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Finance Terms

Accounts Receivable Financing
A loan gained by borrowing against receivables. Loans are paid down as receivables are collected.
Annual Fee
The amount charged by the lender each year to cover the administrative costs of the loan.
Business Credit Card
An amount of money, which a business can borrow against at times it needs capital. Using a card accesses the money.
Commercial Real Estate Loans
Similar to residential mortgages, but collateral is business property. Interest rates are usually fixed, the length of the loan can range from 5 – 20 years and payments due monthly.
Commercial Term Loans
Loans made to businesses that can be either secured and unsecured. Usually made to mid-size and large businesses.
Credit Rating
A predictor of the ability to pay back a loan. The credit rating is a result of credit scoring
Credit Report
Financial history supplied by a credit information company like Dun and Bradstreet, Equifax, Experian or TransUnion. Contains credit information on a business or an individual, including payment history of bank cards, store cards, mortgages, student loans, and trade payments
Credit Scoring
The evaluation system used by lending institutions to determine relative credit riskiness of a business or consumer. When evaluating businesses, it generally considers factors such as credit payment history, new credit sought by owner of business, and financial strength and longevity of business.
CreditFYI
A web site for checking business credit reports
Debt Financing
A loan with pre-agreed terms, including payback schedule and interest
Dun & Bradstreet
Leading provider of business credit information
Equifax
One of three leading providers of personal credit information
Equipment Leases
Leases allowing companies to purchase new equipment
Experian
One of three leading providers of personal and business credit information
Fixed Interest Rate
An interest rate that is the same throughout the life of a loan
Interest Rate
amount charged by a lender for the money borrowed. It can be fixed or variable
Inventory Financing
Money borrowed on the basis of finished inventory. The loan is paid as inventory is sold.
Line of Credit
An amount of money, which a business can borrow against at times it needs capital. Often accessed by check, ATM, or business card.
Loan Term
The length of time the borrower has to repay debt.
Long Term Debt
Financing used to purchase or improve assets such as plant, facilities, large equipment and real estate.
Maturity
A loan’s maturity is the life of the loan; that is, how long you have to repay the loan. It usually applies to term loans and not lines of credit.
Multi-Lender Environment
Numerous lending institution sharing the same site and information to provide instant financing to small businesses.
Personal Guarantee
A guarantee that the primary owner will assume personal responsibility for repayment of the loan, should the company not repay the loan.
Prime Rate
The rate a lender charges its best customers. The rate is calculated differently by each lender.
Revolving Credit
It is the same thing as a line of credit: an amount of money, which a business can borrow against at times it needs capital. Often accessed by check, ATM, or business card
SBA Loan
Loans to small businesses unable to secure financing on reasonable terms through normal lending channels. The program operates through private-sector lenders that provide loans, which are guaranteed by the Small Business Administration (SBA) — the SBA has no funds for direct lending or grants.
Secured Loan
A loan secured by specific collateral. Creditor may foreclose and seize the specific property that is collateral to satisfy an unpaid secure loan.
Short Term Debt
Financing used to secure cash for accounts payable and inventory.
Subsequent Draw Fee
It’s a fee that the financial institution may charge each time you use the line of credit after the initial use.
Term Loan
A loan for a specific amount of money. It has either have a fixed or variable interest rate, matures in between one and ten years and has a set repayment schedule.
Unsecured Loan
A loan granted upon the good credit of the borrower. No collateral involved.
Variable Interest Rate
An interest rate that changes during the life of a loan.
Banks
Banks are the primary financing vehicle, other than owner’s savings, for small businesses.
Banks like to use hard assets such as buildings, motor vehicles, or equipment as collateral against loans. They will loan against receivables and inventory, but, especially in the case of smaller businesses, tend to heavily discount the protection these assets offer. They are afraid the inventory and receivables will be converted to cash in order to cover operating losses if the business experiences any financial difficulties.
While banks like the ultimate protection of hard assets, they also want to feel that there is little chance that the business, or the bank, will have to call upon these assets to pay off the loan. Banks don’t care whether or not your business has sky-high profit potential. They are only interested in the business’ ability to cover the principal and interest payments.
In making a proposal for a loan, the bank will want to see all of your recent tax returns, financial statements, and cash flow projections. They will also want to know how much you would like to borrow. And, if yours is a small business, it will expect you to conduct all of your business banking activities through its institution.
Banks are reluctant to loan to businesses that cannot show at least two years of profitable operation. They want to see that the owner of the business is heavily invested in the enterprise. And, typically, they won’t make loans in amounts that exceed 50 percent of the firm’s capitalization.
Many bankers feel they are extending a loan not only to the small business, but to the owner-operator as well. They will feel more comfortable loaning business funds to someone with community ties, who has experience related to the business he or she is conducting, and who has made a complete and total commitment to that business.
Small business loan criteria vary greatly from one bank to another. It can even vary from one loan officer to another. If you have been turned down by nine out of ten banks in your region go ahead and try the tenth. While all banks and loan officers consider the same factors when weighing a loan request, they will place different emphasis on those factors. Some bankers place great store in hard asset collateral, some in the profitability or continuity of the business, and yet others will go with their impression of the owner as the deciding factor.
Personal Loans
Are a great back-door alternative when seeking financing for a small business venture.
One of the most common means for attaining funds for use in operating a small business is through a home equity loan. If you have been paying your mortgage for a few years, you have probably built up some sizable equity in your property. Banks loans taken against a person’s primary residence are low-risk no matter what the funds are going to be used for. You can take the proceeds garnered from a home equity loan and use them to operate your business. Then, technically, you are financing your business, not the bank.
If you use the proceeds from a personal loan to finance your business you do, however, need to make this clear on your loan application. If you lie on a loan application you have committed fraud a serious criminal offense.
Lease Financing
is a super financing alternative if you are seeking funding to obtain business equipment. Finance companies, banks, and many firms that sell high-priced equipment will lease to you.
When you lease an item, the lessor retains ownership of it. You use the equipment by virtue of the monthly payments you will be required to make. You can often purchase the equipment at the end of the lease term for its market value or less.
A great advantage to leasing is that it may be allowed to be “off the balance sheet.” This means that leases can be disclosed as balance sheet footnotes. They do not appear as debt even though they represent an ongoing company liability. This may sound like financial doublespeak, but it’s not. Let’s say a supplier is considering whether or not to extend credit to you, or a bank is weighing a loan proposal you have submitted. The lease commitment will play a relatively minor role in evaluating your debt burden.
Banks also tend to consider their total exposure when lending to small businesses. If you have obtained lease financing through a third party, they are more likely to lend you funds than if all of your borrowing needs have been met through them. This is very important if you have a relatively small business, because most banks expect you to use them exclusively for traditional lending but may not care if you use a nonbank source for lease financing. In any case, though, do keep your bank informed regarding any significant lease commitments you are considering prior to actually signing any agreements.
Factoring
refers to a practice whereby you sell your receivables for a discount before they are due. Historically, factoring has been heavily used in some industries, such as the garment industry, and less in others. Today, however, entrepreneurial factoring companies are willing to buy creditworthy receivables from just about any industry.
Factoring is a relatively expensive means of obtaining financing. You are paying for the cost of the capital, the extra risk including bad debt, and the paperwork factoring requires. If you can finance your business through other sources, particularly the more traditional ones, you will certainly save money.
However, factoring can be a cash bonanza to a growing business, especially one that cannot obtain the necessary capital through traditional borrowing.
Venture Capital
Despite all of the attention venture capital firms get in the business press, they actually finance very few businesses. The better venture capital firms are deluged with proposals from budding entrepreneurs. But most of these entrepreneurial proposals are inappropriate to the goals of venture capitalists.
Most venture capitalists concentrate their financing efforts on later-stage business funding. Some venture capital firms will, however, consider financing a start-up. What they want to see from any entrepreneur seeking funding is a history of start-up successes under the applicant’s belt. They are best known for financing high-tech firms, but they do finance other types of businesses over 50 percent non-high-tech businesses for some venture capitalists.
Venture capital firms prefer to cut deals that provide an exit path within five years. They view the probability, or not, that a firm will be successful enough to go public or be purchased by a larger company. They also expect very high returns for their investment risk that only the fast pace of highly profitable growth will bring. They want to see a management team in place that can handle rapid growth. And they want that management team to be well balanced with all types of experience and skill represented creative, engineering, financial, marketing, and management.
Going Public
Going public, that is, selling stock or debt to the general public, is an extremely complex and massive undertaking. You should not consider going public unless your business is earning well over a million dollars in after-tax profits, has steady profitability, excellent growth prospects, and a tremendous thirst for funding that other sources can not provide.
Entrepreneurs who have taken their firms public are generally shocked by the amount of energy and anxiety that goes into the initial public offering. And, later, they are frustrated by the added demands placed on them as a CEO of a public as opposed to a private firm.

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