19 financial terms every small business owner needs to know from the class you DIDN’T take in college:
Back in college, before you knew you would be a small business owner, the goal was just to graduate so you could get a leg up on the people competing for the same job you wanted. Little did you know that the jobs you had before becoming your own boss were just steps on your ladder to success.
But if you’re like some, becoming your own boss may not have been something you planned for or even dreamed of. One day you woke up and it just hit you.
So you started your own business.
Today your business has the potential for growth. But getting the financing, or CAPITAL, – to back that growth requires a class you never took in college.
When you need capital (cash), you may consider various options that include debt or equity. Rather than give up ownership in your business, debt tends to be the alternative of choice for many small business owners to grow their business. Prior to the 2008-2009 recession, banks were typically the best option. With banks scaling back their lending to small business since the recession, various non-bank lenders have grown to serve the cash needs of small business owners. Non-banks often have better terms, faster turn-around times, customizable offers tailored to your needs, and more flexible approval standards. But before you get started, you’ll want to get yourself up to speed so you can talk the talk.
Here are 19 of the most important financial terms you should know.
- AIR: Annual Interest Rate is the yearly interest percentage the lender charges based on your loan amount (excludes compounding and fees).
- APR: Annual Percentage Rate is the yearly interest rate charged for borrowing, plus any fees.
- Assets: something of value owned by the borrower, which can be used as collateral by a lender in the event of a default.
- Business credit profile: Information collected based on your business’ history of credit used to predict the risk and likelihood your business will repay borrowed.
- Cash flow: The single most important aspect of your business because it focuses on the actual cash that goes in and out of your company. Positive cash flow means your cash receipts (inflows) is greater than your fixed and variable expenses (outflows).
- Default: Failure to repay a loan.
- Fixed asset: A long-term, tangible asset, like property, buildings or equipment that the business can use for an extended period of time.
- Gross profit: Amount left over after the total cost of goods is subtracted from the total revenue.
- Interest-only payments: Only making the interest payments on a loan with no payments on the principal. At the end of the term, the borrower will either need to pay back the principle in a lump sum or refinance.
- Liabilities: Debts or obligations owed by a company, which can be resolved in the form of payments or the transfer of goods or services.
- Line of credit: A pre-approved loan amount of money agreed by the lender to provide. You can draw the line of credit when you need it, up to the maximum amount. You pay interest only on the amount of funds borrowed or outstanding.
- Net income: A company’s total earnings. The total revenue for a given period of time minus all expenses.
- Principal: The amount of money borrowed (excludes interest payments and fees).
- Revenue: The total sales or receipts a business generates before costs and expenses are deducted.
- Secured loan: A loan where the borrower pledges an asset for collateral in the event they should default.
- Term loan: The borrower receives a lump sum to be paid back in regular payments (principal and interest) for a set length of time.
- Unsecured loan: A loan that is approved without the need for collateral.
- Personal guaranty: An agreement from an individual guarantor of someone’s credit worthiness, which includes being responsible for repaying their debt if they don’t.
- Liens: A right to keep possession of property belonging to another person until a debt is paid back to that person and is discharged.