To make up for this, some lenders include prepayment penalties in their contracts, which force borrowers who pay early to also pay a fee that’s typically equal to a percentage of the early payment. In addition to incentivizing you to stick to the lender’s payment schedule, prepayment penalties make it more expensive to refinance your loan if you find better terms. This means if you plan to pay off your loan early or you want the option of refinancing, you should try to avoid lenders who charge prepayment penalties when you can. Luckily, that’s easy to do if you check out our small business loan reviews, as none of the small business lenders we have reviewed charge prepayment penalties, except for Dealstruck.

Revolving Credit

As we noted in a previous article, there’s not just one type of small business loans. Term loans, which give you a lump sum of cash that you repay over a set period of time, are great for expanding your business, but for dealing with recurring expenses, you may want to go with revolving credit instead. Revolving credit, like a line of credit or a business credit card, lets you borrow any amount of money you want up to a maximum limit, then pay that amount off over time (plus interest) in fixed, regular payments. If you open a line of credit, though, make sure you thoroughly read the agreement before you sign, as lines of credit tend to have more fees associated with them compared to term loans. Not every online lender offers lines of credit, but there are some, like OnDeck and Fundation, that do.

Arbitration Clause

Unlike the other business loan terms in this article, this doesn’t affect the amount of money you’ll pay on your loan or the structure of your loan, but it does affect your rights as a borrower. If you read the borrower agreements of small business lenders, you may see a clause that says any dispute between you and the lender will be resolved by binding arbitration. This means you are waiving the right to resolve issues with the lender via litigation, which may include participating in class action lawsuits. Instead, any legal problems between you and the lender will go through arbitration, which involves both sides presenting testimony and evidence to an arbitrator, who then makes a decision and possibly issues a financial award to one of the parties. Many lenders include arbitration clauses in their contracts because arbitration is much cheaper and faster than settling a legal dispute in court, reducing the lender’s legal costs. If you’re not comfortable with waiving your right to sue your lender in the case of a legal issue, you may want to find a lender that doesn’t have an arbitration clause in their borrower contract, such as Funding Circle.

If you’re looking for a small business loan, a great place to start is with our reviews of lending services. For more tips on finding the best loan for your small business, read our small business loans blog.