Do you want Financing? 20 Financial Terms You Should Know
Financing is an important part of running a business. Most businesses will need access to finance at some point to grow their business. Banks and lending agencies are more willing to loan money to businesses with a proven track record and which have good financial records. It is also empowering and effective to have a solid understanding of financial terms when approaching a lending agency. Below are some financial terms those seeking financing should know:
AIR: Annual Interest Rate is the yearly interest percentage you pay based on your average loan balance. This rate excludes any fees.
APR: Annual Percentage Rate is the annualized interest rate plus any fees that are a condition of receiving capital – expressed as a yearly rate.
Assets: Within the context of a small business loan an asset is something of value, owned by the borrower, which can be used as collateral by a lender.
Business Credit Profile: A collection of information based on your business’ history of credit used to predict the likelihood of your business to be able to pay back borrowed funds.
Cash Flow: The total amount of money being transferred into and out of a business that is used to pay for day-to-day expenses.
Cents on the Dollar: Cents on the Dollar is the total amount of interest paid per dollar borrowed. This amount excludes any fees.
Collateral: An asset, or assets, a borrower offers to a lender to secure a loan. The lender can take possession of these assets if the borrower defaults on the loan.
Default: Failure to make the agreed upon periodic payments on a loan.
Fixed Asset: A “tangible asset,” like property or equipment that can be used as collateral.
Gross Profit: What is left over when the total cost of goods is subtracted from the total revenue.
Interest-Only Payments: Making only the interest payments on a loan without paying anything on the principal. At the end of the term, the borrower will either need to refinance or pay back the principal in a lump sum.
Liabilities: A business’ debts or obligations, which can be resolved in the form of payments or the transfer of goods or services.
Line of Credit: Where the borrower receives access to a revolving set amount of funds to be utilized at the borrower’s discretion and to be paid back based on the borrowed amount over a set period of time.
Net Income: The total revenue for a given period of time minus all costs and expenses.
Principal: The amount of money being borrowed excluding interest payments and fees.
Revenue: The total income generated for a given period of time before deducting any costs or expenses.
Secured Loan: A loan where the borrower puts forth collateral in the event he or she should default.
Stacking: Loan stacking is where a loan or cash advance is approved on top of a loan or advance that is already in place with similar characteristics and payback terms.
Term Loan: A loan where the borrower receives a lump sum to be paid back in a predetermined dollar amount per period (day, week, month, etc.) for a set length of time.
Unsecured Loan: A loan where the borrower is not required to put up collateral to secure the loan.
There are a range of resources in print, audio and visual form online that can assist with helping persons to understand the financials of their business. Be prepared and be informed as this will give you the best chance to obtain the financing your business needs.
Financial terms Adapted by Shellecia Brooks-Johnson from Ondeck.com (Ariele Krantzow)
