Business Finance and Loan Definitions You Need to Know

March 21, 2012

You need to know these finance terms when it comes to managing your business. It will help you ensure your business has the money it needs to pay employees, vendors and other business-related expenses. The list also includes terms related to loans and getting financing.

Accounts receivable (AR). Money owed to a company from its clients or debtors. The company has performed the service or delivered the product, but it hasn't yet received payment.

Accounts receivables financing. See factoring.

Angel investor. (Also referred to as private investor.) Affluent individuals who provide working capital to a start-up company. They may ask for partial ownership equity in exchange. Angels aren't always motivated by profit because they're passionate about the product or service, or know the individuals personally.

Balance sheet. Snapshot of what your company owns (assets), what it owes (liabilities) and its net worth (shareholder's equity) dating from day one of business to the date on the balance sheet.

Business line of credit. Works like a credit card except a business can write checks for any amount up to the maximum amount set by the financial institution. The business pays interest on the funds spent, not for the full amount of the line of credit.

Cash flow. Cash flow is the money that transfers in and out of a business. Cash enters a business through financing, operations, and investments. Cash flows out of the company's finance through expenses and investments.

Credit card. A card used to make purchases on credit. A credit card may have a borrowing limit and fees. The limit, fees, and interest rate depend on the credit card issuer's policies and the cardholder's (or company's) credit history.

Factoring. (Also referred to as invoice financing and accounts receivables financing.) Selling accounts receivables to a third party (factor) at a discount. Factoring isn't a loan as the company gets paid for its asset. The factor takes on the risk when it buys the accounts receivables in ensuring they're paid. For example, a client has an accounts receivable worth $100. It sells the invoice to a factor for $80. Although it won't see the full $100, selling invoices allows the company to get cash faster.

Income statement. (Also referred to as profit and loss statement.) Shows the company's sales, expenses, taxes and net profit for a set time, such as a quarter or year. Analyzing multiple statements reveals whether the company is showing a profit or loss.

Invoice financing. See factoring.

Micro loans. Small, short-term loan to impoverished business owners.

Peer-to-peer (P2P) lending. Loans from individuals, colleagues, friends, or family, or from strangers through online P2P communities. It makes it possible to obtain loans without going to a financial institution.

Profit and loss (P&L) statement. See income statement.

Short-term loans. Extended credit with a fixed repayment period and interest rates. Typically require repayment within one year.

Venture capital (VC). Group of investors or an organization that invests in a start-up. It's a high risk investment that could bring in better than average returns.

Working capital (WC). A company's current assets minus its current liabilities. When the company has working capital, it can pay its short-term debts and operational expenses. A working capital deficit puts a company at risk for paying its creditors and bankruptcy.

What other business financing definitions are important? What definitions would you like explained?