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Updated: March 27th, 2020
As a small business owner, you probably have a strong skill set that will help your business grow. But if managing finances isn’t one of them, you may still want to familiarize yourself with some important financial terms (while your accountant handles the money). We’re not talking about speaking in office jargon, although putting these business financial terms on your radar ASAP will help you better understand your day-to-day business. Here are some of the most important business financial terms to know
A balance sheet is one of the main financial statements your company will create. Thus, it’s an essential business financial term. It represents a snapshot of your company’s assets (resources your business owns), liabilities (financial debts or obligations), and shareholders’ equity as of a specific date. Accounts receivable, or money a client owes you for goods or services you’ve already provided, is a type of asset you’ll track on the balance sheet. Accounts payable, or money you owe a creditor or supplier, is a financial term to know that refers to the type of liability recorded on the balance sheet
B2B, an important financial term that means business-to-business, is a model in which your company does commerce primarily with other businesses. For example, a food manufacturer sells to grocery stores. B2C, or business-to-consumer, is a model in which your company sells products or services directly to consumers. For example, the grocery store sells to the customer. B2G, a business financial term meaning business-to-government, is a business model in which your company creates goods or services primarily for government agencies.
This business financial term refers to the last line on a financial document, such as a balance sheet, that indicates how much your business has earned or lost at the end of a specified period.
A document that explains your business’ marketing, financial, and operational plans and how it will achieve its goals.
Capital describes the resources your business owns, which may include financial assets (such as cash in the bank), tangible factors of production (such as machinery), and facilities (such as buildings).
A financial report that shows money that came in and out of your business during a specific period of time. It usually includes operating activities, investing activities, financing activities, and supplemental information.
An asset, such as a piece of machinery, that your business pledges to a lender to secure repayment on a loan. If your business defaults on the loan, you may need to surrender the collateral.
Credit is an important financial term to know that describes the agreement your company makes with a lender to receive something of value now in exchange for repayments at a later date, typically with interest. A commercial credit report is a document that lists the money your business has borrowed, information on its payment history, and any outstanding public records. A commercial credit score is another business financial term relating to credit that refers to a numerical assessment of your company’s creditworthiness and how it’s managing borrowed money.
Rolling several forms of debt into one new loan, which allows your business to easily keep track of the debt.
An important financial term that compares your business’ cash flow to its debt obligations to see if you can cover debts due within one year. You can calculate this ratio by dividing your business’ net operating income by your debt payments. A DSCR greater than 1.0 means your business has enough income to cover current debt payments.
A unique nine-digit number, assigned by the IRS, that your company uses for identification and for reporting taxes.
Reports your company creates to convey information about its financial health over a specified accounting period. There are generally three main financial statements: the income statement, balance sheet, and cash flow statement.
Gross profit is an important financial term to know that describes your company’s profit before operating expenses, interest payments, and taxes are factored in. Net profit is your profit after all expenses — such as taxes, cost of goods sold, and depreciation — are subtracted.
A person or entity that acts as a sort of co-signer, promising to make payments on a loan if your business defaults on a loan obligation.
One of the main financial statements that summarizes your company’s revenues, expenses, profits, and losses during a specific period.
Interest is an essential financial term to know if your business is exploring financing options. It refers to the amount a lender charges to borrow money, expressed as a percentage of the principal. The annual percentage rate (or APR) is the total amount of interest, fees, and other costs you’ll pay annually, averaged over the full term of the loan. Variable interest rates, sometimes called floating rates, are typically based on a benchmark rate and can change over the course of the loan term, while fixed interest rates won’t change.
When someone checks your credit reports, it creates an inquiry or “pull” on the report. This business financial term can refer to one of two types: A soft pull usually results from monitoring your own reports or getting a loan prequalification, while a hard pull usually occurs when a lender checks your credit, typically to loan your business money.
Two methods that can help fill the void between business income and your bills. With invoice factoring, you sell your accounts receivable invoices (which represent potential income) to another company that collects on the invoices. Invoice financing is a business financial term that describes when another company advances your business cash based on the value of the invoices, but it doesn’t take on the responsibility of collecting the debt.
A lender’s claim on specific assets your company owns, such as a piece of machinery or a building, until a debt has been satisfied.
A line of credit is a preset amount of money that a bank or credit union has agreed to lend your business. Your business can draw from the line of credit when needed, up to the maximum amount. Lines of credit can either be revolving or nonrevolving. A revolving line of credit, like a business credit card, can be paid off and then used again (and again), while a nonrevolving line of credit has an established limit that does not replenish after payments are made.
Money that a lender gives you, usually in a lump sum, with an agreement it will be paid back on defined terms. This important financial term can take a few forms. A term loan is repaid over a set period of time with regular payments. With a secured loan, such as a home equity loan, the lender has a claim to the collateral until the loan is paid off, in case your business defaults on the loan. An unsecured loan, such as a personal loan, doesn’t require collateral.
A financial term to know referring to a lump sum of money that a financing company lends your business, which you usually pay back with a percentage of your daily or weekly credit card and debit card sales, plus a fee.
Net worth is an important business financial term that can be calculated by subtracting the value of all your outstanding liabilities from the value of your business’ non-financial and financial assets.
An upfront fee that a lender charges for putting a loan together, usually expressed as a percentage of the loan principal.
An agreement you make with a lender or credit card company to personally make payments if the business can’t make them on time.
Prime rate is a financial term to know if you are seeking a loan. It refers to the interest rate that banks charge its most creditworthy customers. It’s based on the federal funds rate, which is the rate that banks use to lend to one another. The prime rate largely influences the rates set for loans such as mortgages and credit cards.
The sum of money your company borrows for a particular loan or puts into an investment. The lender will typically add interest and fees to the principal, which increases the amount you pay back. This business financial term can also refer to the amount you have left to pay back on a loan.
Profit is your company’s total revenue minus total expenses, while the profit margin measures how much your company keeps in earnings against every dollar of sales it generates.
Refinancing involves replacing one debt for a different one with new (usually better) terms.
The efficiency of an investment. Simply put, if you invest X dollars, how much will you get back?
You don’t have to be a financial wizard to run a successful company. But a few important financial terms can come up in conversations with investors, potential clients. and colleagues. By familiarizing yourself with these financial terms to know, you’ll have a better understanding of your business’ financial health.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.