Need help to start or grow your business? Begin BizStarts
ENTER YOUR EMAIL to get our newsletter delivered to your email box >>

By submitting this form, you are granting: BizStarts, 1555 N. Rivercenter Drive, Milwaukee, WI, 53212, permission to email you. You may unsubscribe via the link found at the bottom of every email. (See our Email Privacy Policy ( for details.) Emails are serviced by Constant Contact.

Financing – Glossary of Terms

Accounts Payable: A list of a firm’s current business debts or liabilities that must be paid in the future (usually within 1 year.)

Accounts Receivable: A list of the amounts a firm is owed by others for merchandise or services sold, representing current assets.

Amortization: Liquidation on an installment basis; the process of gradually paying off a liability over a period of time; e.g., a mortgage is amortized by periodically paying off part of it.

Assets: The valuable resource, or properties and property rights, owned by an individual or business enterprise.

Balance sheet: A detailed listing of assets, liabilities, and owners’ equity accounts (net worth) showing the financial position of a company at a specific time.

Business plan: An overview developed by business owners which details all aspects of a business and its financial statements. Needed to apply for and obtain a loan.

Capital: Capital founds are those funds needed for the base of the business. Usually they are put into the business in a fairly permanent form, such as fixed assets, plant, and equipment, or are used in other ways that are not recoverable in the short run unless the entire business is sold.

Capital equipment: Equipment used to manufacture a product, provide a service, or to sell, store, and deliver merchandise. Such equipment will not be sold in the normal course of business, but will be used and worn out or be consumed over time as business is conducted.

Cash flow: The actual movement of cash within a business – cash inflow minus cash outflow. A term used to designate the reported net income of a corporation plus amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserves. Cash flow should include all non-cash expenses that are bookkeeping deductions and are not actually paid out in cash.

Collateral: Assets, such a as a house or stocks and bonds, pledged to support a loan. This “guarantees” that you that will pay back the loan according to its terms, usually in monthly payments.

Compensating Balances: Cash balance kept on deposit at a bank, usually non-interest-bearing, which are taken into consideration when the bank decides what interest rate it will charge for a loan.

Cosigner: A person, or business, that signs and or guarantees a loan for someone else.

Credit: Ledger’s aggrement to provide funds to an account owned by the customer. A privilege of buying goods, services, or borrowing money in return for a promise of future payments.

Credit line: Amount of money available to a borrower for a predetermined period of time.

Current assets: Cash or other item that will normally be paid off within 1 year, and assets that will be used up in the operations of a firm within 1 year.

Current liabilities: Amounts owed that will normally be paid off within 1 year. Such items include accounts payable, wages payable, taxes payable, the current portion of a long-term debt, and interest dividends payable.

Current ratio: A ratio of a firm’s current assets to its current liabilities. Because a current ratio includes the value of inventories that have not yet been sold, it does not offer the best evaluation of the firm’s current status. The “quick” ratio, covering the most liquid current assets, produces a better evaluation.

Debenture: A bond or other debt obligation usually backed only by the integrity or general credit of the issuing borrower and not secured by a lien or any specific asset.

Debt: Debt refers to borrowed funds, whether from your own coffers, from other individuals, bank, or other institutions. It is generally secured with a specific amount of money, goods or services that is owed from one to another. It is generally evidenced by a note, which in turn may be secured by a lien against property or other assets. Ordinarily, the note states repayment and interest provisions, which vary greatly in both amount and duration, depending upon the purpose, source and terms of the loan. Some debt is convertible; that is, is; it may be changed into direct ownership of a portion of a business under stated conditions.

Depreciation: Assets lose value with time and can be deducted from your business as an expense. Current values of assets are shown as original cost less depreciation.

Equity: Equity is the owners’ investment in the business. Unlike capital, equity is what remains after the liabilities of the company are subtracted from the assets. Thus, equity may be greater than or less than the capital invested in the business. Equity investment carries with it a share of ownership and usually a share in the profits, as well as some say in how the business is managed.

Financial statement: A report that shows the financial condition of a business for a specified time period (such as one year.)

Fixed assets: Those items of a permanent nature, required for the normal conduct of a business, and not converted into cash during a normal fiscal period. Examples include building, machinery, and furniture.

Gross profit: Net sales (sales minus returned merchandise, discounts, or other allowances) minus the cost of goods sold.

Guaranty: A pledge by a third party to repay a loan in the event that the borrower cannot.

Income statement: A statement of income and expenses for a given period.

Interest rate: A cost of borrowing money expressed as a percentage rate of the loan.

Inventory: Materials owned and held by a business firm, including new materials, intermediate products or parts, work-in-progress, finished goods, intended either for internal consumption or for sale.

Liquidity: A term used to describe the solvency of a business and which has special reference to the degree of readiness in which assets can be converted into cash without a loss. Also called cash position. If a firm’s current assets cannot be converted into cash to meet current liabilities, the firm is said to be illiquid.

Lien: A legal right or encumbrance to secure payment performance on property, either personal or real, pledged as collateral until debt/loan which it secures is satisfied.

Line of credit: A line of credit is a short-term loan for a specific amount which allows you to receive money to pay for routine or regular expenses, such as rent or equipment leases. This type of loan allows you to borrow repeatedly—so t hat you repay and reborrow as often as you need.

Loan agreement:
A document that states what a business can and cannot do as long as it owes money to (usually) a bank. A loan agreement may place restriction on the owner’s salary or dividends, on amount of other debt, on working capital limits, on sales, or on the number of personnel added.

Loans: Money advanced to a borrower with an agreement to repay amount borrowed with interest within a specific period of time. Debt money for private business is usually in the form of bank loans. In a sense, many loans are personal because a private business can be hard to evaluate in terms of creditworthiness and degree of risk. Examples: A secured loan is a loan backed by a claim against some asset or assets of a business. An unsecured loan is backed by the faith the bank has in the borrower’s ability to pay back the money.

Long-term liabilities: Expenses, loans, and accounts payables due after one year or more.

Long-term loan: Loan with a maturity date of 10 years or longer.

Net profit: Money left after all expenses have been paid.

Net sales: Revenue or income from sales after returns and allowances are deducted.

Net worth: The owner’s equity in a given business represented by the excess of total assets over the total amounts owed to outside creditors (total liabilities) at a given time. Also, the net worth of an individual as determined by deducting the amount of all his personal liabilities from the total value of his personal assets. Generally refers to tangible net worth, i.e., does not include goodwill, etc.

Note (Promissory Note): The basic business loan, a note represents a loan that will be repaid or substantially reduced 30, 60, or 90 days later at a stated interest rate. These are short-term, and unless they are made under a line of credit, a separate loan application is needed for each loan and each renewal. A written promise by a borrower to pay a certain amount of money to a lender either on demand or over a specific period of time.

Prime rate: A benchmark interest rate that an individual bank may establish and sometimes use to compute an appropriate rate of interest for a particular loan contract. This rate is based on numerous factors, including the bank’s supply of funds, its administrative costs, and competition from other suppliers of credit.

Profit: The excess of the selling price over all costs and expenses incurred in making a sale. Also, the reward to the entrepreneur for the risks assumed in the establishment, operation, and management of an enterprise.

Pro Forma: A projection or estimate of what may result in the future from actions in the present. A pro forma financial statement shows how the actual operations of a business will turn out if certain assumptions are realized.

Quick ratio: Cash plus other assets that can be used immediately (converted to cash) should approach or exceed current liabilities.

Rates (Variable): Variable loan rates will generally change monthly or quarterly and are based on some index, such as the bank’s prime rate. Variable rates can rise or fall during the life of a loan depending on what happens to the index rate the loan is based on. A typical variable rate quote would be prime +2 percent. Variable rates will usually be quoted for short-term equipment loans.

Rates (Fixed): Fixed loan rates will be just that, fixed for the life of the loan. These types of loan rates are generally associated with longer-term, fixed-asset financing.

Refinancing: Replacing existing loans with new loans that have different terms.

Revolving credit: A contractual agreement allowing a customer to borrow funds whenever needed up to a specified maximum amount for a limited period. Funds to be borrowed, repaid, and re-borrowed during the life of the credit. A credit facility is good for a stated period of time but does not have a fixed repayment schedule.

Secured loan: A loan for which the lender’s interest is protected by collateral pledged by the borrower. The collateral may be any marketable asset.

Small Business Administration (SBA): Operated by U.S. Government, this federal agency will guarantee loans to qualified borrowers. It acts as co-signer, ensuring banks that it will pay off the loan if the business owner if unable to do so. Business banks often use the SBA to guarantee for loans that may be considered riskier than loans they might normally make.

Term loan: Either secured or unsecured, usually for periods for more than a year to as many as 20 years. Term loans are paid off like a mortgage: so many dollars per month for so many years. The most common uses of term loans are for equipment and other fixed assets, for working capital, and for real estate.

Working capital: The difference between current assets and current liabilities. Contrasted with capital, a permanent use of funds, working capital cycles through your business in a variety of forms: inventories, accounts, and notes receivables, and cash and securities.

Our Sponsors

Thinking Of Joining?

Interested in joining the BizStarts BizForge program to help your start-up grow? Sign up today! It's free. After completing our online application, a BizStarts representative will contact you to begin your journey.


The latest from BizStarts

Stay In The Know

Get entrepreneur resources, event information, and inspirational stories at your fingertips with BizStarts. It's free to sign up.