Business financing dictionary
Straight definitions of the 69 terms you'll run into when funding a business, from A to Z. No jargon, no spin.
A
- Accounts payableAccounts payable is the money a business owes to its suppliers and vendors for goods or services received but not yet paid for.
- Accounts receivableAccounts receivable is the money customers owe a business for goods or services already delivered but not yet paid for.
- Accounts receivable financingAccounts receivable financing uses your unpaid invoices as collateral for an advance or line of credit, so you borrow against receivables without selling them.
- AmortizationAmortization is the process of paying off a loan through regular fixed payments that gradually reduce both principal and interest.
- Angel investorAn angel investor is a wealthy individual who puts personal money into an early stage company in exchange for an ownership stake.
- Annual percentage rate (APR)Annual percentage rate is the yearly cost of financing expressed as a single percentage that folds in interest and most required fees.
- Annual revenueAnnual revenue is the total income a business brings in over a year before expenses, and it is a core measure lenders use to size financing.
B
- Balance sheetA balance sheet is a snapshot of what a business owns and owes at a single moment, built on the equation assets equal liabilities plus owner equity.
- Balloon paymentA balloon payment is a large lump sum due at the end of a loan whose earlier payments did not fully pay off the balance.
- Bank statement financingBank statement financing is financing approved mainly on a business's bank deposits and cash flow rather than tax returns or strong credit.
- Blanket lienA blanket lien is a single claim that covers most or all of a business's assets rather than one specific item.
- BootstrappingBootstrapping means building a business using personal savings and the revenue it generates rather than outside investment.
- Bridge loanA bridge loan is short term financing that covers an immediate funding gap until longer term capital or an expected payment arrives.
- Burn rateBurn rate is the pace at which a business spends down its cash reserves, usually measured as net cash used per month.
- Business credit scoreA business credit score is a rating of how reliably a company pays its debts, scored separately from the owner's personal credit.
- Business line of creditA business line of credit is a revolving credit limit you can draw from as needed and only pay interest on what you use.
- Business term loanA business term loan is a lump sum of capital repaid in fixed installments over a set period, usually with a stated interest rate.
C
- Cash flowCash flow is the net cash moving in and out of a business over a period, calculated as cash inflows minus cash outflows.
- CollateralCollateral is an asset a borrower pledges to a lender that the lender can take and sell if the loan is not repaid.
- Commercial real estate loanA commercial real estate loan finances the purchase, refinance, or renovation of business property and is secured by that property.
- Convertible noteA convertible note is a short term loan to a startup that is designed to convert into equity at a later funding round.
- Credit scoreA credit score is a number that estimates how likely a borrower is to repay debt based on their credit history.
- CrowdfundingCrowdfunding raises capital by collecting smaller contributions from a large number of people, usually through an online platform.
- Current ratioCurrent ratio is current assets divided by current liabilities, measuring a business's ability to pay its short term obligations.
D
- Debt consolidation loanA debt consolidation loan combines several business debts into one new loan with a single payment, ideally at a lower rate or longer term.
- Debt service coverage ratio (DSCR)The debt service coverage ratio (DSCR) measures whether a business earns enough to cover its debt payments, calculated as net operating income divided by total debt service.
- Debt to income ratioDebt to income ratio compares your monthly debt payments with your monthly income to show how much of your earnings already goes to debt.
- DilutionDilution is the reduction in an existing owner's percentage of a company when new shares are issued to raise capital.
- Draw periodThe draw period is the window during which you can borrow from a line of credit, typically paying interest only on the amount you actually use.
- DUNS numberA DUNS number is a unique nine digit identifier assigned to a business by Dun and Bradstreet to track its credit file.
E
- EBITDAEBITDA is earnings before interest, taxes, depreciation, and amortization, a measure of core operating profit found by adding those four items back to net income.
- Equipment financingEquipment financing is a loan or lease used to buy business equipment, where the equipment itself secures the financing.
- Equity financingEquity financing raises money by selling ownership shares in the business instead of borrowing funds that must be repaid.
F
- Factor rateA factor rate is the cost of a merchant cash advance or some short-term financing, written as a decimal multiplier (for example 1.3) instead of an annual percentage rate.
- FICO scoreA FICO score is a widely used three digit credit score, typically ranging from 300 to 850, that summarizes how likely a borrower is to repay.
- Fixed vs variable interest rateA fixed interest rate stays the same for the life of the loan, while a variable rate moves up or down with a benchmark such as the prime rate.
G
H
- Hard money loanA hard money loan is short term financing secured by real estate, where the property value matters more to the lender than the borrower's credit.
- HoldbackA holdback is the fixed percentage of a business's daily or weekly sales that a merchant cash advance provider collects automatically until the agreed amount is delivered.
I
- Interest rateInterest rate is the percentage a lender charges on the outstanding balance of a loan, not counting separate fees.
- Invoice factoringInvoice factoring is the sale of your unpaid B2B invoices to a factoring company at a discount, giving you most of the cash now instead of waiting on net terms.
L
M
- Maturity dateThe maturity date is the day a loan is scheduled to be fully repaid and the financing agreement ends.
- Merchant cash advanceA merchant cash advance is a purchase of a business's future receivables, not a loan. A provider gives you a lump sum today in exchange for a set share of your upcoming sales.
- MicroloanA microloan is a small business loan, typically under fifty thousand dollars, aimed at startups and underserved borrowers who need modest capital.
N
O
P
- Personal guaranteeA personal guarantee is a promise by a business owner to repay a business debt from personal assets if the business cannot.
- Prepayment penaltyA prepayment penalty is a fee some lenders charge if you pay off a loan ahead of schedule.
- Prime rateThe prime rate is the benchmark interest rate banks use as a starting point for pricing loans to their most creditworthy customers.
- Profit and loss statementA profit and loss statement summarizes revenue, costs, and expenses over a period to show whether a business earned a profit or took a loss.
- Purchase order financingPurchase order financing is funding that pays your supplier to fulfill a confirmed customer order when you lack the cash to produce it yourself.
R
- Recourse vs non-recourse factoringRecourse factoring means you cover the factor if your customer never pays. Non-recourse factoring shifts certain non-payment risk to the factor, usually for a higher fee.
- Revenue based financingRevenue based financing provides capital that you repay as a fixed percentage of your monthly revenue until a set total is paid back.
S
- SBA 504 loanAn SBA 504 loan provides long term, fixed rate financing for major fixed assets such as real estate and heavy equipment.
- SBA 7(a) loanAn SBA 7(a) loan is the Small Business Administration's flagship program that backs general purpose business loans made by approved lenders.
- SBA Economic Injury Disaster LoanAn SBA Economic Injury Disaster Loan provides working capital to small businesses that have suffered substantial financial harm from a declared disaster.
- SBA loanAn SBA loan is a business loan made by a lender and partially guaranteed by the US Small Business Administration, which lowers lender risk and often improves terms.
- SBA Microloan programThe SBA Microloan program provides small loans to startups and small businesses through nonprofit community lenders.
- Secured business loanA secured business loan is backed by collateral the lender can claim if you default, which typically lowers the rate and raises the amount available.
- Short term business loanA short term business loan provides a lump sum repaid quickly, usually within three to eighteen months, often with frequent payments.
T
U
- UCC filingA UCC filing is a public notice a lender records to claim a legal interest in business assets pledged as collateral.
- UnderwritingUnderwriting is the process a lender uses to evaluate a borrower's risk and decide whether to approve financing and on what terms.
- Unsecured business loanAn unsecured business loan is financing that does not require specific collateral, relying instead on your credit, revenue, and a personal guarantee.
V
W
- Working capitalWorking capital is the cash a business has to cover its day-to-day costs, calculated as current assets minus current liabilities.
- Working capital ratioWorking capital ratio is current assets divided by current liabilities, showing whether a business can cover its short term obligations.
Browse by topic
Products
- Bridge loan
- Business line of credit
- Business term loan
- Commercial real estate loan
- Debt consolidation loan
- Equipment financing
- Hard money loan
- Merchant cash advance
- Microloan
- Purchase order financing
- Revenue based financing
- SBA loan
- Secured business loan
- Short term business loan
- Unsecured business loan
- Working capital