When being involved in a startup or a young small company, you’re essentially throwing yourself into the community too. Whether it’s building relationships with other young companies or browsing growth hacking forums, you want to be aware of the terminology that surrounds running a business. This is important especially to financing terms.
Financial terms are notoriously difficult and plentiful, yet this is only one aspect. There’s also marketing terms, leadership terms and general business phrases. This article will tick off the top 20 terms that every entrepreneur should know surrounding financing specifically. It is also worth exploring the analysis of bank offering vs lender more generally, as they are two completely separate forms of financing.
1. Business loan
Loans are one way of financing your small business. Business loans are the lending of money for specific business purposes. This creates debt for the borrower, who will then have to repay the principal plus the interest. The principle is the amount you borrow, whilst the interest is the price of borrowing (i.e. the “lost” money).
The collateral you may hear when seeking a business loan. Collateral is essentially an asset that the lender uses as security for a loan. In other words, for some loans you will be asked for security, meaning that you have to hang an asset of yours on the line that they can repossess from you, should you fail to repay the loan.
Bootstrapping is another way of financing your small business. If you’re not looking to gain funding or external investments, and instead want to build the business solely from your own cash, you are in bootstrapping. This means that the business grows on its own, from little other support.
4. Angel investor
An angel investor, or a business angel, is essentially a wealthy person who invests their own money into startups. You will give them some ownership in the company (equity), in exchange for some money. This is often a tactic used in the early growing stages.
Crowdfunding is essentially gaining resources from a large group of people through an online project. For example, this would be taking to social media to ask for small amounts each in order to get their project off the ground.
6. Working capital
Working capital (often referred to as “NWC”) is essentially the difference between the company’s current assets and its current liabilities. Current assets are liquid assets such as cash and accounts receivables, whilst current liabilities are somewhat immediate payments due (i.e. accounts payable and debts that have less than a year of maturity)
7. Cash advance
A cash advance is a form of funding where you bring forward your future credit/debit card sales. Thus, you receive the cash instantly but have to repay a percentage of card sales as repayment.
8. Repayment schedule
A repayment schedule refers to the agreed details of a loan, such as the monthly payments, interest, and due dates.
APR stands for Annual Percentage Rate. This refers to the cost of the loan expressed as a yearly rate. This takes into account the total interest and fees.
Scalability alludes to the replication potential of a process. For example, if you have a refined and standardized process for setting up a bakery store, this is scalable, because you can replicate this process around the country successfully. This is important because it’s often at the core of borrowing money for expansion purposes (the bank wants to gauge your future success).
11. Balloon Payment
A balloon payment is an unpaid balance that is due at the end of a loan’s term. This is the amount due at the end of the term in order to pay the balance in full.
12. Cash Flow
Cash flow is the amount of money that is going in and out of the business, which is used to pay day-to-day expenses. This is important because it shows how well you can meet short-term liabilities i.e. the very financing that you may ask for.
13. Cents on the dollar
This is a phrase that refers to the amount of interest that is paid, per each dollar that is borrowed. This excludes fees and is a form of informal phrasing to some people.
14. Interest-only payments
Loan/mortgage repayments of course include interest. However, sometimes you will be given the option to pay back only the interest and none of the principle, meaning the debt remains the same size but your cash flow is improved.
An overdraft is the withdrawal of money that causes a temporary deficit in the account. Sometimes you will be charged a fee for this.
16. Total cost of capital
The total cost of capital is the amount of interest and other unavoidable expenses for a loan. This is a nominal amount instead of a %.
17. Unsecured loan
An unsecured loan is when the borrower is not required to put forward collateral to secure the loan, meaning that the lender is more exposed (these often cost more for the borrower).
A holdback is the % of daily credit/debit card receipts that are withheld each day by a merchant cash advance provider. This holdback is a kind of security regarding paying back the provider.
Defaulting is to fail to meet the agreed repayment schedule terms. Upon a default (which can occur after only one missed payment), a provider may seek to repossess your collateral, if the loan was secured.
20. Line of credit
A line of credit is a revolving/extended loan with a cap. This means that the credit is there to use, and you only pay interest on the money that is borrowed (which may be less than the available amount).