A

Accounts Payable: Refers to the money a business owes to its suppliers or creditors for goods and services purchased on credit. It is recorded as a liability on the company's balance sheet, representing an obligation to pay off short-term debts. This account typically includes invoices that a company has received but has not yet paid. Effective management of accounts payable is crucial for maintaining cash flow and ensuring financial stability within a business.

Accounts Receivable: Refers to the outstanding invoices or amounts owed to a business by its customers for goods or services delivered but not yet paid for. This represents a line of credit extended by the business, where customers have agreed to pay at a later date. Accounts receivable is considered an asset on the balance sheet, as it reflects future cash inflows that the business expects to collect. Managing accounts receivable effectively is crucial for maintaining cash flow and financial stability within a company.

Accruals: Accounting entries that recognize revenues and expenses incurred but not recorded in financial statements. This is key to the accrual basis of accounting, which matches income with expenses, regardless of cash transactions. For example, wages owed for work completed but paid later are recorded as expenses in the period the work was done. Likewise, revenue for services rendered but billed later is recognized when the service is provided. This approach offers a clearer view of a business's financial performance and position.

Amortization: Paying off debt through regular payments over time, covering principal and interest. In accounting, it also means allocating the cost of an intangible asset over its useful life, helping businesses manage expenses and reflect a more accurate financial position. Amortization schedules detail each payment, indicating amounts for principal and interest.

Appreciation: Financial appreciation is the recognition and increase in the value of financial assets or investments over time. It is essential in investment contexts, indicating growth and returns from assets like stocks and real estate. This concept highlights effective investment strategies and offers insights into market conditions and economic factors. Recognizing financial appreciation helps investors and businesses make informed decisions, enhance portfolios, and improve financial health. In summary, it is crucial for assessing financial success and supporting long-term strategies and organizational growth.

B

Balloon Payment: A large final payment due at the end of a loan, after smaller periodic payments that do not fully cover the principal or interest. This remaining balance is paid in one lump sum. Balloon payments are common in loans like mortgages or auto loans, allowing for lower initial monthly payments but requiring a substantial payout at the end.

Blanket Lien: A legal claim a lender holds over all a borrower’s assets, often used in secured lending where multiple assets like inventory or real estate are pledged as collateral. If the borrower defaults, the lender can seize any of these assets. Blanket liens offer lenders broader protection than specific liens, but they can limit borrowers' ability to secure additional financing, as existing assets are already encumbered.

Business Acquisition Loan: Financing for purchasing an existing business. It provides capital for the purchase price, legal fees, due diligence, and working capital. These loans come from banks, credit unions, and alternative lenders, typically requiring a solid business plan, good credit history, and sometimes collateral. Terms vary significantly, including interest rates and repayment periods.

Business Credit Report: Details a company's credit history and financial health, including its credit score, payment history, debts, and any collections. Lenders, suppliers, and partners use this report to evaluate creditworthiness before granting credit or contracts. Generated by credit agencies from various sources, it is crucial for securing financing and favorable trade terms.

Business Credit Score: A numerical representation of a company's creditworthiness, summarizing its credit history and financial behavior. This score helps lenders and suppliers assess the risk of extending credit or doing business with a company. It is influenced by factors such as payment history, the amount of debt, length of credit history, types of credit used, and any public records, such as bankruptcies. A higher business credit score indicates that the company is more likely to meet its financial obligations, while a lower score may signal potential risks to creditors.

C

Capital: Financial resources like cash, investments, equipment, and property used for business operations and growth. It also encompasses human capital (workforce skills) and social capital (networks and relationships). Access to capital is essential for small businesses to invest in inventory, hire employees, and expand market reach.

Cash Flow: The movement of money in and out of a business over time, reflecting its financial health and ability to meet obligations like bills and salaries. It is divided into three types:

1. Operating Cash Flow: Cash from core business operations, including sales revenue and payments to suppliers and employees.

2. Investing Cash Flow: Cash used for acquiring or selling physical assets like property and equipment.

3. Financing Cash Flow: Cash raised from loans or stock issuance and cash returned to shareholders as dividends.

Positive cash flow indicates a business can fund expenses and investments, while negative cash flow may suggest financial difficulties. Effective cash flow management is crucial for sustaining operations and long-term growth.

Collateral: Refers to an asset that a borrower offers to a lender to secure a loan. In the event that the borrower fails to repay the loan, the lender has the legal right to take possession of the collateral to recover the outstanding amount. Common forms of collateral include real estate, vehicles, and financial instruments. By providing collateral, borrowers may be able to access loans with more favorable terms, such as lower interest rates or larger amounts, as it reduces the lender's risk.

Convertible Debt: A financing instrument that blends debt and equity. It is a loan convertible into a set number of shares of the borrowing company's stock at the investor's option, usually within a specific timeframe or during events like a financing round or acquisition. This allows companies to raise capital while postponing ownership dilution for existing shareholders until later when valuations may rise. Convertible debt often carries an interest rate, giving investors a return before conversion.

D

Debt Service Coverage Ratio: (DCR) measures a business's ability to generate income to cover debt obligations. It is calculated by dividing net operating income (NOI) by total debt service (TDS): A DCR below 1 indicates insufficient income to meet debt payments, while above 1 shows adequate income. Lenders use this ratio to assess loan risk and the company's financial health.

Depreciation: The accounting method used to allocate the cost of a tangible asset over its useful life. It represents the reduction in value of an asset as it ages, wears out, or becomes obsolete. Businesses use depreciation to reflect the decreasing value of their assets on financial statements, ensuring that profits are not overstated and that expenses are accurately matched with revenues generated during a specific period. There are several methods for calculating depreciation, including straight-line, declining balance, and units of production, each of which can impact a company's financial reporting differently.

E

Employee Identification Number (EIN): An unique identifier assigned by the IRS for tax reporting and identification. It is used by employers for payroll taxes, employee benefits, and business accounts. An EIN is often necessary for opening bank accounts and obtaining business licenses, ensuring compliance with federal regulations and proper tax management for small businesses.

Equity: The ownership value in an asset or business after liabilities are settled. It reflects ownership interest in finance, real estate, and business. In business, equity shows shareholders' stake as the difference between total assets and liabilities, important for assessing financial health and investment opportunities. Additionally, equity involves fairness and justice, highlighting equal access and opportunity in social and economic contexts.

F

Fixed Asset: A long-term tangible piece of property or equipment that a business owns and uses in its operations to generate income. Fixed assets are not intended for sale in the regular course of business and typically include items such as buildings, machinery, vehicles, and furniture. These assets are recorded on the balance sheet at their historical cost and are subject to depreciation over time, reflecting their gradual loss of value due to use and wear.

G

Guarantor: Someone who takes responsibility for a debt if the borrower defaults, providing additional security to lenders. Guarantors are often required when borrowers lack adequate credit history, income, or assets. By backing the loan, a guarantor increases the chances of approval and may help secure better terms.

H

Hard Pull: Or hard inquiry, occurs when a lender checks your credit report during a credit application. This can impact your credit score as it indicates you're seeking new credit. Hard pulls usually happen with loans, credit cards, or mortgages and can stay on your report for up to two years. Limiting hard pulls is crucial, as multiple inquiries may signal financial distress to lenders and affect your credit eligibility.

Holdback: A financial arrangement where part of a payment is withheld, typically to mitigate risks or ensure compliance with contract terms. In business, holdbacks protect buyers from defects in goods or services and ensure sellers meet specific conditions before full payment. They are commonly outlined in contracts across industries like construction, real estate, and finance.

I

Income Statement: An income statement, or profit and loss statement, summarizes a company's revenues, expenses, and profits or losses over a specific period. It reveals financial performance, showing revenues and expenses to determine net income or loss. This tool is essential for stakeholders like investors and management to evaluate profitability and financial health.

Intangible Asset: A tangible asset is a physical item of value that can be touched and measured, including machinery, buildings, equipment, vehicles, and inventory. These assets are vital for businesses, as they are used in operations and have quantifiable intrinsic value on a balance sheet. Unlike intangible assets, tangible assets have a physical presence and contribute to revenue generation.

L

Lien: A legal claim a lender has on a borrower's property until the debt is paid. It guarantees loan repayment; if the borrower defaults, the creditor can seize the property. Liens can be voluntary (e.g., mortgage) or involuntary (e.g., tax lien).

Loan Stacking: Refers to the practice of borrowing multiple loans from different lenders simultaneously or within a short period of time. This approach can lead to a situation where a borrower accumulates a total debt that exceeds their ability to repay. Loan stacking is often seen in contexts where individuals or businesses seek quick access to funds, potentially leading to higher interest rates and increased financial risk. Lenders may have policies that prevent stacking to mitigate their risk, and borrowers should be cautious, as it can affect their credit score and overall financial stability.

Loan-to-Value Ratio: The (LTV) ratio measures the loan amount relative to the asset's value, calculated by dividing the loan by the appraised value, typically expressed as a percentage. For instance, if a $200,000 property is purchased with a $160,000 loan, the LTV ratio is 80% (LTV = ($160,000 / $200,000) x 100). LTV ratios influence lending decisions, as higher ratios suggest increased risk, possibly resulting in higher interest rates or private mortgage insurance requirements.

M

Maturity: Refers to the period until a loan’s principal must be fully repaid. It marks the loan agreement's end date, requiring the borrower to settle outstanding balances, including interest. Loan maturities vary widely, from a few months for short-term loans to several years for long-term loans. Understanding maturity is essential for borrowers, as it affects repayment planning and financial strategy.

N

Net Income: Often referred to as net profit or net earnings, is the amount of money a business retains after all expenses, costs, taxes, and other deductions have been subtracted from total revenue. It is a key indicator of a company's financial performance and profitability. Net income can be found on a company's income statement and is used by stakeholders to assess the health of the business and to make informed investment or operational decisions. In personal finance, net income represents an individual's earnings after all deductions, such as taxes and retirement contributions, have been accounted for, providing a clearer picture of available disposable income.

P

Personal Guarantee: A personal guarantee is a legal commitment by an individual, usually a business owner, to be personally responsible for a business's debts. If the business fails to meet its financial obligations, the individual can be held liable. Lenders often require personal guarantees to secure loans, providing assurance they can recover funds if the business defaults.

Prime Rate: The prime rate is the interest rate banks charge their most creditworthy customers, often large corporations. It acts as a benchmark for loans, including those for small businesses. Influenced by the Federal Reserve's policy, it generally follows the federal funds rate. When the federal funds rate increases, the prime rate rises, making borrowing costlier; when it decreases, the prime rate falls, leading to lower borrowing costs.

Principal: Refers to the original sum of money borrowed from a lender, which does not include any interest or fees associated with the loan. It is the amount that a borrower must repay over the life of the loan, typically in addition to interest payments. Understanding the loan principal is crucial for borrowers, as it affects the overall cost of the loan and the calculations for monthly payment amounts. In repayment schedules, the principal gradually decreases as payments are made, while the interest is calculated on the remaining balance.

Profit and Loss Statement: P&L summarizes revenues, costs, and expenses over a specific period, typically a fiscal quarter or year. It shows a company's financial performance by detailing earnings (revenues) and spending (expenses), leading to either a profit or loss.

Key components include:

• Revenues: Income from operations, like sales and services.

• Cost of Goods Sold (COGS): Direct costs related to producing goods, such as materials and labor.

• Gross Profit: Revenue minus COGS, indicating profit before operating expenses.

• Operating Expenses: Costs not directly linked to production, including rent, utilities, salaries, and marketing.

• Net Profit or Loss: Final figure calculated by subtracting total expenses (operating expenses, interest, taxes) from gross profit. A positive number indicates profit; a negative one indicates loss.

The P&L statement is essential for small business owners to assess financial health, make informed decisions, and plan for growth.

T

Total Cost of Capital (TCC): The overall expense a business incurs to finance its operations through debt and equity. It includes costs like interest on borrowed funds and dividends to investors. Typically expressed as a percentage, it helps evaluate investments, assess financial performance, and determine the minimum return needed to satisfy investors. A lower total cost of capital indicates a better financial position for a business.

U

UCC Filing: Refers to a legal document that a lender files to publicly declare their interest in a debtor’s assets. UCC stands for Uniform Commercial Code, which is a set of laws governing commercial transactions in the United States. The UCC filing serves as a notice to other creditors that the lender has a security interest in the collateral specified in the filing. It is typically used in secured transactions, where a borrower uses personal property as collateral to secure a loan. The UCC filing is an important tool for lenders to protect their interests and establish priority in claims against the debtor’s assets.