Finding financing: terms and definitions

When you approach a potential financier to provide a loan for starting or expanding your business, it's best to be aware of some of the terminology that may be used and what they mean.

  • Accounts Receivable Financing – A loan gained by borrowing against receivables (debtors). Loans are paid as receivables are collected.
  • Angel investor – an individual who invests his or her own money in an entrepreneurial company.
  • Annual Fee – The amount charged by the lender each year to cover the administrative costs of the loan.
  • Bridge Financing – A limited amount of equity or short-term debt financing used to "bridge" a company to the next round of financing.
  • Business Credit Card – An amount of money that a business can borrow against, when it needs capital, using a card accesses the money.
  • Commercial Property Loans – Similar to a bond on your house, but the security used is business property. Interest rates are usually fixed, the length of the loan can vary and payments are due monthly.
  • Commercial Term Loans – Loans made to businesses that can be either secured or unsecured. These are usually made to mid-size and large businesses.
  • Credit Rating – A predictor of your ability to pay back a loan. The credit rating is a result of credit scoring (see below).
  • Credit Report – Financial history supplied by a credit information company, which contains credit information on a business or an individual, including payment history of bank cards, accounts, mortgages, student loans, etc.
  • Credit Scoring – The evaluation system used by lending institutions to determine the credit risk of a business or consumer. When evaluating businesses, it generally considers factors such as credit payment history, new credit sought by owner of business, and financial strength and longevity of business.
  • Debt Financing – A loan with pre-agreed terms, including a repayment schedule and interest rate.
  • Due Diligence – the process of in-depth analysis of a business's processes, where an investor conducts research before it makes a final decision about going forward.
  • Equipment Leases – Leases allowing companies to purchase new equipment.
  • Fixed Interest Rate – An interest rate that is the same throughout the life of a loan.
  • Interest Rate – The amount charged by a lender for the money borrowed. It can be fixed or variable.
  • Inventory Financing – Money borrowed on the basis of finished inventory. The loan is paid as inventory is sold.
  • Loan Term – The length of time the borrower has to repay debt.
  • Long Term Debt – Financing used to purchase or improve assets such as plant, facilities, large equipment and real estate.
  • Maturity – A loan's maturity is the life of the loan; that is, how long you have to repay the loan. It usually applies to term loans and not lines of credit.
  • Multi-Lender Environment – Numerous lending institution sharing the same site and information to provide instant financing to small businesses.
  • NDA (Non-disclosure agreement) – An agreement issued by entrepreneurs to potential investors to protect the confidentiality of their ideas when disclosing those ideas to third parties.
  • Overdraft – An amount of money, which a business can borrow against when it needs capital. Often accessed by check, ATM or business card.
  • Personal Guarantee – A guarantee that the primary owner will assume personal responsibility for repaying the loan, should the company not repay the loan.
  • Prime Rate – The rate a lender charges its best customers. The rate is calculated differently by each lender.
  • Revolving Credit – It is the same thing as a line of credit: an amount of money, which a business can borrow against at times it needs capital; often accessed by check, ATM or business card.
  • Secured Loan – A loan secured by specific security. The creditor may foreclose and seize the specific property that is used as security to satisfy an unpaid secure loan.
  • Short Term Debt – Financing used to secure cash for accounts payable and stock.
  • Term Loan – A loan for a specific amount of money. It has either a fixed or variable interest rate, matures in a prescribed number years and has a set repayment schedule.
  • Unsecured Loan – A loan granted upon the good credit of the borrower, with no security given.
  • Variable Interest Rate – An interest rate that changes during the life of a loan.
  • Venture Capital Financing – an investment in a start-up business that is perceived to have excellent growth prospects, but does not have access to external capital.
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