With a variety of business loans out there, understanding a few key terms can help you find the option that best meets your business’s needs.
A to H
Accounts receivable. Money that a company is owed by its clients, usually in the form of outstanding invoices. This counts as an asset.
Accounts payable. Money that a company owes a supplier, vendor or other source that it purchased goods or services on credit from. This counts as a liability.
Asset. Anything of value that a person or business owns or buys, as well as money they are owed — like accounts receivable.
Bridge financing. A high-interest short-term loan, usually with terms between two weeks and three years, that’s used to cover gaps in longer-term financing. It’s typically used to cover the initial costs of a project or change to a business that hasn’t yet been finalized.
Business assets. Property or equipment that a business owns, including inventory, real estate, securities and accounts receivable.
Daily holdback. When a creditor takes a percentage of a business’s daily sales as repayment for a cash advance.
Cash flow. The amount of money going into a business, minus the amount of money going out. Positive cash flow means that you have enough money to cover your expenses. When you get into negative territory, you might need a working capital loan to keep afloat.
Debt-service coverage ratio (DSCR). Also known as debt coverage ratio, this is a business’s cash flow (usually the net operating income) divided by debt service payments (loan repayments and leases). It’s used by creditors to determine how able a business is to repay a loan — similar to a debt-to-income ratio.
Gross profit. The total amount a business made, minus the cost of producing goods or delivering a service.
I to P
Lien. A form of collateral, this is a legal agreement that allows a creditor to take certain assets if the borrower is unable to repay a loan.
Microloan. A small loan — typically less than $35,000 — that can help cover small expenses when a business is getting off the ground.
Net income. The difference between how much a business makes and how much it costs to run.
Net operating income. The difference between a business’s profits and its expenses, taxes and interest.
Payback period. The estimated amount of time it will take for a business to repay a cash advance — similar to a loan term.
Personal guarantee. A promise to repay a loan with your personal assets if your business is unable to.
Q to Z
Split withholding. When a credit card processor automatically sends a portion of a sale to a creditor and another portion to a business.
Working capital. Money used to cover the cost of a business’s day-to-day operations.