Glossary of Small Business Lending Terms
Borrowing money is one of the most common sources of funding for a small business, but the language can be confusing.
We’ve put together a list of terms you might encounter when working with a small business lender.
Our list is by no means all-inclusive – if there’s a term you think should be included, please share in the comments below.
5 Cs of credit – The 5 Cs of credit – character, collateral, capital, conditions, and capacity – is a framework some lenders use to evaluate borrowers.
7(a) Loan Program – The SBA’s most common loan program, includes financial help for businesses with special requirements. Learn more about eligibility, use of proceeds, repayment terms and more via the SBA here.
Accounts Payable – Money owed by a company to its creditors.
Accounts Payable Aging Report – Detailed year-to-date report regarding the obligations due to suppliers.
Accounts Receivable – Trade accounts of businesses representing moneys due for goods sold or services rendered evidenced by notes, statements, invoices or other written evidence of a present obligation.
ACH (Automatic Clearing House) – This term is used when a debit has been deducted from your account automatically after the account number and routing number has been provided to your payee.
Appraised Value – The value placed on an item, product or business by an appraiser.
APR – The annual percentage rate (APR) is the amount of interest on your total loan amount that you’ll pay annually (averaged over the full term of the loan).
Assets – The entire property of a person, association, corporation, or estate applicable or subject to the payment of debts.
Assumptions – The act of assuming/undertaking another’s debts or obligations.
Bad Debts – Funds owed to a business determined to be uncollectible.
Balance Sheet – Financial statement listing a company’s assets, liabilities, and equity on a specific date.
Bankruptcy – A condition in which a business cannot meet its debt obligations and petitions a federal district court for either reorganization of its debts or liquidation of its assets as prescribed by the National Bankruptcy Act. A bankruptcy may be voluntary or involuntary.
Business Credit Report – A profile of your business that contains vital information that lenders examine when evaluating a business loan application. Dun & Bradstreet (D&B) is the most popular company that issues business credit reports. Learn more about business credit scores on the SmartBiz blog.
Business Credit Score – A business credit score (also known as the Commercial Credit Score) is similar to a personal credit score, or FICO score and measures a company’s creditworthiness. Business credit scores generally range from 0 to 100. Read 5 reasons to keep Personal Credit Scores and Business Credit Scores Separate on the SmartBiz blog.
Business Plan – An essential roadmap for business success. This living document generally projects 3-5 years ahead and outlines the route a company intends to take to grow revenues. Learn how to build a business plan from the SBA.
Capital – Assets less liabilities, representing the ownership interest in a business.
Cash advances – A service provided whereby a borrower provides a check payable to the lender for the amount that he or she wants to borrow, in addition to a fee that must be paid for borrowing.
Cash flow – Typically calculated as cash receipts less cash payments over a certain period of time. There is often a lag between when you have to pay your suppliers and employees and when you actually collect cash from customers.
Collateral – Something pledged as security for repayment of a loan, to be forfeited in the event of a default.
Community bank – Generally used to describe banks with less than $1 billion of assets. Community bankers often describe their banking as relationship driven, instead of transaction based.
CPA – Certified public accountant. CPAs provide a wide array of services, including auditing financial statements, financial analysis and planning, tax preparation, etc.
Credit Score – Also known as a FICO score, credit scores are a 3-digit number that summarizes your creditworthiness, ranging from 300 (the worst) to 850 (best). Read 5 reasons to keep Personal Credit Scores and Business Credit Scores Separate on the SmartBiz blog.
Debt Service – The amount of the required periodic payments of principal and interest on a loan.
DUNS Number – The Data Universal Numbering System is abbreviated as DUNS or D-U-N-S. It’s a proprietary system developed and regulated by Dun & Bradstreet (D&B) that assigns a unique numeric identifier to a single business entity. Learn why a small business needs a DUNS number on the SmartBiz blog.
FICO – Also known as a credit score, FICO is a software company based in California and founded 1956. Its FICO score, a measure of consumer credit risk, has become a fixture of consumer lending in the United States. Read more about understanding your FICO score on the SmartBiz Blog.
Insolvency – The inability of a borrower to meet financial obligations as they mature, or having insufficient assets to pay legal debts.
Liquid Assets – Cash, checks and easily-convertible securities available to meet immediate and emergency needs.
Loan Constant – A way to determine the true cost of borrowing, the loan constant is an interest factor used to calculate the debt service of a loan. The loan constant, when multiplied by the original loan principal, gives the dollar amount of the periodic payment.
Maturity – The date on which a loan becomes due.
Microlender – Lenders giving small loan amounts – usually less than $50,000.
Net Worth – Property owned (assets), minus debts and obligations owed (liabilities), is the owner’s equity (net worth).
Partnership – A legal relationship existing between two or more persons contractually associated as joint principals in a business.
Prime Rate – Interest rate that is charged to business borrowers having the highest credit ratings, for short-term borrowing. Published daily in the Wall Street Journal, the Prime Rate is the basis for rates to other lenders.
Proprietorship – A common legal form of business ownership. Approximately 85 percent of all small businesses are proprietorships.
Solvency – The financial ability to continue business.
SMB – Small and Medium Business.
Working capital – Capital used in a company’s daily operations, defined as current assets less current liabilities.
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