If you have a small business, there’s a good chance you’ll need to apply for a loan or other type of financing at some point. In order to understand the process, you should be familiar with the lingo. Here are some of the most frequently used financial and credit terms you should know. Chances are, you’ll already know some of these while you might need a refresher on others.
13 Credit Terms All Small Business Owners Should Know
1. Line of Credit. An account that allows you to borrow a certain amount of money from a financial institution. The amount of a line of credit is determined based on the type of loan, your credit history, assets, and other factors.
2. Annual Percentage Rate or APR. The total yearly cost of a loan, including interest and fees.
3. Assets. This is anything you own of value that can be used as collateral when applying for a loan.
4. Liabilities. Financial debts or obligations such as services that must be performed. Often contrasted with a business’ assets.
5. Principal. The total amount of money borrowed excluding interest and fees. Interest is based on the principle of a loan. When paying off loans, it’s important to know how much of your payment is paying the principal and how much is going towards interest.
6. Collateral. When you apply for a loan, the bank may demand that you pledge an asset as security. Real estate, stocks, bonds, and other assets can be used as collateral. In the event of nonpayment, the financial institution has the right to seize these assets.
7. Unsecured Loan. A loan where the borrower isn’t required to put up collateral. This type of loan generally comes with high-interest rates. Loans, where collateral is required, are known as secured loans.
8. UCC-1. Abbreviation for Uniform Commercial Code-1, is a legal document that a creditor files with the Secretary of State to perfect interest on certain assets as collateral on a secured loan.
9. Business Credit Score. The credit history of a business. This is distinct from your personal credit score. While almost all adults have a personal credit score, a new business owner may not have established a business credit score.
10. Cash Flow. This is the money that enters and leaves your business every month. Cash generally flows in from sales and flows out in the form of payroll and various business expenses. If your cash inflow is greater than your outflow for a certain period, then you have positive cash flow. Cash flow is not the same as profit, however, it is crucial for a business to be operable. Your cash flow provides you a better understanding of your business’s liquidity, flexibility, and overall financial performance.
11. Profit and Loss Statement or P & L. Also called an Income Statement, is a report created by businesses that summarizes revenue and expenses. P & L statements are usually generated quarterly or annually.
12. Gross Profit. The revenue your business takes in minus the cost of what you’ve sold. Other expenses are not subtracted. Compare to net profit.
13. Net Profit. Your revenue minus the cost of goods, taxes and all business expenses.
Make sure you’re familiar with these small business credit terms so you understand what you’re getting into when you apply for any type of financing. Now let’s look at one more term that’s often not included in lists of small business credit terms.
One More Important Finance Term: Invoice or Accounts Receivable Factoring
When considering credit terms, make sure you don’t overlook invoice factoring. This is actually an alternative to bank loans, so some of the above terms such as principal and APR don’t apply. Invoice factoring does, however, have a lot to do with cash flow as it’s a method for getting cash immediately for invoices. The factoring company pays you upfront for invoices and handles collection from your customers.
Riviera Finance is one of the leading invoice factoring companies. With 50 years of experience, Riviera offers flexible financing options for all types of B2B businesses. To learn more about how invoice factoring can help your business, contact Riviera Finance.