A Glossary of Small Business Financing Terms

A Glossary of Small Business Financing Terms

If you're new to small business financing, here are some key terms to get you started.

Accounting software: Computer programs that track financial transactions and provide automated reports and analysis. Examples include QuickBooks and Peachtree.

Accounts payable: Money owed to vendors for goods or services bought on credit. Accounts payable appears as a current liability on the company balance sheet.

Accounts receivable: Money owed to the company for products or services sold on credit. Once a company sends a customer an invoice for a specific sale, the sale becomes an account receivable and is recorded as a current asset on the company balance sheet.

APR: The annual percentage rate is the total cost of a loan. It includes the interest rate and any other fees assessed, for example, the origination fee. It is the most useful basis for comparing different types of debt.

Asset: Anything of value, tangible or intangible, that is  owned by a company. Assets include cash, accounts receivable, inventory, prepaid expenses, property, equipment, trademarks, and patents.

Balance sheet: A snapshot of a company's net worth, based on what it owns and what it owes.  This statement is set up according to a simple equation; assets should equal the sum of a company's liabilities and shareholders' equity.

Bookkeeping: An accounting activity that involves recording financial transactions like purchases, sales, receipts, and payments.

Bootstrapping: Funding startup operations and growth using personal finances and revenue from the business. Bootstrapping gives a business owner much more control over business decision-making.

Business credit report: Prepared by a credit bureau, a business credit report is a record of a business' credit history. Commercial or business credit scores are calculated based on the information in a credit report. Lenders, insurance companies, and investors use business credit reports to assess the risk and financial health of a business.

Business credit score: Also called a commercial credit score, business credit scores are based on a business' credit and repayment history, legal filings, size, and length of time in business. Equifax, Experian, and Dun and Bradstreet are the three major business credit scoring companies.

Capital: The wealth of a business as captured in its accounts, assets and investments. In accounting, capital refers to money invested in a business, in the form of debt or equity, to generate income.

Cloud-based accounting software: Online applications that track and analyze financial transactions. QuickBooks Online (QBO) is the national leader in cloud-based accounting software. Xero is a popular choice for micro-businesses and the leader outside the U.S. Wave operates a freemium model for businesses with fewer than 10 employees.

Credit limit: The maximum amount a debtor is authorized to borrow on a credit card or line of credit. A line of credit maxes out when a debtor borrows up to or beyond the credit limit.

Debt consolidation: Combining multiple loans or debts into one account to reduce fees or to get a lower interest rate.

Debt financing: Borrowing money from a lender to be paid back with interest. Debt financing includes loans, credit cards, lines of credit, invoice factoring and merchant cash advances.

Equity financing: Selling a piece of your business to an investor-friends or family, angel investors, or venture capitalists-in exchange for capital.

Financial statements: A collection of records of an organization's financial activities, over a specified period. There are 4 main reports: the income statement, the balance sheet, the statement of cash flows and the statement of shareholder's equity.

Fixed interest rate: A fixed interest rate holds steady throughout the term of the loan; it does not change with the market.

Floating interest rate: A floating interest rate, also known as a variable or adjustable rate, changes with the market over time.

Income statements: A financial report that addresses the bottom line directly, by reporting how much a company has earned and spent over a period of time. If the difference between the gains and losses is positive, the statement shows net income. If the net amount is negative, the business suffers a net loss. Also known as a profit and loss statements.

Interest rate: A percentage that represents the current rate of borrowing or the amount earned on an interest-bearing account. For loans, higher interest rates generally represent higher risk. Interest rates may be fixed or variable.

Invoice financing: Raising capital for your business by selling unpaid invoices at a discount.

Liability: A legal obligation to settle a debt. Current (payable within one year) and long-term (payable after one year) liabilities are recorded on a company's balance sheet. These liabilities can include accounts payable, taxes, wages, accrued expenses, and deferred revenues.

Lien: A lien is the legal claim of a creditor to the collateral of a debtor who does not meet the obligations of their signed contract.

Line of credit: A pool of capital a business can draw from, up to a certain maximum. When you draw down on a line of credit, cash is made available in your bank account. This cash is a short-term loan that must be repaid with interest.

Merchant cash advance: An MCA is a short-term loan based on a business' monthly sales volume. Repayment is made through a fixed debit or percentage taken off daily or weekly sales.

Personal credit report: Prepared by a credit bureau, a personal credit report contains detailed information about an individual's financial history with banks, credit card companies, collection agencies, and governments. Credit scores are based on the information in a credit report.

Personal credit score: The three national credit bureaus-Experian, Equifax and Transunion-use variations of the FICO Score algorithm to determine a personal credit score. This algorithm uses the patterns in hundreds of thousands of credit reports to approximate a consumer's level of future risk.

Principal: The original amount borrowed or the outstanding balance yet to be repaid, excluding interest.

Secured loan: A loan protected by an asset or collateral, to which the lender holds the title.

Statement of cash flows: A summary of the cash generated and used by a business over a period of time, in operating, investing and financing activities. The statement of cash flows is an important supplement to the income statement, because it accounts for the actual collection of revenue and payment of expenses.

Statements of shareholders' equity: A financial report that describes the changes in the equity section of a balance sheet in detail.

Tax lien: The legal claim of a government entity to seize or sell a taxpayer's assets when an individual or business fails to pay taxes. Besides paying what is owed, a person or business may get rid of a lien by getting the debt dismissed in bankruptcy court or establishing an offer in compromise with tax authorities.

Term loan: A term loan is a lump sum (the “loan amount”) borrowed from a lender and paid off at specified intervals over a set period of time (or “term”). Term loans are typically appropriate for one-time investments in business growth - opening a new storefront, renovating an existing location, hiring new employees, etc.

UCC lien: A public notice that a lender claims an interest in a debtor's property, in exchange for a loan.

Unsecured loan: Financing instruments like credit cards and education loans that are not backed by collateral. Unsecured loans involve greater risk for the lender and therefore higher costs and shorter repayment terms for the borrower.

Working capital: Also called current capital, working capital is the cash available to a business for day-to-day operations.