Being in a business industry requires its individuals, from staff to managers and owners, to learn and remember certain important and useful terms (also called terminology or glossary). Such terminology not only comes handy in business practices, but it also brings about a significant impact when having to deal with even the minutest of activities – in your company or between one or more organizations. Here we have mentioned  60 business finance definitions and terms that you should be aware of to get a basic understanding of business finance and its related terms.

In business finance, you will often come across words that may seem completely alien to you, yet they have concise meanings when you are able to understand them well.

Business finance is the money we need to establish and run your business, which includes modernizing or diversifying operations and expansion. The more you manage your money, the higher your odds are for profitability.

The term ‘business finance’ thus, includes the ways in which a company obtains and uses money, usually in reference to loans. Business finance is all about strategies for earning, saving and investing revenue.

In this article, we shall explore a little more detail about the definition of business finance and also see other terminology.

Definition of Business Finance

Business finance describes the information contained in financial documents such as profit and loss statements, balance sheets and cash flow statements. It covers strategies that businesses typically use to manage their money, such as leveraging future rather than present value.

Armed with this knowledge about how money flows and grows, you will have the tools to make strategic decisions for managing your business’ finances and take advantage of opportunities.

For instance, you may have a choice between two loan products, one of which has a higher interest rate and flexible terms, while the other has a lower interest rate but rigid terms.

Understanding business finance gives you the know-how to evaluate how much you will likely spend repaying either of these loans in longer or shorter repayment times.

You will need to review your circumstances in-depth and all the costs associated with the product you are planning to develop.

If you are reasonably sure of your product’s success and believe you can take it to market quickly, the lower interest loan with rigid terms.

If, however, the development process will be slow and there are multiple wildcards, then you may be better off with the higher interest loan. Its more flexible terms will allow you extra leeway for a research and development process to perfect the product, even if you end up paying a little extra for financing.

Important Terminology Used In Business Finance You Should Know

From accounting to business loans, to general business financial operations, all the business finance terms and definitions you need to know are here. So, let’s take a look at a few important terms in the business finance industry.

Accounts Payable

Accounts payable is one of the business finance definitions and terms. This represents your small business’ obligations to pay debts owed to lenders, suppliers, and creditors. Sometimes refers to as A/P or AP for short, accounts payable can be short or long term depending upon the type of credit provided to the business by the lender.

Accounts Receivable

Accounts Receivable

 

Also known as A/R or AR for short, accounts receivable is another business finance term that means the money owed to your small business by others for goods or services rendered. These accounts label as assets because they show a legal obligation for the customer to pay you cash for their short-term debt.

Accrual Basis

The accrual basis of accounting is an accounting method of recording income when it is actually earned and expenses when they actually occur. Accrual basis accounting is the most common approach used by larger businesses to record and maintain financial transactions.

Accruals

Accural

Accruals is one of basic business finance definitions and terms referring to expenses that have been incurred but have not yet been recorded in the business books. Wages and payroll taxes are common examples of accruals.

Annual Percentage Rate

The business finance term and definition for annual percentage rate (APR) represents the yearly/annual real cost of a loan including all interest and fees.

The total amount of paid interest is based on the original amount loaned, or the principal and is represented in percentage form. Shopping for the right loan for your small business, you should know the APR for the loan in question. This figure can be very beneficial in comparing one financial tool with another since it represents the actual cost of borrowing.

Appraisal

Apprisal

Like your real estate appraisal when buying a house, an appraisal is a professional opinion of market value. When closing a loan for your small business, you will probably need one or more of the three types of appraisals: real estate, equipment, and business value.

Articles of Incorporation

This is legal documentation of the business’ creation, which includes name, type of business and type of business structure or incorporation. Paperwork is one of the first tasks you will complete when you officially start your business. Once submitted, your articles of incorporation are kept on file with the appropriate governmental agencies.

Asset

Asset

Business finance key term is anything that has value, whether tangible or intangible and is owned by the business is considered an asset. Items listed as business assets are cash on hand, accounts receivable, buildings, equipment, inventory and anything else that can be turned into cash.

Balance Sheet

Along with the three other reports relating to the financial health of your small business, the balance sheet is essential information that gives a snapshot of the company’s net worth at any given time. The report is thus, a summary of the assets and liabilities of a business.

Balloon Loan

Ballon loan is a loan that is structured so that the small business owner makes regular repayments on a predetermined schedule and one much larger payment, or balloon payment, at the end.

These can be perfect for new businesses because the payments are smaller at the outset when the business is more likely to be facing strict financial constraints. Just be sure that your business will be capable of making that last balloon payment since it will be a large one.

Bankruptcy

Bankruptcy

Bankruptcy, in federal law, uses as a tool for businesses or individuals who are having severe financial challenges. It provides a plan for reduction and repayment of debts overtime or an opportunity to completely eliminate the majority of the outstanding debts. Turning to bankruptcy should give careful thought because it will have a negative effect on the business credit score.

Bookkeeping

Bookkeeping is a method of accounting that involves the timely recording of all financial transactions for the business. we also call it by using different names such as journals, a book of accounts, ledger, financial accounts, accounting, etc.

Bootstrapping

Using your own money to finance the start-up business and growth of your small business. Think of it as your own investor, once the business is up and running successfully. The business finance term and definition for bootstrapping refers to the use of profits earned to reinvest in the business.

Business Credit Report

Just like you have a personal credit report that lenders look at to determine risk factors for making personal loans, businesses too, generate credit reports. These reports maintain by credit bureaus that record information about a business’ financial history. Items such as how large the company is, how long has it been in business, amount and type of credit issued to the business, how credit has been managed and any legal filings (i.e., bankruptcy, etc.) are all questions addressed by the business credit report. Lenders, investors, and companies use these reports to evaluate risk exposure and financial health of a business.

Business Credit Score

credit score

A business credit score calculates on the basis of the information found in the business credit report. Using a specialized algorithm, business credit scoring companies take into account all the information found on your credit report and give your small business a credit score. Also called a commercial credit score, this number uses by various lenders and suppliers to evaluate your credit-worthiness.

Business Plan

A business plan is your tool for demonstrating how you want to establish your small business and how you plan to grow it into good financial health. When writing a business plan, it should include financial, operational and marketing goals as well as how you plan to get there.

Capital

Capital refers to the overall wealth of business as demonstrated by its cash accounts, assets, and investments. Often called as ‘fixed capital’, it refers to the long-term worth of the business. Capital can be tangible like durable goods, buildings, and equipment, or intangible such as intellectual property.

Cash Flow

Cash flow

Every business needs cash in order to operate. The business finance term and definition for cash flow refers to the amount of operating cash that flows through the business and affects the business’ liquidity. Cash flow reports reflect activity for a specified period of time, usually one accounting period or one month. Maintaining tight control of cash flow is especially important if your small business is new since ready cash have a limit until the business begins to grow and produce more working capital.

Cash Flow Projections

Future business decisions will depend on your educated cash flow projections. To plan ahead for expenditures and working capital, you need to depend on previous cash flow patterns. The patterns will give you a comprehensive look at how and when you receive and spend your cash. This info is the main key to unlock informed, accurate cash flow projections.

Collateral

Any asset that you pledge as security for a loan instrument as collateral. Lenders often require collateral as a way to make sure they will not lose money if your business defaults on the loan. When you pledge an asset for collateral, it becomes subject to seizure by the lender if you fail to meet the requirements of the loan documents.

Credit Limit

When a lender offers a business line of credit it usually comes with a credit limit, or a maximum amount that you can use at any given time. It is said that you have reached your credit limit or ‘maxed out’ your credit when you exceed that number or limit. The business line of credit can be especially useful if your business is seasonal or if the income is extremely unpredictable. It is one of the fastest and best ways to access cash for emergencies.

Debt Consolidation

If your small business has several loans with various payments, you might want to consider a business debt consolidation loan. It is a process let you combine multiple loans into a single loan. The advantages are possibly reducing the interest rates on the borrowed funds as well as lowering the total amount you repay each month. Many businesses use this tool to help improve cash flow.

Debt Financing

debt-financing

When you borrow money from a lender and agree to repay the principal with interest in regular payments for a specified period of time, you are using debt financing. It has been the most common form of funding for small businesses.

Debt financing can include borrowing from banks, business credit cards, lines of credit, personal loans, merchant cash advances, and invoice financing. This method creates a debt which must be repaid but lets you maintain sole control of your business.

Debt Service Coverage Ratio

Business finance term and definition for debt service coverage ratio (DSCR) is the ratio of cash your small business has available for paying or servicing its debt. Debt payments include making principal and interest payments on the loan you are requesting. Generally speaking, if your DSCR is above 1, then your business has enough income to meet its debt requirements.

Depreciation

Depreciation is simply the value of any asset that depreciates (reduce in value) when it loses some of that value in increments over time. It occurs due to wear and tear. Various methods of depreciation used to decrease the recorded value of assets. For example, when you sell your car, you will get a depreciated value for it and not the original value which you paid when you purchased the car.

Employee Identification Number (EIN) Certificate

In order to get identification by the Internal Revenue Service (IRS), every business entity gets a unique number is Employee Identification Number (EIN). When you start your small business, then you will get an EIN and mail to the business address. This number never changes and you will be asked to furnish it for various other purposes.

Equity Financing

Equity financing is the act of using investor funds in exchange for a piece or share of your business. It is another way to raise capital. The funds can come from friends, family, angel investors, or venture capitalists. Before using equity financing to raise the cash necessary for your business, decide how much control you are willing to share when it comes to decision-making and philosophy. Some investors will also want voting rights.

FICO Score

A FICO score is another type of credit score that uses by potential lenders for evaluating the wisdom of entering a contract with you and your business. FICO score comprises a substantial part of the credit report that lenders use to assess credit risk. It creates by the Fair Isaac Corporation, hence the name FICO.

Financial Statements

A financial statement is an integral part of the loan application process that is furnishing information which shows your business is a good credit risk. The standard financial statement packet includes four main reports: the income statement, the balance sheet, the statement of cash flow and the statement of shareholders’ equity if you have shareholders.

Lenders and investors want to see your business well-balanced with assets and liabilities, has positive cash flow and will have the capital to make expected repayments.

Fixed Asset

A tangible, long-term asset is using for the business and not expecting to be sold or otherwise converting into cash during the current or upcoming fiscal year is a fixed asset. Fixed assets are items such as furniture, computer equipment, equipment, and real estate.

Fixed Interest Rate

Basically, a fixed interest rate is the interest rate on a loan that establishes in the beginning and does not change for the lifetime of the loan. Loans with fixed interest rates are appealing to small business owners because the repayment amounts are consistent and easier to budget for in the future.

Floating Interest Rate

In contrast to the business finance term and definition of fixed interest rate, the floating interest rate will change with market fluctuations.

Also, refer to as variable rates or adjustable rates, these amounts may often start out lower than the fixed-rate percentages. This makes them appealing in the short term if the market is trending down.

Franchise Agreement – Let’s learn more about franchises and its best low-cost franchises to start a new business.

For a small business owner, entering into a franchise agreement with a larger company can be a way to enter the marketplace. The agreement establishes between you and the larger company gives you the right to operate as a satellite of the larger company in a certain territory for a given period of time. This lets you, the business owner, take advantage of a brand name that is already familiar in the marketplace and a process or operation that has already been tested.

Guarantor

When starting a new small business, lenders might want you to provide a guarantor. This is an individual who guarantees to cover the balance owed on a debt if you or your business cannot meet the repayment obligation.

Gross Profit

This business finance term and definition calculates as total sales (income) minus the costs (expenses) directly related to those sales. Raw materials, labor costs, marketing, manufacturing expenses and transportation of goods are all included in expenses.

Income Statement

Basically one of the four most vital reports which many lenders and investors would want to see, especially when evaluating the viability of your small business is your income statement. This statement refers to as a profit and loss statement and it addresses the business’ bottom line, reporting how much the business has earned and spent over a given period of time. The result will be a net gain or a net loss.

Intangible Asset

Any business asset that is non-physical and cannot be touched is considered intangible. Such assets can be items like patents, goodwill, intellectual property, etc.

Interest Rate

All loans and other lending instruments assign to the business finance key are termed as interest rates. It is a percentage of the principal amount charged by a lender for the use of its money. Interest rates represent the current cost of borrowing.

Invoice Factoring or Financing

If your business has a significant amount of open invoices outstanding, you may contact a factoring company and have them purchase the invoices at a discount. By raising capital using this way, there is no debt, and the factoring company assumes the financial responsibility for collecting the invoice debts.

Liability

Business finance key term is a legal obligation to repay or otherwise settle a debt. Liabilities consider to be either current (payable within one year or less) or long-term (payable after one year) and are listed on a business’ balance sheet. A business’ accounts payable, wages, taxes, and accrued expenses are all considered as liabilities.

Lien

Lien is a business finance term and definition, which is a creditor’s legal claim to the collateral pledged as security for a loan.

Line of Credit

A lender can offer you an unsecured amount of funds available for your business to draw on when it will be a need for capital. This line of credit considers being a short-term funding option, with a maximum amount available. That pre-approved pool of money is appealing because it gives you quick access to the cash.

Liquidity

Liquidity is an indicator of how rapidly an asset can be turned into cash for full market value. In short, the more liquidation of your assets, the more financial flexibility you have.

Loan-to-Value

The loan-to-value (LTV) comparison is a ratio of the fair market value of an asset which compares to the amount of the loan that will fund it. This is important number for lenders who need to know if the value of the asset will cover the loan repayment if your business defaults and fails to pay.

Merchant Cash Advance

A merchant may offer a funding method through a loan based on the business’ monthly sales volume. Repayment makes with a percentage of the daily or weekly sales. These tend to be short-term loans and are one of the costliest ways to fund your small business.

Microloan

Nonprofit, community-based organizations make the microloans and amounts under $50,000.

Net Worth

The business finance term and definition of net worth is an expression of your business’ total value, as determined by your total current assets less the total liabilities currently owned by the business. With your business’ most recent balance sheet in hand, you can calculate the net worth using a simple formula: Assets – Liabilities = Net Worth.

Personal Guarantee

If you are seeking financing for very new business and do not have a high-value asset to offer as collateral, you may be asked by the lender to sign a statement of personal guarantee. In effect, this statement affirms that you as an individual will act as guarantor for the business’ debt, making you personally liable for the balance of the loan even in the event that your business fails.

Principal

Any loan instrument is made of three parts; principal, interest, and fees. A principal is a business finance key term and is the original amount that is borrowed or the outstanding balance to be repaid less interest. It uses to calculate the total interest and fees charged.

Profit & Loss Statement

Same as income statement. Basically one of the four most vital reports which many lenders and investors would want to see, especially when evaluating the viability of your small business is your income statement. This statement refers to as a profit and loss statement and it addresses the business’ bottom line, reporting how much the business earns and spends over a given period of time. The result will be a net gain or a net loss.

Retained Earnings

Just like it sounds, this business finance term and definition use to represent any profits earned that are retained in the business. This can also refer to as ‘bootstrapping’.

Revolving Line of Credit

The business finance term and definition for a revolving line of credit is a funding option that is similar to a standard line of credit. However, the agreement here lends a specific amount of money, and once that sum repays, it will not borrow again.

Secured Loan

Many lenders will require some form of security when loaning money. When this happens this business finance term and definition is a secured loan. The asset being used as collateral for the loan is said to be securing the loan. In the event that your small business defaults on the loan, the lender can then claim the collateral and use its fair-market value to offset the unpaid balance.

Statement of Cash Flow

Statement of cash flow is one of the important documents that require by lenders and investors which shows a summary of the actual collection of revenue and payment of expenses for your business. The statement of cash flow should reflect activity in the areas of operating, investing and financing and should be an integral part of your financial statement package.

Tax Lien

If your business fails to pay taxes owed to the designated government entity, namely the IRS, you may find your assets seized by the claim of a tax lien. The government can not only seize your assets for liquidation to resolve the tax debt, but they can also charge you penalties on the amount you owe.

Term Loan

These are debt financing tools use to raise needed funds for your small business. Term loans provide the business with a lump sum of cash upfront in exchange for a promise to repay the principal and interest at specified intervals over a set period of time. These are the typically longer-term, one-time loans for start-up expenses or costs for established business expansion.

Unsecured Loans

Loans that are not backed by collateral are called unsecured loans. These types of loans represent a higher risk for the lender, so you can expect to pay higher interest rates and have shorter repayment time frames. Credit cards are an excellent example of unsecured loans that are a good option for small business funding when combined with other financing options.

Working Capital

Don’t get flummox with capital. Working capital is another business finance term. It consists of the financial resources that are necessary for maintaining the day-to-day operation of the business. Working capital, by definition, is the business’ cash on hand or instruments that you can convert to cash quickly.

Suggested Blog: List Of Important Business Terms Every Entrepreneur Should Know

Define Your Approach to Business Finance With These Commonly Used terminologies

Before you let yourself get intimidated by the business finance terms and definitions, just remember that knowledge is power. You can serve your small business most effectively by knowing 60 business finance definitions and terms. And you will know how they affect your business’ financial health.

with these basic understanding of business finance key terms, you will be able to face the financial challenges.

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