While day-to-day operations may come naturally to you, business finance is riddled with confusing jargon that can make growing your business seem daunting. However, many of these terms are simply different names for things you already understand, and others just require a brief explanation.
Reference the glossary below to help make sense of your business finances.
A
Accounts payable
Refers collectively to the money your business owes to lenders, suppliers, and creditors at any one time. Accounts payable management tools are designed to organize your outstanding debts and ensure you pay them on time.
Accounts receivable
Refers collectively to the money vendors and customers owe to your business at any one time. Accounts receivable management tools are designed to facilitate the receiving and processing of payments sent to your business.
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Accruals
Refers to expenses that you’ve paid or received but haven’t yet processed.
- When doing accrual accounting, payments and revenue are logged as those transactions are made, before the money has finished moving accounts. Contrasts with the less common cash basis accounting.
Adjusted net worth
The estimated fair market value of your tangible assets after your business has been through hardship or disaster. This value will be estimated for you by an insurance company.
Amortization
In debt financing, refers to the process of breaking up debt into periodic repayments of principal and interest.
- An amortized loan is any loan whose repayments are broken into periodic repayments.
- Your amortization schedule refers to how often you must make repayments and how much you owe per repayment (principal amount plus interest rate).
Annual percentage rate (APR)
The total cost of a loan or credit card per year (including all interest, fees, and additional costs), expressed as a percentage of the principal amount. Business-related APRs are usually higher than personal loan, mortgage, or credit card APRs.
Annual percentage yield (APY)
The annual rate of interest you’ll earn from an interest-bearing account.
Appraisal
Can refer to two related things:
- The fair market value of a business asset, group of assets, or your business as a whole.
- The process of determining this fair market value, done by an independent appraiser.
Articles of Incorporation
A document you file with your state government to establish your business structure (LLC, C-corp, or S-corp, etc.), business name, and business type or industry. Many financial providers require your articles of incorporation when applying for a business banking account or loan.
Asset
Anything with economic value that your business owns and will benefit your business in the future. Contrasts with liabilities.
An asset can belong to one or more of the following categories:
- Current assets, or liquid assets can be easily converted into cash—e.g., inventory, short-term investments, stock holdings, bank account balances.
- Fixed assets are things you buy for long-term use that can’t be easily converted into cash—e.g., land, real estate, equipment, machinery.
- Tangible assets are those you can physically touch and see—e.g., inventory, land, real estate, equipment, machinery.
- Intangible assets are those you can’t physically touch or see—e.g., patents, brands, trademarks, copyrights, franchise agreements.
- Operating assets are those your business needs and uses to run day-to-day operations—e.g., cash, bank account balance, inventory, machinery.
- Non-operating assets are those that are not essential to your day-to-day operations but may still generate revenue or increase your company’s total worth—e.g., excess cash, vacant land or buildings, idle equipment.
B
Balance sheet
A report on your business assets and liabilities on a given date, a snapshot of your company’s financial situation and net worth.
Balloon loan
A loan that isn’t fully amortized—you repay it in small, regular installments, but end on a large installment, known as a balloon payment.
Bankruptcy
A legal proceeding that forgives unpayable debts for individuals and/or businesses experiencing extreme financial duress. When you file as bankrupt, your creditors will probably receive some repayment based on your liquid assets.
Bookkeeping
A process in which a bookkeeper systematically records a business’s transactions in real- or near-real-time.
Bootstrapping
The practice of relying on your own money or profits to finance your business, with little to no outside investment.
Break-even analysis
Calculates and compares how many sales you’d have to make to cover your costs. The number of sales required to cover your costs is your break-even point—anything below is considered unprofitable while anything above is profitable.
Business credit report
A report of your business’s financial history as maintained by each of the major credit bureaus—Dun & Bradstreet, Equifax, and Experian. Includes your business information, amount and type(s) of credit, how you manage that credit (payment history, etc.), and any legal filings such as bankruptcy. Used to evaluate your business’s financial health and ability to repay debts.
Business credit score
A category of metrics used by the credit bureaus to measure your business’s creditworthiness using the information found in your credit report. While each credit bureau’s scoring systems are slightly different, they’re all based on the same contents of your business credit reports.
Business plan
A comprehensive outline of your business, including plans for financial growth, operations, and marketing. Communicates to financiers what your business does and how you plan to make money and grow over time.
C
Capital
Refers to your business’s overall wealth, including cash, assets, and investments.
Capital gain
An increase in the value of an asset or investment relative to what you originally paid for it.
Cash flow
The movement of money into and out of your business. Divided into inflows (money received) and outflows (money spent).
Cash flow projection
A forecast, based on data, of your cash flow in the future.
Cash flow statement
A report of all the money your business received and spent over a time period. Can help demonstrate your solvency to financiers.
Cash basis accounting
An accounting method in which payments and revenue are logged once the money has moved accounts, instead of when the transactions are made. Contrasts with accrual accounting.
Collateral
Assets that you (the borrower) pledge to secure a loan or other credit—and which a lender can seize if you default on your payments. Common for high value loans or if your business credit score is low.
Cost of goods sold (COGS)
The production costs (materials, labor, distribution, sales, etc.) of your goods and services.
Credit limit
The maximum amount of credit you can use from your line of credit or credit card before repaying. Try to keep the amount of credit you use well below your credit limit, as regular full credit use can negatively impact your business credit report and credit score.
D
Debt consolidation
The process of combining multiple loans into one, usually to reduce interest and repayment amounts. This can be helpful for businesses with multiple loans looking to improve cash flow.
Debt financing
To borrow money from a lender and repay the principal—plus interest—in regular repayments over a predetermined period of time. Includes small business loans, bank loans, business credit cards, lines of credit, invoice factoring, and more.
Depreciation
The process of an asset decreases in value over time. Can be due to use-related wear, market changes, or technological advancements.
E
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
(Acronym pronounced “ee-bit-dah.”) Measures your business’s profitability by adding your net income and your depreciation and amortization expenses. Commonly used to assess profitability and project cash flow.
Employer identification number (EIN)
Your business’s federal tax ID number, received after incorporating with your state government. Many lenders require one as part of their loan applications.
Equity
The amount of company wealth that belongs to shareholders after liabilities are accounted for. Can also refer to the amount of company wealth or ownership percentage belonging to a single shareholder.
Equity financing
Financing from an investor that you exchange for equity, or an ownership percentage. Such investors can include angel investors or venture capitalists, or unofficial investors like friends and family.
Expense
Any cost that, according to the IRS, is “ordinary and necessary” to run your business.
F
FICO Score
A commonly used type of personal credit score used by traditional lenders when assessing business loan applications. Not influenced by your business credit profile.
Financial statements
Records of your business’s financial activity, including an income statement, balance sheet, cash flow statement, and a statement of shareholder equity. Lenders and investors look at these for an overview of your business’s financial health.
Fixed interest rate
An interest rate that doesn’t change during the loan term. Contrasts with variable interest rate.
G
Gross profit
Your business’s total sales or income minus any costs associated with making and selling your products and services.
Guarantor
An individual who guarantees repayment of a loan if you or your business can’t meet the payment obligations.
I
Income statement
Reports on your business’s earnings and expenses over a given time period. Sometimes called a profit and loss (P&L) statement.
Interest rate
The cost of borrowing money, a percentage of the principal amount borrowed. Types of interest rates include APRs, fixed interest, and variable interest.
Invoice factoring (AKA invoice financing)
A form of business financing in which you sell your outstanding invoices at a discount to a factoring company or other third party for an advance on the invoice amount. Then, once the factoring company collects the invoice payment on your behalf, they pay you the remainder of the invoice amount minus their fees. Invoice factoring is an asset sale, not a business loan, so it has a negligible impact on your business credit score.
L
Liability
Any financial obligation or debt for which your business is legally responsible. Contrasts with assets.
- Current liabilities must be repaid within one year—e.g., short-term loans, accounts payable, credit card debt.
- Long-term liabilities must be repaid, but aren’t due within one year—e.g., lines of credit, business leases.
Lien
A lender’s legal right or claim to your asset(s) as security against repayment of a loan, as negotiated at the start of the loan. If you miss loan payments, your lender can claim your property until you’ve repaid the loan in full.
Line of credit
A pool of funds supplied to businesses by lenders, that you can use whenever you need up to your credit limit. In most cases, you’ll only pay for what you use and, as you make repayments, the line of credit replenishes.
See how a Bluevine Line of Credit can help power your business growth.
Liquidity
Refers to how quickly an asset or group of assets can be turned into cash. A liquid asset can be quickly sold for full price or close to it—for example, cash on hand is the most liquid asset your business can have, stocks and bonds are highly liquid, and real estate and equipment are relatively illiquid.
Loan-to-value (LTV)
Ratio used to assess the value of an asset loan relative to the asset it’s paying for, expressed as a percentage. For example, a mortgage loan that will cover 80% of the cost of a warehouse purchase has an LTV of 80%, which is relatively high risk for the lender.
Long-term loan
Any loan with a repayment schedule that lasts longer than one year.
M
Merchant cash advance (MCA)
An expensive and risky type of business financing in which you receive a lump sum of money and repay it daily using a percentage of your card sales plus a factor rate. Merchant cash advances are not loans, which can make them faster and easier to attain but riskier for your business, as they’re not subject to the same regulations as loans.
- Factor rates are expressed as a decimal—for example, a factor rate of 1.4 means you’re responsible for repaying the lender 140% of the loan amount.
- Your holdback rate refers to the percentage of your debit and credit card sales you’ll repay each day.
Microloan
Small loans, typically under $50,000, awarded to small businesses and nonprofits via the SBA or community organizations.
N
Net profit
The total amount your business has earned minus expenses. To calculate, subtract all business expenses from your total sales revenue for a given time period.
Net worth
Can refer either to your or your business’s total value. To calculate, subtract the value of all liabilities from the value of all assets.
P
Personal guarantee
A statement provided to a lender affirming that you, the business owner, will act as guarantor for your business’s debt. Sometimes used if your business doesn’t have high-value collateral to offer and transfers risk from the lender to you.
Principal
The original amount you borrowed from a lender. Interest rate and fee amounts are usually based on this number.
S
Secured loan
A loan that requires you to post collateral to the lender—if you default, the lender can seize the collateral to offset your unpaid balance. Typically have lower interest rates and more favorable repayment terms than unsecured loans, as secured loans are lower risk to lenders.
Short-term loan
Any loan with a repayment schedule shorter than one year.
Solvency
Your business’s ability to repay debts and other obligations, as determined by whether the value of your assets exceeds that of your liabilities.
- A business that’s solvent is probably able to cover its obligations because its assets outweigh its liabilities.
- A business that’s insolvent is probably unable to cover its obligations because its liabilities outweigh its assets.
Statement of shareholders’ equity
A section of your income statement that details how equity is divided among shareholders and reports any changes in the value of assets and liabilities.
T
Tax lien
A type of lien against your business that allows the IRS to seize your assets and/or charge you penalties if you fail to pay taxes owed.
Term loan
A type of debt financing in which your business receives a lump sum of cash up front and repays principal plus interest at regular intervals over a predetermined period of time. Term loans can be short-term or long-term.
U
Unsecured loan
A loan that doesn’t require you to post collateral to the lender. Typically have higher interest rates and less favorable repayment terms than secured loans, as unsecured loans are higher risk to lenders.
V
Variable interest rate
An interest rate that changes in accordance with market fluctuations. Also known as floating rate or adjustable rate.
W
Working capital
Your business’s cash on hand that’s necessary for day-to-day operations.
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