Financial Terms and Definitions
Account Receivables Financing
A type of financial service where a business sells or transfers the title of the accounts receivable to a lending company, which then acts as principal , not as agent. The receivables are sold with or without recourse, which means the lender must bear the risk of collection. For more information on Account Receivables Financing see Best Financial Products According to Biz Profile and Need.
Accrual Basis Accounting
A method of accounting that recognizes revenue and expense at the period when invoices are issued. Liabilities are matched to the revenue for the same period.
The gross income of a business or line item 1 on a tax return.
A formal process of determining the value of an asset. The appraised value is a key determining factor of the loan size in secured financing. With real estate, the estimated value of real property is based on replacement cost, sales of comparable property, or expected future income from income producing property. Business appraisals depend on gross revenue, EBIDTA, industry type, and comparables to similar businesses across different states. Other factors are location ( retail business), quality of clients (IT staffing companies and other businesses having A/R)and revenue distribution across different clients.
A financial statement detailing a company's outstanding invoices organized by client name and expected realization time.
An item of property that has monetary value. Assets appear on a company's balance sheet and inventories of probate estates. There are current assets (which include accounts receivable), fixed assets (basic equipment and structures), and such intangibles as business good will and rights to market a product.
The point at which total costs equal total sales.
The formal purchase of an existing business.
Business Certificate of Deposit
A note, either issued by a bank or reputable corporation, promising a return over a period of time.
Business Checking Account
An account at a banking institution setup specifically for businesses. Usually the account features payroll services for employees and other cash management services geared for the small business owner. This account does not earn any interest income for the business.
Your business credit record is the primary way that companies evaluate whether to do business with you and on what terms. Companies rely on your business creditworthiness to make critical decisions, including whether:
- to have a business transaction with you or not.
- to lend you money
- you are viable as a partner
- to lease the equipment you need to grow your business
- to increase your line of credit
- to help you carry more inventory at competitive prices
- to give you favorable financing rates and terms
- you stack up favorably against other companies competing in your market space
Business Credit Card
A credit card offered by a lending institution for small business owners. Usually the credit card features a cash back and fraud alert facility.
A key intangible asset that represents the portion of the business value that cannot be attributed to other business assets. Some factors that may attribute to the value of goodwill are location of enterprise, going concern value, excess business income, expectation of future economic benefits and quality of clients and revenue distribution across clients.
Total fixed assets used to operate a business (land, equipment, inventory, etc.).
The amount made from the sale of an asset - the sale price minus the initial purchase price. Assets include real estate, businesses, stocks, mutual fund holdings, etc.
Capital Gains Tax
Amount of tax charged on the net gain of an asset sale. Currently, the capital gains tax rate is around 15 percent if the time between purchase and sale is more than one year.
The amount lost from the sale of an asset – the initial purchase price minus the sale price. Assets include real estate, business, stocks, mutual fund holdings, etc.
Cash Basis Accounting
A method of accounting that recognizes revenue when cash is received and expenditure when cash is paid. This does not follow the Generally Accepted Accounting Principles.
The net income from an asset or assets calculated after subtracting all the disbursements and taxes.
Additional money issued to a borrower with a loan to refinance existing debt.
Certificate of Incorporation
A document issued by the state at point of company registration. The certificate is included in the registration kit and shows the date of incorporation and official company location. It is required for opening the business account and securing financing.
Chartered Accountant (CA)
A Chartered Accountant (CA) is one who audits financial statements and business practices, and offers advisory services to his / her clients.
An asset held to honor a loan agreement. Usually, real estate titles are held as collateral for large loans to ensure repayment. If the borrower defaults, the ownership of the asset held as collateral is transferred to the lender as recompensation.
An enterprise that is legally separated from the owners in terms of liability. The corporation has its own credit core and tax identification number.
Credit Card Receivables
The account statement of credit card payments pending to a business for services or products previously sold. Any business which expects credit card payments has receivables. The payments and transactions are handled either by banks or third party payment settlement companies.
Credit Card Vendors
A lending institution or a third party payment processor that handles credit card processing.
See FICO Score.
Cs of Creditworthiness
A business's creditworthiness is ultimately determined by what are known as the '4 C's of Credit' -- character, capacity, capital and conditions -- most of which can be found explicitly or implicitly in a company's credit report.
Character includes factors such as: size, location, number of years in business, business structure, number of employees, history of principals, appetite for sharing information about itself, media coverage, liens, judgments or pending law suits, stock performance, and comments from references.
Capacity assesses the ability of the business to pay its bills, i.e., its cash flow. It also includes the structure of the company's debt whether secured or unsecured'and the existence of an unused lines of credit. Any defaults must also be identified.
Capital assesses whether a company has the financial resources (obtained from financial records) to repay their creditors. In general, this portion of the credit report is the one most closely reviewed by the credit analyst. Heavy weighting is given to such balance sheet items as working capital, net worth and cash flow.
Conditions consider the external factors surrounding the business under consideration - influences such as market fluctuations, industry growth rate, political/ legislative factors, and currency rates.
A credit manager or loan officer will answer these questions by locating and reviewing:
- requests for credit information
- customer supplied information
- bank information
- trade information
These factors are also taken into consideration by other service providers, such as insurance companies to set premiums.More than ever, companies are using automated decisioning, which means they input scores and ratings that summarize the 4 Cs into a financial model to determine the risk of doing business with you.*Definition provided by D&B®
D&B (NYSE:DNB) is the world's leading source of commercial information and insight on businesses, enabling companies to Decide with Confidence for 167 years. D&B's global commercial database contains more than 130 million business records. The database is enhanced by D&B's proprietary DUNS Right Quality Process, which provides our customers with quality business information. This quality information is the foundation of our global solutions that customers rely on to make critical business decisions.
A D&B® D-U-N-S® Number is a unique nine-digit sequence recognized as the universal standard for identifying and keeping track of over 100 million businesses worldwide.
- It enhances the credibility of your business in the marketplace
- It enables potential customers, suppliers and lenders to easily identify and learn about your company
Earnings Before Interest Taxation Depreciation and Amortization (EBITDA) measures profitability. It's important to note that EBITDA can be misleading as a cash flow evaluation tool because it does not take into account cash used to fund working capital or replace old equipment. EBITDA = Revenue - Expenses (excluding interest, tax, depreciation and amortization)
An Enterprise Zone is a specific geographic area targeted for economic revitalization, encouraging economic growth and investment in distressed areas by offering tax advantages and incentives to businesses locating within the zone boundaries.
See Equipment Loan.
Title to the equipment is vested in the Lessor and/or its assigns. In return for periodic rental payments, the Lessee has virtually unrestricted use of the equipment throughout the duration of the contracted period and any renewal periods that extend thereafter. The equipment lease is a non-cancelable contract that extends for a specific period of time, typically one to five years.
Borrowing money from an institution to finance the purchase of equipment. The equipment is used as the loan collateral. See Equipment Leasing and Financing: Why you should never use a line of credit to purchase equipment.
Also known as credit score, Fair Isaac Company (FICO) scoring is a formula for credit risk assessment that is believed to be highly predictive of future payment risk. The borrower's score is derived by weighing credit information at a snapshot in time and assessing "points" for each piece of information. The information is taken from a credit bureau file and scores are based on credit information only. The borrower's score is calculated based on assigned numerical values for certain credit characteristics. The higher the overall score, the less risk there is for the lender. High risk characteristics include bankruptcy, non-bankruptcy, derogatory public record, charge-offs or loans defaults, repossessions, serious delinquency. Other weighted characteristics are number and age of trade lines, presence of derogatory trade line information, current level of indebtedness, types of credit available (revolving vs. installment), amount of time credit has been in use, credit inquiries.
A document issued by the state in which the company was registered. Businesses receive the filing receipt as part of the kit issued by the state at the time of registration of the company. The document records the date of incorporation, name of the registered agent and registered address, and is required for unsecured and secured line of credit against the business.
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board is a federal government administered body that sets the national accounting rules.
A document proving the future health of the enterprise. A financial projection includes estimations for future gross revenue, profits, and expenses (including line items like cost of goods sold, interest, depreciation, salaries of the officers, wage costs, rental, etc.).
Amount of manufactured product on hand that awaits sale to customers. Finished goods inventory represents a current asset in the balance sheet.
First In First Out (FIFO)
An accounting method that values inventory from oldest to newest. The first product inventoried is the first product picked.
The borrower states all his personal income and it supports the debt servicing ratio.
Generally Accepted Accounting Principles
Generally Accepted Accounting Principles. It is a combination of authoritative standards (set by FASB) and that outlines the accepted methods of accounting. This helps investors to value the companies better. For example, Accrual based accounting is accepted in GAAP while cash based accounting is not.
Revenue minus the cost of the goods or services which are directly associated with producing them. This includes costs of raw material, labor/ salaries and marketing costs.
Total revenue generated from the sale of goods or services.
A detailed, itemized list, report, or record of things in one's possession, especially a periodic survey of all goods and materials in stock.
Last In First Out (LIFO)
An accounting method that values inventory from newest to oldest. The first product inventoried is the first product picked.
Legal Name of Business
The name one has for official purposes. For example, the legal name of GM is General Motors, Incorporated.
Any legal responsibility, duty or obligation. The state of one who is bound in law and justice to do something which may be enforced by action. This liability may arise from contracts either express or implied or in consequence of torts committed. Some examples of liabilities include mortgages, UCC liens, accounts payable, settlement charges and/or tax liens.
The right to retain the lawful possession of the property of another until the owner fulfills a legal duty to the person holding the property, such as the payment of lawful charges for work done on the property. A mortgage is a common lien. Liens may arise in three ways: 1. Expressed contract; 2. Implied contract, as from general or particular usage of trade (Property, Inventory, Accounts Receivables) 3. Legal relation between the parties, which may be created in three ways. i. When the law casts an obligation on a party to do a particular act and in return for which, to secure him payment, it gives him such lien; common carriers and inn keepers are among this number; ii. When goods are delivered to a tradesman or any other, to expend his labor upon, he is entitled to detain those goods until he is remunerated for the labor which he so expends; iii. When goods have been saved from the perils of the sea, the salvor may detain them until his claim for salvage is satisfied; but in no other case has the finder of goods a lien.
Limited Liability Company
A cross between a corporation and a partnership. This type of corporation is owned by a limited number of shareholders, which are not personally liable for investments made in the company.
A partnership where the owners are liable for the company's debts and obligations.
Line of Credit
A type of financing in which a bank is obligated to provide an amount of funds for a client during a predefined period of time. A client can either withdraw the credit amount at one time or make number of withdrawals during a (the) period of time. The borrower only makes interest payments on the amount withdrawed. A line of credit can be secure or unsecured.
When assets are sold to pay off debts. This is done normally when companies file bankruptcy.
The abandonment value is generally a cash value, or equivalent, associated with disposal of an asset. This value is important for companies when analyzing the profitability of particular projects or assets and deciding replacement value also.
A percentage of a company's assets that can easily be converted into cash.
Loan to Value (LTV)
The ratio of the outstanding loan to the value of the asset/s against which the lien has been taken. Normally for a stated asset back deal, the financing is done up to 70% of the value of the property while for the full document deal it is 80 to 85%.
Lower Cost or Market Cost
A GAAP principle that states the value of asset should be lower than either the product cost or market value.
Mixed Use Property
A property which has both residential and commercial units.
Modified Accrual Basis Accounting
A method of accounting that recognizes revenue when the invoice is issued. Expenditures are recorded when they are incurred.
A temporary, conditional pledge of property to a creditor as security for performance of an obligation or repayment of a debt.
A property unit which has more than 3 independent units.
A partnership agreement where one partner can bind all partners in an agreement to partnership debts. This is also called unlimited liability.
The difference between the total assets and total liabilities.
Net Operating Loss
When total revenues are less than the total expenses.
A contract that allows the Lessee to use the assets without owning them. The expenses can be claimed as rent.
The ratio of fixed to variable expenses. The higher the ratio, the more leveraged the business.
Operating Performance Ratio
The ratio of profitability to revenue. Also known as gross profit margin and net profit margin, the higher the ratios the more financially stable the business.
The difference between total assets and current liabilities.
Type of business entity in which the owners invest jointly and share the profits and losses in proportion to the invested amount.
An exclusive right granted by the state to an individual or company to use, market or sell a product or a service for a set period of time.
Small amount of cash used for discretionary spending as part of day to day operations.
A solemn binding promise to do, give, or refrain from doing something.
Today's value of a future payment discounted at some rate of interest.
Profit and Loss Statement
An official statement that states a company's total revenues, expenses and net income incurred over a period (monthly, quarterly or yearly).
The legal right of ownership of a company or an asset.
A company that has issued securities that are traded in the open market.
An unprocessed natural product used in manufacture.
The period that a company fully depreciates an asset and recovers the investment.
To provide new financing or new financing for, as by discharging a mortgage with the proceeds from a new mortgage obtained at a lower interest rate.
The market value of an asset after accounting for depreciation.
The portion of net income that is retained and re-invested into a company.
Return on Investment (ROI)
The percentage of income generated from a project over the costs of implementing the project.
A company with 1 to 100 shareholders. The profits and losses are passed through to the individual shareholders.
SBA Backed Lender
A lender certified by Small Business Administration to lenders who don't need to consult the SBA on each loan application.
SBA Backed Loan
A loan guaranteed by SBA administered through a lender. SBA guarantees 75% of the loan amount.
Secured Line of Credit
A line of credit backed by a hard asset which can be real estate and/or the business's accounts receivables, equipment, inventory or credit card receivables. Normally, lenders will loan up to 70 percent to 90 percent of the value of the asset. Typically, these lines are extended as part of a business acquisition, when a business needs more than $250,000 and/or is less than 2 years old. In the cases where real estate is involved, the closing costs can be around 2 percent to 3 percent of the loan amount (includes cost of appraisals, title search as well as any mortgage taxes levied by respective states). General documents required include the last 2 years of business and personal tax returns, certificate of incorporation, filing receipt, tax ID papers and personal financial statements.
A business owned and managed by one person, who is personally liable for all business debts and obligations.
The borrower does not declare all of his income.
Tax Identification Number
A unique nine digit code issued by the IRS after the company has been registered. The number is required to perform transactions in the name of the enterprise such as opening an account, applying for a financing and/or accessing other kinds of services.
A firm provides goods or services to a customer with an agreement to bill them later.
A two-column (namely debit and credit) worksheet that stores balances from each ledger.
Represents a general and comprehensive revision of the state's prior laws applicable to commercial transactions. The Code provides a uniform and easily available set of rules for the conduct of commercial transactions responsive to modern business conditions and needs. In short, the purpose was to simplify, clarify and modernize the law(s) governing commercial transactions; to make uniform the law among the various jurisdictions, and to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties involved. The Uniform Commercial Code Bureau files and maintains records on financial obligations (including IRS liens) incurred by individuals (in business as a sole proprietor), business entities and corporations. This information is important to any business or financial institution contemplating entering into a lien transaction as the secured party (the party providing funds or financing collateral). Knowing the current financial status of the debtor party (the potential borrower) before extending credit is crucial, and it is the number of active, existing liens already in effect for that particular debtor party that most interests the potential secured party. As a prerequisite for entering into a lien relationship, many secured parties first research a debtor name to ascertain their credit worthiness and then demand a lien filing in regard to the actual, current transaction. Secured parties routinely include banks, commercial businesses (appliances, autos, boats), and sole proprietors.
Unsecured Line of Credit
A lending institution lends against the goodwill of the business, the business and personal credit score as well as overall credit worthiness of the business. This includes filing of UCC. The unsecured line of credit is normally provided to businesses more than 2 years old and generally to businesses which have some sort of inventory and/ or accounts receivables.
Work in progress
Work in progress indicates any good that is not considered to be a final product, but must still be accounted for because funds have been invested toward its production.
The assets of a business that can be applied to its operation.
Working Capital Ratio
The difference between current assets and current liabilities.