16 Financial Terms Every Business Owner Should Know
In order to understand how to define the state of your business in financial terms, it is important to understand what these terms actually mean. This terminology may be important when talking to potential clients, investors or industry colleagues. Here is a non-exhaustive list of financial terms that every business owner should know.
APR – The annual percentage rate (APR) is a common way for lenders to charge borrowers for business loans, credit card spending, mortgages, etc. An APR is an annual rate, expressed as a percentage, and calculated per year over the term of the loan. Typically, lenders combine the total interest that is owed and divide it by the loan term to calculate a monthly percentage.
Assets – In a business, any resource that is owned by the company and can be converted into cash is classified as an asset. Fixed assets can include equipment and owned office space while current assets can include inventory and contractual work that has not yet been delivered.
Business Loans – A specific amount of money provided by a financial institution as a credit is known as a business loan. Specifically, these loans are repaid over a pre-determined period of time and consequences occur when payments are missed.
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Cash Flow – The money that flows into a business’ day-to-day operations from paying customers is referred to as cash flow. This also includes money flowing out for overhead, taxes and other monthly expenses.
Equipment Financing – When a business struggles to come up with the cash to purchase equipment outright, equipment financing provides a line of credit that is paid back (plus interest) over a period of time.
Equipment Leasing – Equipment leasing is a form of securing business machinery, appliances or other equipment through a rental agreement. Equipment leasing is ideal for companies that have high equipment turnover or the need to update equipment on a frequent basis.
Gross Profit – A company’s profit prior to accounting for operating expenses, taxes and interest payments is knows as gross profit.
Inventory Financing – A short-term business loan for purchasing products that uses inventory as collateral. A lien is placed on both the current and future inventories in this type of loan.
Liabilities – Financial debts or monetary obligations that arise from doing business and have yet to be settled.
Master Lease Agreement – A lease agreement that allows a company to lease multiple pieces of equipment under one contract.
Merchant Capital – Working capital that is advanced to business owners. However, in order for the lender to collect repayment from the borrower, money is taken from the business’s future sales.
Net Income – A company’s profit after subtracting expenses, taxes, interest and depreciation from the gross profit is the net income.
Revenue – The income that derives from company sales before any costs or expenses are subtracted.
Secured Loans – A lending scenario in which the borrower offers assets to be used as collateral for the amount of money being borrowed.
Unsecured Loans – A business loan considered mostly on a given business’s revenues, but also on the business and business owner’s respective creditworthiness. This loan is both the easiest to qualify for and the fastest to secure.
Working Capital – A measure of how liquid a company is, working capital is calculated by deducting current liabilities from current assets.
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