Below is a collection of common terms used in daily business dealings. While not comprehensive, we hope to continue to build on this list as terms and questions bring the needs to our attention.
Ability to Pay
Ability to pay loans from the business’ income.
Accounts Payable (A/P)
Expenses incurred and purchases made, but not paid for.
Accounts Receivable (A/R)
Sales made but not collected.
Accounts Receivable Financing
Short-term financing obtained by pledging receivables to the lender (as collateral for a loan). This enables a business owner to draw against an established line of credit, dictated by a formula (a percentage of accounts receivable).
An accounting method.
The length of time required to notify your lender of business action such as cancellation of a lease or prepayment of a loan. Adequate notice is predetermined in writing.
Money withdrawn from a pre-approved line of credit.
A chart or table that breaks a monthly loan payment into two categories; principal and interest. It also reports the balance due.
Annual Percentage Rate
The cost of credit as a yearly rate.
Articles of Incorporation
Legal document filed by a prospective corporation’s owners in a designated state that explains the purpose of the corporation, its directors, and the distributed shares of stock. When approved by the state, the corporation then becomes a legal entity.
What the company owns. Current assets can be converted into cash in one year. Non-Current Assets take one year or more to turn into cash.
Financing secured by pledging assets (inventory, receivables, or collateral other than real estate).
The unused portion of a line of credit.
When a company has neither a profit nor a loss, it’s considered to be at the breakeven point. One dollar more and the company has a profit; one dollar less and the company shows a loss.
Loans made to businesses in the form of a term loan or a line of credit.
An overview put together by new companies and existing companies that are trying to obtain a loan. It includes all aspects of a business and financial statements.
If the loan covenants (rules) are broken or if the maturity is reached, “calling” a loan means it must be paid in full.
A cap limits a loan’s interest rate from rising beyond a certain rate. A 10% loan with a 2% cap will only rise to 12%.
Borrower’s ability to repay a debt.
Capital or Net Worth
Assets less liabilities. The amount of money invested in the business plus the retained earnings. A business can have a negative balance.
A type of accounting system that recognizes cash when it is received and expenses when they are paid.
Bank deposits and similar assets that can be converted to cash quickly.
Money available from a business’ operations to satisfy cash needs. The primary source for monthly payments on a loan.
Assets pledged to support a loan. The money received from liquidating the assets is the secondary source of loan repayment.
Value of pledged asset(s) as determined by an appraisal or other methods of valuation. Lenders often discount collateral by a certain percentage.
A loan for a business’ real estate. Rates and terms are negotiated and the finance charge is usually related to the prime rate.
When a lender agrees to lend a specific amount, with the rates, terms, conditions and covenants…in writing.
Community Development Bank
Locally-operated commercial bank which lends money to the local community.
When a lender’s loan portfolio is heavy in a particular industry or type of business.
A form of business registered with the state as a legal entity.
A person who signs and guarantees a loan for someone else.
Money you agreed to repay by signing notes, or by being a co-maker or guarantor of loans. Lenders want to know how much money you are liable for if the loan results in legal actions or contested taxes.
Cost of Goods Sold
Cost to make a product, including materials, labor , and related overhead.
Loan agreement rules for the borrower dictated by the lender.
Lenders’ agreement to provide funds or apply money to an account owned by the customer.
Certain amount of money available to a borrower for a predetermined period of time.
An individual’s worthiness for credit as determined by a credit reporting agency. In addition to the information these agencies provide, lenders use tax returns and other financial statements to determine your credit worthiness.
A predetermined process of scoring which is used to approve or reject loan applications.
Assets that can be converted into cash in one year. Non-Current Assets take one year or more.
Liabilities due within one year.
Failure to make a loan payment when it is due.
Except for land, assets wear out. The value goes down and can be deducted from your business as an expense. Present values of assets are shown as original cost less depreciation. Market value, or the price you could sell it for, could differ from this figure.
Activating a line of credit. For example, when you “draw down” a line of credit, you activate it.
Difference between the total assets of a business and the total liabilities.
Short-term financing from the sale of accounts receivable to a third party.
Reports showing the financial condition of a business on a particular date or for a period of time (such as one year). Lenders review the Balance Sheets and Income Statements.
Assets like furniture, fixtures, equipment, machinery, and real estate.
When a business is a partnership, every owner who holds a share (a percentage) of the company shares in the profits and losses. General partners are responsible for total liabilities.
Gross sales less cost of goods sold. This is your mark-up. Also called gross margin.
Revenue or income from sales before returns and allowances.
Guaranty (or Guarantee)
Agreement by a third party to pay debt if the borrower does not.
A guarantor has the same responsibilities as a co-signer. If the loan goes into default and is not paid by the signer(s) of the loan, the guarantor is responsible.
The difference between the value of the hard assets and the business’ selling price. Also called “blue sky”.
Financial statement showing a business’ profit and loss over a period of time (usually a month or a year).
Money paid (cost of credit) for the use of money.
The interest expressed as a percentage rate.
Assets held for eventual resale. May be in the form of raw materials, work in progress, or finished goods.
Contract giving a business owner the right to use an asset for a specified period of time. The asset owner is called the lessor and the owner using the property is called the lessee. Can be used for a building, equipment or machinery.
Improving your leased business location, at your own expense.
Letter of Credit (L/C)
Payments to a third party by the lender, on the owner’s behalf.
A claim against a business’ assets to secure payment of a debt.
Partner that invests in a business and receives a share of the profits (or losses). A partner’s liability is limited by the amount of his or her investment. A limited partner does not have any management authority in the operation of the business; the role is purely that of an investor.
Limited Liability Company/LLC
A form of business that is a hybrid between a corporation and a partnership.
How much the company owes. Current liabilities are those due within one year. Long-term liabilities are due after one year.
Line of Credit (LOC)
A short term loan.
Asset that can be turned into cash quickly.
A company’s ability to pay its expenses. The ability to turn an asset into cash (such as selling a piece of machinery).
The document or contract of the parties that reflects the commitment.
Team that evaluates approves or denies loan applications. Whether a loan officer or a loan committee decides on a loan request may vary by type of loan and lender.
Loan Package Documentation
Documents for the commercial loan contract including financial statements, a business plan, and a credit report. It includes legal documents that show the debt, notes, mortgages/leases, and loan agreements.
System of classification that evaluates risk by assigning a number according to risk. Loan grading is used by lenders, and helps lenders to evaluate loan applications and manage loans.
Expenses, loans, and payables due after one year.
Activities used to sell a product or service to the purchaser.
The price an asset, product or service will bring in a current, competitive market.
Written agreement between a credit card processing bank and merchants (who allow clients to use credit cards). The bank turns the credit card sales into deposits for the merchant and charges a processing fee.
Money left after all expenses have been paid. Used to pay loans and grow the company.
Revenue or income from sales after returns and allowances are deducted.
Assets less liabilities.
Assets that take one year or more to turn into cash.
Person authorized by the state to administer oaths and witness documents. A notary’s seal and signature authenticates a document.
Checks that have been sent for payment but are still in the process of being collected by the bank.
When the amount of a check exceeds the available balance. Overdraft protection allows business owners to write checks for more than the account balance without the checks being returned. This service must be approved by the bank.
The money owners have invested in a business.
The rate of interest per annum announced by the lender from time to time. Most business owners are charged the printed rate plus a percentage (if the prime rate is 6%, the borrower is charged “prime + 2” or 8%).
Forecasting future income, expenses, or cash flow with projections.
Net profits accumulated through the company’s life and reported in the net worth or equity section of the balance sheet. Note: Can be negative if losses occur.
Rate of Interest
Fixed: Interest rate remains the same for the length of the loan.
Variable: Interest rate depends upon an index and increases or decreases (for example, the prime rate or the Treasury Bill index).
Ratios are your business’ “scores” that come from your Income Statement and Balance Sheet, not the Cash Flow Statement.
Replacing existing loans with new loans that have different terms. Often called “refi”.
Extending the length of time required to pay the loan which adjusts the monthly payment.
Releasing collateral when a loan has been paid off or substituted by other collateral.
Loan secured by collateral (which will be liquidated if the borrower defaults on the loan).
Subchapter S Corporation
A legal form of business that is incorporated but taxed at the business owners’ individual rate of return.
Real property such as buildings and machinery. Trademarks, goodwill, or accounts receivable are not considered tangible assets.
A loan’s maturity, stated in months or years.
Loan, given in one lump sum, is provided at the closing. Repayment is monthly.
A process by which lenders examine business statements and financial ratios to determine if the financial strength is improving or weakening.
Difference between current assets and current liabilities. An indication of liquidity and the ability to meet current obligations.