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Accounts payable
Amount owing to creditors for goods and services on an open account.
Accounts receivable
Amount due from customers for merchandise or services purchased on an open account.
Asset
Anything owned by a business or individual that has commercial or exchange value.
Balance Sheet
Financial statement that presents a "snapshot" of what the business owns, what it owes, and what equity it has on a given date.
Capital
See Equity.
Cash flow
Incoming cash to the business less the outgoing cash during a given period. Also used to refer to the figure derived from net income plus noncash items charged off in the accrual accounting process.
Collateral
Assets pledged to secure a loan.
Collection period ratio
Indicates how quickly your customers pay you. Average accounts receivable divided by net sales, multiplied by 365.
Community Reinvestment Act (CRA)
Under provisions of the Community Reinvestment Act of 1977, banks and thrift institutions seek opportunities to help meet the credit needs of their local communities, including low -- and moderate -- income neighborhoods, consistent with safe and sound operation of the institutions.
Compensating balance
Money a bank requires a company to leave in a deposit account as part of a loan agreement.
Corporate Visa Expense Cards
Corporate Visa Expense cards are held under the name of the business for use by employees. A company should ensure that all authorized cardholders have a clean credit history. Typically, established companies have unsecured Visa cards where the assets of the company and personal net worth of the owners are pledged as security. Start up companies and companies with minimal assets should expect to secure the Visa cards through hard security such as cash.
Corporation
Form of business ownership that is a legal entity on its own and puts stockholders and the board of directors in control. Owners have limited liability for the corporation's actions. A corporation has unlimited life and in most cases is taxed as an entity on its own.
Cost of goods sold
Figure representing the cost of buying raw materials and producing finished goods.
Current assets
Cash or other assets you expect to use in the operation of the firm within one year.
Current liabilities
Debts you expect to pay within one year.
Current ratio
Shows the firm's ability to pay its current obligations from current assets. Current assets divided by current liabilities.
Days purchases in accounts payable ratio
Indicates how quickly you pay your suppliers for inventory purchases. Average accounts payable divided by the cost of goods sold plus change in inventory, multiplied by 365.
Days to sell inventory ratio
Indicates the firm's efficiency at matching purchases to expected sales. Average inventory divided by the cost of goods sold, multiplied by 365.
Debt ratio
Indicates the firm's debt level, or leverage. Total liabilities divided by total liabilities plus capital.
Depreciation
Amortization of the cost of a fixed asset, such as plant and equipment, over several years, or the "depreciable life."
Dividend
Distribution of earnings to shareholders.
Equal Credit Opportunity Act (Federal Reserve Regulation B)
Prohibits lenders from denying your application on the basis of race, color, religion, national origin, sex, marital status, or age, or from discouraging you from applying, or giving you less favorable terms than any other applicant, on such a basis. Regulation B also contains specific rules governing credit transactions.
Equity
The ownership interest in a business remaining after its liabilities are deducted. Also known as common stock plus retained earnings, or capital.
Extraordinary items
Unusual or nonrecurring event that must be explained to shareholders or investors, such as a manufacturer's sale of a building.
Finance company
Competitors of commercial banks in providing credit to households and firms. Unlike banks, they do not accept deposits.
Financial projections
Estimates of the future financial performance of a firm.
Financial statements
Written record of the financial status of an individual or organization. Commonly include profit and loss, or income, statement; the balance sheet, which includes a statement of the company's retained earnings; and the cash flow statement.
Fixed assets
Long-term assets such as buildings, equipment, or property that are not expected to be converted to cash in the near term.
Gross profit
Indicates the revenues of the firm before consideration of its operating expenses. Net sales less cost of goods sold.
Gross profit margin
Measures a firm's profitability. Gross profits divided by net sales.
Gross income
Net sales less cost of goods sold. Installment loan: Loan type that is paid in periodic payments, such as an automobile loan.
Inventory
Value of a firm's raw materials, work in process, supplies used in operations, and finished goods.
Investor
An individual who takes an ownership position in a company, thus assuming risk of loss in exchange for anticipated returns.
Lease
The requirements for a lease are similar to a term loan as the risks to a financial institution as identical. There can be tax benefits applied to leasing. Leased goods are generally owned by the financial institution or a 3rd party. The amortization period should closely match the useful life of the asset purchased (a lease for computers should have an amortization period of not more than 3 years). The value placed on an asset varies depending on resale value and the type of asset leased.
Leverage
Measures the firm's use of borrowed funds versus those funds provided by the shareholders or owners (equity).
Line of Credit
Although not a contract, a bank's promise to lend to a specific borrower up to a pre-agreed amount during a specific time frame. Usually reviewed annually and subject to cancellation without notice.
Liquid assets
Those assets that can be readily turned into cash.
Liquidity
Gauges firm's ability to quickly turn assets into cash.
Marketable securities
Securities that are easily sold.
Merchant Account
Merchant Visa risk applies to unsigned Visa drafts such as taking orders through the Internet or telephone. Risks occur to financial institutions due to fraud. Shop around, many Banks do not require security for Merchant Visa and many E-Commerce Internet sites have online applications for an account.
Mortgage
This is a term loan secured by a building on a piece of land. The maximum amortization period varies greatly between Banks - from 10 to 30 years. Your business must still meet standard lending criteria such as debt serviceability. In general, a business mortgage is more complicated and more expensive than your personal mortgage; many Banks will require you to pay for a full property appraisal, environmental audit, and legal fees in additional to regular Bank fees.
Net income
The sum remaining after all expenses have been met or deducted. Also called profit.
Net sales
Gross sales minus returns and allowances.
Net worth
Excess of assets over debt.
Niche
Particular specialty in which a firm has gained a large market share.
Operating expenses
Those costs associated with the day-to-day activities of the business.
Operating Line
Operating loans are also called working capital loans, Line of Cedit over or overdraft protection. They are loans that fluctuates with the day-to-day cash flow needs of a business. The maximum amount you may borrow for an operating line is primarily based on accounts receivable. Cash businesses such as restaurants and retail stores generally do not qualify for an operating line. Inventory is not generally financed (but exceptions are made frequently).
Operating profit (loss)
Income or loss before taxes and extraordinary items resulting from transactions other than those in the normal course of business.
Operating profit margin
Measures a firm's profitability by examining the pre-tax profit generated from primary operations (versus extraordinary items) in relation to net sales. Operating profit divided by net sales.
Partnership
Can be general or limited, but in either case the general partners are in control. The tax burden is shared by all the partners at their personal rate, and the general partners have unlimited liability. Limited partners have limited liability.
Principal
The currently unpaid balance of a loan, not including interest owed. Also can refer to a primary owner or investor.
Profit
Compensation an entrepreneur receives for the assumption of risk in a business venture. Also called net income.
Profit and loss statement
Summary of the revenues, costs, and expenses for a business over a period of time. Also called the income statement.
Pro forma financial statements
Financial statements for a business where certain amounts shown are hypothetical, or estimated, for the period depicted.
Quick ratio
Liquidity ratio that focuses on the firm's most liquid assets by excluding inventory. Also known as the acid test ratio. Cash, marketable securities, and accounts receivable divided by current liabilities.
Retained earnings
Net profits kept to accumulate in a business after dividends are paid.
Seasonal loan
A loan made for the purpose of meeting predictable and periodic funding needs, such as funding of camping gear inventory before summer purchases.
Small Business Administration (SBA)
Federal agency created in 1953 to provide management and financial assistance to small businesses. Mainly, the SBA guarantees loans through financial institutions. The loans may be used for working capital, machinery and equipment acquisition of real estate, and expansion.
SBA Loan (USA)
This is a loan where the Government partially guarantees repayment to the Bank. SBA loans are used when the business is slightly outside a Bank's standard lending criteria. A business must qualify for financing through a bank (using regular banking guidelines) and gain further approval from the SBA prior receiving any money.
SBA's 7(a): Used to assist most types of small business loans up to $1 million including: equipment, real estate, working capital or purchasing existing businesses. In most cases the SBA will guarantee no greater than 75% of loan value and a maximum amortization of 6 years. SBA loans are targeted at existing and growing businesses; it is difficult to finance a start up business through this product.
SBA's MicroLoan: Targeted at very small and start up companies to purchase computers, equipment and materials required to launch a business. You may borrow up to $25,000 for up to 6 years. Interest rates do not exceed prime plus 4%.
SBA's 504: Used to purchase real estate for businesses that are likely to increase the level of employment at the company. The guarantee value may be as high as 90% of the appraised value of the property.
SBA's Fastrak Loan: Some large, national Banks are able to approve loans up to $100,000 without consulting the SBA. The SBA may guarantee up to 50% of the loan value.
SBL Loans (Canada) renamed CSBFL
These loans are similar to SBA loans in the United States where the Government provides a guarantee. Maximum loan value is $250,000 where the chartered Bank's approve the loan without consulting a Government agency. These loans are targeted to both existing and start up businesses.
While the program is more flexible on paper we notice the following guidelines.
Uses of funds: To purchase computers, equipment or renovations (cannot finance working capital)
Repayment: Maximum 5 years (3 years for computers)
Personal guarantee signed by the owners: 25% of the loan value
Percentage of assets financed: Up to 90% of the asset value depending on the type of asset being purchased and strength of the business. It is rare for a restaurant to receive financing greater than 50% of the asset value.
Costs: 2% upfront fee to the Government, legal fees, and interest rates cannot exceed prime plus 3%.
Sole proprietorship
A type of business where the owner has full control and unlimited liability. A sole proprietorship is taxed at the personal income tax rate.
Term Loan
A term loan is a loan that has monthly principal and interest payments. The outstanding principal amount decreases each month. Generally, term loans are established to assist in financing long term assets such as computers or equipment. The amortization period should closely match the useful life of the asset purchased (a term loan for computers should have an amortization period of not more than 3 years). Most term loans have an amortization period of 5 years or less (but there are exceptions).
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