Loan applications can be full of unfamiliar terms, and that’s before you’ve even looked at the numbers. From APR to balloon payments, business lending in New Zealand comes with its own language. It’s easy to get stuck on the wording before you even start weighing up the options.

This guide is here to help. Consider it your mini commercial lending glossary, explaining the most common business loan terms so you can compare options with confidence.

What you’re really paying: interest and fees explained

When it comes to borrowing for your business, interest isn’t always as simple as it sounds. Understanding how it’s calculated, and how it shows up in loan offers, can make a real difference to what you end up paying.

APR vs interest rate

These two terms are often used interchangeably, but they refer to different things.

  • Interest rate is the base cost of borrowing, expressed as a percentage of the loan amount.
  • APR (Annual Percentage Rate) includes the interest rate plus most fees and charges. It gives you a clearer view of the total cost of the loan over a year.

APR is especially useful for comparing loan products. If two lenders offer the same interest rate but one has a higher APR, that usually indicates more fees are included in the offer.

Simple vs compound interest

  • Simple interest is calculated only on the original loan amount (the principal).
  • Compound interest is calculated on the principal plus any interest already added, so you may end up paying interest on interest.

It’s worth checking your loan terms to understand exactly how your repayments will work.

Commercial loan terms explained

Start reading a business loan contract and you’ll quickly run into terms that don’t mean what you think they do. This section decodes the most common terminology you’re likely to come across.

Principal

The principal is the original amount you borrow, before interest or fees are added. If you take out a $50,000 loan, that’s your principal. Your interest and repayments are calculated based on this figure unless otherwise specified.

Loan term

This refers to the length of the loan, or how long you agree to take to pay it back. Shorter terms usually mean higher repayments but lower overall interest. Longer terms may reduce the monthly cost but increase how much you pay in total.

Fixed vs variable interest

Fixed interest stays the same over the life of your loan. It can make it easier to budget, since your repayments won’t change.

Variable interest can move up or down, often in line with market conditions. This means your repayments could increase or decrease over time.

Balloon payment

A balloon payment is a larger-than-usual amount due at the end of the loan term. Some lenders offer lower repayments during the loan period, with a lump sum due at the end. It’s important to plan for this. If you’re not prepared, it can put pressure on your cash flow.

Prospa loans don’t include balloon payments. Every loan comes with a clear repayment schedule so you know exactly what to expect from start to finish.

Early repayment

This refers to paying off your loan ahead of schedule. Some lenders charge early repayment fees, while others, including Prospa, allow early repayments without penalties. Paying early may reduce your interest cost, depending on how the loan is structured.

Types of business loans explained

How a loan is structured affects more than repayments. It can shape how you manage cash flow and adapt to changes in your business.

Below are the most common types of business loans:

  • Term loans provide a lump sum upfront, which you repay over a fixed period. These are often used for larger investments, like expanding your premises or purchasing equipment.
  • Lines of credit give you access to funds up to a set limit, letting you draw down as needed. You only pay interest on what you use, making this a flexible option for managing short-term needs.
  • Working capital loans are designed to help cover everyday operational costs like payroll, stock purchases, or supplier invoices, especially during slower trading periods.
  • Invoice finance lets you access funds based on your outstanding invoices. This can help improve cash flow when clients are slow to pay.
  • Equipment finance is used to purchase vehicles, machinery, or other business-critical assets. The equipment itself usually serves as security for the loan.
  • Business overdrafts allow you to go into a negative balance on your business account, up to an approved limit. It’s a quick way to manage cash flow gaps, but may come with higher interest rates.

Not sure which option suits your needs? Here’s how to choose the right lending product for your business.

Before you go

Understanding the language of business finance puts you back in control. And that’s good for both your confidence and your cash flow.
Download the business loan terms cheat sheet to keep key definitions on hand when comparing finance options.