Essential Business Key terms

1. What is "Debt Consolidation"? Ans: If your small business has several loans with various payments, you might want to consider a business debt consolidation loan. It is a process that lets you combine multiple loans into a single loan. The advantages are possibly reducing the interest rates on the borrowed funds as well as lowering the total amount you repay each month. Businesses use this tool to help improve cash flow. 2. What is "Balloon Loan"? Ans: A loan that is structured so that the small business owner makes regular repayments on a predetermined schedule and one much larger payment, or balloon payment, at the end. These can be attractive to new businesses because the payments are smaller at the outset when the business is more likely to be facing strict financial constraints. However, be sure that your business will be capable of making that last balloon payment since it will be a large one. 3. What is "Bootstrapping"? Ans: Using your own money to finance the start-up and growth of your small business. Think of it as being your own investor. Once the business is up and running successfully, the business finance term and definition bootstrapping refers to the use of profits earned to reinvest in the business. 4. What is "Collateral"? Ans: Any asset that you pledge as security for a loan instrument is called collateral. Lenders often require collateral as a way to make sure they won’t lose money if your business defaults on the loan. When you pledge an asset for collateral, it becomes subject to seizure by the lender if you fail to meet the requirements of the loan documents. 5. What is "Debt Service Coverage Ratio"? Ans: The business finance term and definition debt service coverage ratio (DSCR) is the ratio of cash your small business has available for paying or servicing its debt. Debt payments include making principal and interest payments on the loan you are requesting. Generally speaking, if your DSCR is above 1, your business has enough income to meet its debt requirements. 6. What is "Debt Financing"? Ans: When you borrow money from a lender and agree to repay the principal with interest in regular payments for a specified period of time, you’re using debt financing. Traditionally, it has been the most common form of funding for small businesses. Debt financing can include borrowing from banks, business credit cards, lines of credit, personal loans, merchant cash advances, and invoice financing. This method creates a debt that must be repaid but lets you maintain sole control of your business. 7. What is "Equity Financing"? Ans: The act of using investor funds in exchange for a piece or ”share” of your business is another way to raise capital. These funds can come from friends, family, angel investors, or venture capitalists. Before deciding to use equity financing to raise the cash necessary for your business, decide how much control you are willing to share when it comes to decision-making and philosophy. Some investors will also want voting rights. 8. What is "FICO Score"? Ans: A FICO score is another type of credit score used by potential lenders for evaluating the wisdom of entering a contract with you and your business. FICO scores comprise a substantial part of the credit report that lenders use to assess credit risk. It was created by the Fair Isaac Corporation, hence the name FICO. 9. What is "Invoice Factoring or Financing"? Ans: If your business has a significant amount of open invoices outstanding, you may contact a factoring company and have them purchase the invoices at a discount. By raising capital this way, there is no debt, and the factoring company assumes the financial responsibility for collecting the invoice debts. 10. What is "Lien"? Ans:This business finance term and definition is a creditor’s legal claim to the collateral pledged as security for a loan is called a lien. 11. What is "Line of Credit"? Ans: A lender may offer you an unsecured amount of funds available for your business to draw on when capital is needed. This line of credit is considered a short-term funding option, with a maximum amount available. This pre-approved pool of money is appealing because it gives you quick access to the cash. 12. What is "Loan-to-Value"? Ans: The LTV comparison is a ratio of the fair-market value of an asset compared to the amount of the loan that will fund it. This is another important number for lenders who need to know if the value of the asset will cover the loan repayment if your business defaults and fails to pay. 13. What is "Merchant Cash Advance"? Ans: A merchant may offer a funding method through a loan based on the business’s monthly sales volume. Repayment is made with a percentage of the daily or weekly sales. These tend to be short-term loans and are one of the costliest ways to fund your small business. 14. What is "Microloan"? Ans: Microloans are loans made through nonprofit, community-based organizations and they are most often for amounts under $50,000. 15. What is "Personal Guarantee"? Ans: If you’re seeking financing for a very new business and don’t have a high value asset to offer as collateral, you may be asked by the lender to sign a statement of personal guarantee. In effect, this statement affirms that you as an individual will act as guarantor for the business’s debt, making you personally liable for the balance of the loan even in the event that your business fails. 16. What is "Principal"? Ans: Any loan instrument is made of three parts—the principal, the interest, and the fees. The principal is a business finance key term and is the original amount that is borrowed or the outstanding balance to be repaid less interest. It is used to calculate the total interest and fees charged. 17. What is "Revolving Line of Credit"? Ans: This business finance term and definition is a funding option is similar to a standard line of credit. However, the agreement is to lend a specific amount of money, and once that sum is repaid, it can be borrowed again. 18. What is "Secured Loan"? Ans: Many lenders will require some form of security when loaning money. When this happens, this business finance term and definition is a secured loan. The asset being used as collateral for the loan is said to be “securing” the loan. In the event that your small business defaults on the loan, the lender can then claim the collateral and use its fair-market value to offset the unpaid balance. 19. What is "Term Loan"? Ans: These are debt financing tools used to raise needed funds for your small business. Term loans provide the business with a lump sum of cash up front in exchange for a promise to repay the principal and interest at specified intervals over a set period of time. These are typically longer term, one-time loans for start-up expenses or costs for established business expansion. 20. What is "Unsecured Loans"? Ans: Loans that are not backed by collateral are called unsecured loans. These types of loans represent a higher risk for the lender, so you can expect to pay higher interest rates and have shorter repayment time frames. Credit cards are an excellent example of unsecured loans that are a good option for small business funding when combined with other financing options. 21. What is "Articles of Incorporation"? Ans: This is legal documentation of the business’s creation, including name, type of business, and type of business structure or incorporation. This paperwork is one of the first tasks you will complete when you officially start your business. Once submitted, your articles of incorporation are kept on file with the appropriate governmental agencies. 22. What is "Employer Identification Number (EIN) Certificate"? Ans: In order to be more easily identified by the Internal Revenue Service, every business entity is assigned a unique number called an EIN. When you start your small business, an EIN will be assigned and mailed to the business address. This number never changes, and you will be asked to furnish it for many reasons. 23. What is "Tax Lien"? Ans: If your business fails to pay taxes owed to the designated government entity, namely the IRS, you may find your assets seized by the claim of a tax lien. The government can not only seize your assets for liquidation to resolve the tax debt, but they can also charge you penalties on the amount you owe.