When you’re researching starting or a business or financing options to fund your operations or growth, you’re likely to come across a lot of vocabulary and terminology. We’ve compiled a list of some of the most common terms business owners should know.
1. Automated Clearing House (ACH) Transfer
Typically shortened to “ACH transfer,” payments processed in this manner go through an automated clearing house network. It’s an electronic system that banks use when sending money from one to another. Most lenders will disburse your funds by ACH transfer and process your payments through one, too.
2. Annual Percentage Rate (APR)
APRs, or annual percentage rates, offer a standardized way to compare the cost of various financial instruments even when they’re calculated differently or have fees tacked on, though they don’t account for compounding interest.
3. Business Credit Score
Having a high business credit score is important in order to qualify for a loan, and will impact the interest you pay. Many banks will look at your personal credit score if your business credit score isn’t strong. If your personal and business credit score are both less than desireable, you will likely need to look into loans and financing options outside of banks. For example, collateral loans, equity financing, or invoice factoring.
4. Business Line of Credit
A line of credit works like a credit card. Your lender establishes a maximum limit, and you can draw funds from the account until you reach your limit. You’ll make regular payments toward the principal, interest and fees. As you pay down the balance, you’ll be able to draw from the account until you reach your maximum limit again. These usually come with a variable interest rate, so it can be difficult to budget out the cost of borrowing, but many business owners open lines of credit, so they can tap into cash as they need working capital.
5. Cash Flow
Money coming into your business is cash flow, but it’s not to be confused with profit. Profit takes into account how much you earn after all expenses and debts are paid; cash flow is only concerned with the amount of money flowing in. A slow or sluggish cash flow can even occur within profitable businesses and can cause issues when the business needs to pay expenses, like payroll and ordering supplies of materials.
Businesses which do not meet the criteria for traditional bank financing may opt to use a collateral or asset-based loan. In these cases, the business promises to give the lender an asset if he or she cannot make payments. Some business owners put their personal homes up as collateral, but business property and things like invoices can serve as collateral, too.
7. Equity Financing
Companies that don’t have cash and don’t want to take on debt may opt to sell a portion of their business in a process called equity financing. For example, if your company is worth $100,000 and you’re willing to give up 50 percent ownership, you can get $50,000 to grow your company through equity financing.
8. Fixed Interest
There are two types of interest; fixed and variable. With fixed interest, your interest rate remains the same for the duration of the loan.
9. Fixed Loan Payments
With fixed loan payments, the amount you pay toward your principal, interest and fees remains the same throughout the span of your loan.
10. Funding Time
The amount of time which passes between the submittal of your application and receiving cash is referred to as funding time. With banks, the funding time can be measured in weeks or months, but other lenders can sometimes get cash to you in as little as 24 hours.
11. Invoice Factoring
Invoice factoring is a debt-free solution for sluggish cash flow. The factoring company purchases your unpaid B2B invoices and gives you a large portion of the value right away, then handles invoicing and collecting from your customers.
12. Loan Renewal
Many people think loan renewals and refinancing are the same. However, renewals simply extend the maturity date of a loan, giving you longer to pay off the balance.
13. Loan Term
The loan term is how long you have to pay off your balance in full. If the loan term is more than one year, it’s considered a long-term loan. If it’s less, it’s a short-term loan.
14. Maturity Date
Some loans establish a maturity date in which the principal and interest are due in full. It’s seen more often on ARM loans or mortgages in which the borrower is only required to pay interest for a period of time and must then pay the full balance of the loan at the end of their term.
15. Maximum Loan Amount
The highest amount of cash a lender will offer you is referred to as the maximum loan amount.
16. Origination Fee
Also referred to as points, origination fees are charged by the lender in order to compensate the loan officer overseeing your funding. They’re seen more often in term loans and mortgages.
Many people believe that being pre-approved means they are guaranteed a loan by the company making the claim. Generally speaking, it really means the individual is pre-qualified, which means the individual meets the qualifications to apply. The individual likely meets some of the criteria the lender will use, but the lender will still be checking into things like cash flow and credit scores. The exception to this relates to mortgages. In these cases, someone shopping for real estate can opt to have a financial institution run all their checks in advance. Then, the mortgage company will let the borrower know what terms they qualify for, so they can shop for real estate with their numbers in mind.
18. Pre-Qualification Requirements
Lenders set their own pre-qualification requirements. Receiving a pre-qualification notice does not guarantee you’ll receive a loan, but it could mean that you meet some or all the lender’s qualifications, such as being a business owner, making regular deposits, or have been in business for a certain period of time.
19. Prepayment Penalty
Sometimes lenders charge you a fee when you pay the balance off early. This is known as a prepayment penalty, and it may negate any savings you might otherwise have had from paying off the balance early.
20. Prime Rate
Banks establish a prime rate and use it to determine the rates they charge for loans. It fluctuates on a daily basis based upon the federal funds rate set by the government. In following fluctuations of the prime rate, hopeful borrowers can try to get loans when the prime rate is low, cutting the interest rate and saving them money.
21. Profit and Loss Statement (P&L)
A profit and loss statement, often shortened to P&L, serves as a barometer of your company’s financial success. You can use your P&L to identify opportunities and create forecasts. Lenders will often want to see a copy of your P&L prior to offering financing.
Paying off an existing loan with a new loan is referred to as refinancing. Those who are trapped in debt cycles from opening lines of credit and similar means as well as those with high interest rates can benefit most, but it’s important to weigh all the costs before committing. Sometimes, the fees associated with signing on a new loan outweigh the savings.
23. Simple Interest Loan
With simple interest loans, interest is added to the balance on a daily basis based upon the principal amount remaining.
24. Small Business
Companies with fewer than 250 employees are considered small businesses. The lending options for small businesses differ from mid-sized and large businesses.
25. Term Loan
Term loans are an alternative to lines of credit. You receive a lump sum of cash and pay the balance in regular installments, typically on a monthly basis. The repayment period usually lasts anywhere from six months to five years. Many business owners prefer this for larger expenses, like equipment, real estate and other growth-related costs.
26. Upfront Costs
Any fees charged at the establishment of a loan, such as origination fees, are considered upfront costs.
27. Variable Interest
There are two types of interest; fixed and variable. With variable interest, your interest rate may fluctuate for as long as you have the loan.
Get Cash Without Going into Debt
If your business does not qualify for traditional financing due to bad credit and other common bank requirements or you simply don’t want to take on debt, invoice factoring can help correct cash flow issues by shortening the time between completing work and getting paid. Download our free factoring guide to learn more.