Sep 29, 2019
We’re here with a guide to every small business financing term you may need to know with definitions you can understand.
accounts payable: Money a company owes to vendors, suppliers, or lenders.
accounts receivable: Money owed to a company. Think outstanding invoices.
accounts receivable financing: Enables companies to borrow up to 80% of the value of their outstanding accounts receivable, giving business owners cash flow to cover expenses like payroll.
accruals: Business expenses that have been incurred but are not on the books yet or work that has been done, but not invoiced.
ACH payments: Payments made through the Automated Clearing House (or ACH) Network. ACH payments are made when one party gives another authorization to deposit or withdraw funds directly from a bank account—commonly used in direct deposit for payroll or automated payments for bills and loans.
amortization: The process of spreading out a loan into a number of fixed payments over time. Your total payment stays the same each month. The percentage of principal vs. interest that makes up the payment fluctuates.
angel investor: An individual who invests in a business at the startup stage, often in exchange for equity or convertible debt.
annual fees: Fees that can be charged by the lender each year to cover the administrative costs of a loan. Most often seen with lines of credit or business credit cards.
APR: Annual percentage rate. This is the annual cost of your loan. It includes the interest rate and any other costs assessed, such as origination fees.
articles of incorporation: The set of formal documents filed with a government body—usually your state— that documents the creation of a company. Think of it as the marriage or birth certificate for your business.
asset: Something of value that you own. Appreciating assets like stocks tend to increase in value or in their ability to produce income. Depreciating assets like cars lose value over time.
asset-based lending: A loan or revolving line of credit that uses a company’s assets as collateral. This can encompass receivables along with assets like equipment, real estate, inventory, and raw materials.
balance sheet: A summary of business assets and liabilities. It gives a snapshot of what a company owes and owns in a given moment.
balloon payment: A large payment due at the end of the loan term. Most commonly seen in mortgages, commercial loans, and other amortized loans. Borrowers often have smaller payments leading up to a much larger (balloon) payment at the end of the loan.
bank loan: The first stop for most businesses seeking funding. Traditional bank loans are often wary of lending to small businesses because of associated risks and relatively small loan amounts (for the bank). Business loan applications through banks are often lengthier and have greater requirements than applying for a business loan through a loan marketplace.
bank statements: The emails or envelopes that you get from your bank each month. Bank statements provide a written record of your bank balances and the amounts that have been withdrawn and deposited.
bankruptcy: When a person or business makes a legal declaration that they are unable to repay their debts. Filing for bankruptcy can result in the reduction or elimination of debts. Businesses should think carefully before entering into bankruptcy because it will negatively affect the business credit score.
blanket lien: A lien that gives a lender the right to seize any of the borrower’s assets in the event of nonpayment.
bookkeeping: Keeping records of the financial activity of a business.
bootstrapping: Self-funding a startup or business. At the startup stage, this is when you use your own money to finance the start or growth of a business. Once the business is established, bootstrapping refers to reinvesting profits into the business to finance growth.
business acquisition loan: A loan awarded for the purpose of providing a business with funding in order to purchase an existing business or franchise.
business credit card: Similar to a personal credit card, it offers on-demand funding for purchases. Unlike personal credit cards, business credit cards can only be used for business purchases.
business credit report: A tool for bankers, lenders, and suppliers to determine a borrower’s creditworthiness. The information contained in a business credit report makes up the company’s business credit score.
business credit score: A score determining the creditworthiness of a business based on factors like time in business, revenue, assets, and outstanding debts. Scores range from 0-100.
business line of credit: A funding account that can be used—or not used—depending on the needs of a business. Interest is only owed on the money used.
business loan application: When a business submits information about its credit history, revenues, debt obligations, and other factors for the purposes of securing funding. Traditional bank applications usually take 29 hours. Loan marketplaces are making applications easier and faster. Lendio’s application can be completed in just 15 minutes.
business plan: A document setting out the goals for a business and its strategies for achieving those goals.
business term loan: See term loan.
capital: Wealth of a business from a combination of cash and assets—both tangible and intangible.
cash flow: Your net income minus depreciation and other non-cash costs. Cash flow is often used to determine whether you qualify for a small business loan.
cash flow projections: An educated estimate of the amount of money you expect to flow in and out of your business. This number is based on previous cash flow patterns and helps you to plan for upcoming spending based on the working capital you expect to have.
collateral: An asset used to secure your loan. This could include real estate, vehicles, or other assets. You can secure a business loan with either business or personal collateral.
commercial mortgage: A loan secured by a commercial property. This allows a business to borrow toward acquiring, financing, or redeveloping a commercial property using its existing commercial property as collateral. Also known as a commercial real estate loan.
commercial real estate loan: See commercial mortgage.
convertible debt: When an individual or company provides capital to a business with the understanding that the debt will be transferred to equity at a later date.
credit limit: The maximum amount of credit that you can use at a given time. For business credit cards, this limits the spending you can do before paying down the balance on the card. For a business line of credit, it’s the maximum amount of cash you can use at a given time.
credit repair: The process of improving poor credit, making it easier to qualify for mortgages, loans, credit cards, or insurance.
credit report: A report of your personal or business credit history. Lenders often use credit reports (as well as other factors) to determine whether they will lend to you.
credit score: A numerical evaluation of your credit history used by lenders to quickly understand how risky it might be to lend to you. Credit scores are calculated using your payment and credit history, debts, inquiries, and other factors.
current assets: Assets that are usually used within a year and can be easily sold in case of emergencies. These typically include inventory, marketable securities, and cash.
debt: Money that is owed.
debt consolidation: A form of debt refinancing where a borrower takes out a larger loan to pay off all of the borrower’s other loans or merchant cash advances. In an ideal situation, the new loan has a lower interest rate that could, therefore, result in lower payments.
debt service coverage ratio: The cash flow available to pay current debt obligations.
dedicated funding manager: When you apply for funding through Lendio, you are given a dedicated funding manager. This person will walk you through the process, help you weigh the pros and cons of different offers, and navigate any potential hiccups along the way.
default: Failure to pay a debt. Loans are typically listed as being in default after they have been reported late several times.
depreciation: When an asset loses value over time.
derogatory mark: Negative, long-lasting marks on your credit score usually caused by failure to repay a loan. This can make it difficult to qualify for the best rates when applying for a loan. There are occasions when derogatory marks are on the credit report in error and can be fixed.
Employer Identification Number (EIN): A unique, 9-digit number assigned to a business by the IRS as a form of identification, like a Social Security number for your business.
equipment financing: Financing that can be used to purchase equipment. This can be anything from large-scale machinery to computer equipment. Because the loan is secured by the equipment, these loans are often easier to get than unsecured loans.
equity: Ownership interest in an asset. For example, if you are the sole owner of your business, you have 100% equity in your business.
expenditure: An amount of money spent by a business.
factor rate: How much the borrower will need to repay the lender, expressed as a decimal figure. Often used in quotes by alternative lenders.
FICO credit score: A measure of an individual’s creditworthiness. It’s based on a variety of factors including paying bills on time, getting current and staying current on bills, and keeping credit card balances low.
fixed asset: Long-term physical assets owned by a company. These often appear on a balance sheet or profit and loss statement as the “property, plant, and equipment,” or PP&E, and often include items like real estate, computer equipment, and machinery.
fixed interest rate: An interest rate that does not fluctuate throughout the term of the loan. It does not change with the market.
franchise agreement: An agreement between a larger company (franchisor) and entrepreneur (franchisee), giving the entrepreneur the right to operate a satellite of the larger company in a certain area for a specific period of time. It’s a legal, binding document that outlines the obligations for the franchisor and franchisee.
funding: Money provided for a particular purpose. For business loans, this is the cash the lender provides upfront to the borrower with the agreement that the borrower will repay the funds along with any additional interest and fees.
gross profit: Total sales minus the cost of goods.
guarantor: An individual who guarantees to cover the balance of a loan if the business should default. Lenders may ask for a guarantor if a small business is newer, for example.
hard pull: The initial step by a lender to evaluate a loan applicant. This becomes a part of the applicant’s credit history, meaning anyone who does a future hard or soft pull will see the inquiry. These inquiries will affect your personal credit score and can affect some business credit scores.
holdback: For a merchant cash advance (MCA), this is the percentage of daily credit card sales applied to repay the advance. Typically, the lender may take 10 to 20% of your daily credit card sales until the MCA is repaid.
income statement: A document that recaps the profits, costs, and expenses. Also called a profit and loss (P&L) statement.
intangible asset: Assets that are not physical. Examples include patents, copyrights, franchises, trademarks, trade names, and goodwill.
interest-only payments: When the entirety of a payment goes toward the interest of a loan and none goes toward the principal amount borrowed. Some loans have a period when borrowers are able to make interest-only payments. Once that period ends, borrowers must begin paying down the principal.
interest rate: The percentage a lender charges annually for the financing they provide.
investor: An individual or entity who invests in a business—often in exchange for equity—with the aim of making a profit.
lender: The institution providing funds for a loan or line of credit. In return for providing cash upfront, lenders dictate terms for repayment including interest, fees, and time period for the funds to be repaid.
lending marketplace: A platform that gives small businesses access to a variety of loan products, making small business financing faster and easier.
liability: A legal obligation to settle a debt. Liabilities can include expenses, accounts payable, deferred revenues, taxes, and wages.
lien: The legal claim of a lender to the collateral of a borrower who does not meet the obligations of their signed loan contract.
line of credit: see business line of credit.
liquidity: Available liquid assets (assets that can quickly be converted to cash) or cash to a company.
loan calculator: A tool to help borrowers determine what loan amount and terms they may qualify for—and any associated costs—before applying for a loan.
loan stacking: When a borrower takes out more than one loan without using the secondary loan to repay the prior loan. Lenders are wary of this because some borrowers take out multiple loans without the intention to repay. As a result, many lenders include a clause barring loan stacking in their contracts.
loan-to-value ratio: The value of an asset compared to the amount of the loan taken out to fund it. If the borrower defaults on the loan, the lender wants to know if the asset can cover the loan repayment.
maturity: The date the final payment on a loan will be paid or the date that the principal on a loan is due.
merchant cash advance: Allows you to borrow against future earnings. This allows businesses to get access to funds quicker than a traditional loan, sometimes in as little as 24 hours.
net income: A measure of a business’s profitability. This takes the total profits minus the cost of goods, expenses, interest, taxes, depreciation, and amortization over an accounting period. The net income is often listed on your balance sheet and profit & loss (P&L) statement.
overdraft: The negative balance that occurs when more funds are withdrawn from a bank account than the funds the account held.
personal guarantee: The business owner gives the lender the right to pursue their personal assets if the business defaults on a loan.
prime rate: The rate US banks charge their best customers. This is the lowest interest rate available to anyone other than another bank. You can find the current prime rate here.
principal: The face value of your loan, not including interest and other fees.
profit and loss statement: Often referred to as the P&L. This financial statement summarizes revenues, costs, and expenses, usually over the course of a fiscal year. Also called an income statement.
receivables: Money owed to your company for products or services. Once your company invoices a customer, that sale becomes an account receivable and is recorded as a current asset on the company balance sheet.
revolving line of credit: When a lender offers a certain amount of capital that is always available to a business for an undetermined amount of time. Once the debt has been repaid, funds can be borrowed again.
SBA loan: The US Small Business Association (SBA) is a federal agency charged with making small business financing more accessible. While the SBA doesn’t directly fund these loans, they require lenders to offer a certain number of loans and establish guidelines for these loans. As a result, SBA loans are comparable with loans from big banks.
SBA 7(A) loan: The most flexible and popular SBA loan. SBA 7(A) loans can be used to buy land, cover construction costs, refinance existing debt, buy or expand an existing business, or to buy machinery/tools/supplies/materials.
SBA 504 loan: Designed to fund a specific project. Because of this, they require a thorough examination of project costs. Examples of qualifying projects include buying an existing building and purchasing machinery for long-term use.
SBA Express loan: The quickest SBA loan option with the most minimal paperwork. Applications are reviewed within 36 hours. Funds typically take 30 days before they’re available to the borrower.
secured loan: A loan issued on the basis of some kind of collateral or personal guarantee. The collateral gives the lender assurance that the loan will be repaid. Typical types of collateral include real estate, machinery, and accounts receivable.
small business loan: A loan provided by a lender to a small business for a variety of uses. This umbrella term is often used in reference to specific products like equipment financing, accounts receivable financing, and startup loans.
startup loans: Loans designed for newer businesses. These loans can be used to hire employees, lease office space, increase inventory, buy equipment, or cover month-to-month expenses.
tangible asset: A physical asset. These include property, land, inventory, vehicles (cars and trucks), furniture, equipment, and financial assets (cash, securities, bonds, and stocks).
term loan: The lender provides the borrower with a lump sum of cash up front with an agreement that the borrower will repay the principal plus interest at predetermined intervals over a predetermined period of time. Also known as a business term loan.
TCC: Total Cost of Capital. This accounts for the principal, interest, and fees to give you a sum of the total money owed.
true factoring: When a company sells its accounts receivable to a third party (factoring company) in exchange for quick cash.
UCC filing: A public notice that a lender claims an interest in a borrower’s property, typically in exchange for a loan.
unsecured loan: A loan issued and supported by the borrower’s creditworthiness rather than by collateral. Examples include credit cards, auto loans, and some types of personal and business loans.
variable interest rate: An interest rate that changes with the market over time.
working capital: The cash your business has available for day-to-day operations.
Mary Kate Miller is a writer based in Chicago, IL. She specializes in covering finance (personal and business), investing, and real estate. Her mission in life is to give readers the confidence and the knowledge needed to grow their wealth by making financial topics more accessible. When she's not writing about topics like business loans, you can find her playing armchair financial advisor to the Real Housewives.
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