Learn Your Business Financing Vocabulary: 40 Most Important Terms
For any new small business, or even a well-established business looking for a loan for the first time, the world of small business finance can be confusing. Not only are there a number of different options available for your small business, with only some suitable, there are also tons of specific terms that are used in any related discussion.
Understanding each of these terms is crucial if you are to learn what type of funding you should be looking for. To help you get closer to your business financing goals, we’ve compiled 40 of the most used terms when it comes to small business financing.
Top 40 Business Financing Terms
- Collateral: Any property or asset offered by a borrower to a lender to secure a loan. This asset will be taken by the lender if the borrower does not abide by the terms of the loan.
- Security: Specifically financial assets such as stock shares that are used as collateral.
- Lien: Using ownership of collateral as a guarantee on a loan. For example, the lender will take a lien on your asset.
- Blanket lien: An agreement that allows the lender to seize anything you or your business own if you are unable to pay back the loan.
- Secured loan: This refers to any loan that is secured with collateral. Secured small business loans come with low interest rates and the best possible terms.
- Unsecured loan: A loan that is provided without any collateral offered to the lender. Because of the risk involved, unsecured loans tend to have high interest rates and unfavourable terms.
- Debt financing: Any loan you take out to finance your business, for which you will pay a principal amount plus interest.
- Traditional bank loan: A loan provided by a bank that has relatively long terms – up to ten years. These loans usually require collateral and evidence that the business is likely to make enough to pay it back.
- Short-term loan: A loan with a term of a year or less. They generally come with high interest rates.
- Medium-term loan: A loan with a term of one to five years. They come with lower interest rates, but not quite as low as you would get from a long-term traditional bank loan.
- Private lender: A private company or individual lending their own money to small businesses.
- Predatory lender: Private lenders who provide high interest short-term loans knowing that the recipient will struggle to pay them back and may end up paying far more interest than the value of the loan. These loans are extremely easy to apply for, even if you have no collateral and a poor credit rating.
- Business line of credit: A short to medium-term loan that works like a credit card. You have a certain amount available but only pay back what you use.
- Revolving line of credit: A line of credit that revolves – you can withdraw again after you pay an amount back, according to specific terms.
- Invoice financing: Taking out a short-term loan on an amount you have already invoiced your clients. This loan works on the basis that you will be able to pay it back as soon as your clients pay.
- Equipment financing: Loans taken out on heavy equipment necessary for your business to begin functioning. The equipment itself can serve as security on the loan.
- Merchant cash advance: Debt that is paid back through a portion of your day-to-day earnings from clients’ credit cards. Often the most expensive type of loan.
- Amortization: An amortized loan is paid off by a fixed amount every month.
- Annual percentage rate (APR): A measurement of how expensive a loan will be.
- Working capital: The capital your business needs to use on a day-to-day basis.
- Variable interest rate: The interest rate on a loan changes with market changes over the loan’s term.
- Fixed interest rate: The interest rate stays fixed regardless of market changes.
- Prime rate: The best interest rate that will be given to borrowers with the best credit and good collateral.
- Principal: The original value of the loan.
- Loan agreement: The terms of your loan.
- Consolidation: A loan that pays for all your debt and which you pay back as one loan with one interest rate.
- Refinancing: Getting a loan to pay off all your debts.
- Debt service coverage ratio (DSCR): An indication of whether your business has the ability to pay off debts. A DSCR should be above 1.
- EBITDA: Earnings Before Interest, Taxes, Debt, and Amortization.
- Grace period: The amount of time allowed by the lender after you have missed a payment before they start charging late fees or take further action.
- Insolvency: Being unable to repay loans.
- Prepayment penalty: Fees that will be charged on certain loans if you choose to pay them off early.
- Profit and Loss (P&L) statement: A document showing your incomes vs expenditure which can be used to secure a loan.
- Maturity: A loan reaches maturity once you have paid your final payment.
- Equity financing: Funding provided to a business as capital that does not need to be paid back. The individual or company owns equity in the business and will profit from the business’s potential success.
- Venture capital (VC): Private equity funding provided to promising businesses.
- Venture capital firms: Private companies comprised of a group of investors who provide equity funding to promising startups. These companies have a pool of capital available. They take calculated risks knowing some of their investments will fail while others succeed.
- Angel investor: A private investor who provides equity funding and financial backing to a startup. Angel investors may take on a mentorship or consulting role in the company.
- Seed round: The very first round of equity funding, usually between $50,000 to $2 million.
- Series A: Equity funding usually between $2 million to $10 million that gives investors Series A Preferred Shares.
These are the terms you need to know to navigate the world of small business financing. With this vocabulary, you will be able to decide which type of financing is best for your business, which lenders to approach or avoid, and whether you are getting good terms and interest rates.
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