Words can weapons – “the pen is mightier than the sword,” as they say. Sometimes through confusing financial jargon, certain words can lead to uninformed consumer decisions. When banks or financial institutions make their funding options hard to understand, they create a disadvantage to their customers. They throw around terms and concepts without ever explaining what they mean, and not everyone has an MBA or the time to research it all.
If you’re trying to get a business loan or receive any sort of funding for your business, all of the financial jargon and literature can get overwhelming. There are terms you hear over and over again, but never actually see defined. There are words that mean multiple things when used in different ways. Not to mention the words that sound complicated but actually mean simple things. We’re here to break down some of these complicated terms in an understandable way.
Here’s our glossary of some common financial jargon:
Accounts payable vs. accounts receivable:
Accounts payable are the debts that your business owes to vendors or creditors, while accounts receivable are the money owed to your business by your customers. This type of credit is done through invoicing and is always short-term.
APR stands for the annual percentage rate, and it’s the total rate charged for borrowing money from a lender. It includes the interest rate and all fees associated with borrowing. It’s expressed as a percentage that represents the annual cost of funds over a loan term. It does not, however, take into account compounding interest.
((Fees + Interest/Principal)/Number of days in a loan term) x 365) x 100
A broker is a middle man within any type of sale. For houses, a broker is a real estate agent – they sell the product on behalf of another person or entity. Brokers facilitate sales for a client or investor, and they often charge a commission on the things they’re selling.
Cash flow is the money your business is bringing in. the ability of a business to create value is determined by its ability to create a positive cash flow, and this is reported on a cash flow statement. Cash flow is used to access a company’s overall financial performance.
Collateral is what you use to secure a loan, and you pledge it as security of repayment. Not every lender needs collateral, but often when they do, they’ll require things such as investments, property, cars or savings deposits. If you don’t pay your loan, they’ll seize your collateral as payment.
Compounding interest is the calculated interest from the principal amount along with the accumulated interest of a loan. It can be compounded after various periods of time – annually, semi-annually, monthly, quarterly – and will make the sum of your loan grow at a faster rate than simple interest, which is just calculated from the principal amount. If you compound a $10,000 loan quarterly at 5%, you’ll be paying not only on the $10,000, but also the 5% interest it accumulated after every quarter.
Credit is borrowed money that you use to purchase things. Loans are credit, and credit cards give you access to credit. As opposed to cash, credit is money you don’t actually possess, but pay back at a later time.
Your credit score is a statistic that evaluates how worthy you are of credit based on your history with it. They range from 300 – 800, with a score of 700 and up considered “good.” Credit is your ability to buy things before you use actual cash. Your credit score takes into account all of the loans and credit cards taken out in your name and scores you based on how well you pay on them. They also score based on how intelligently you use them – such as if you pay more than the minimum. This score is what other credit and loan providers use to decide if they’re going to give you money. If you have a good score, they know you’re more likely to pay them back.
Fixed assets are a tangible property that businesses use in operation. Fixed assets generate income for a company, and aren’t expected to be used or sold for cash within a year. Fixed assets include things like buildings, computer hardware or vehicles.
A guarantor is a person who guarantees something will be paid. For loans, it’s a person who co-signs with you in order to assure the lender they’ll be paid. In the event that you are unable to make a payment, your guarantor takes on the responsibility. They pledge their own assets in case you cannot pay what you’re obligated to by the lender.
A loan term is the period of time your business has to pay off a loan. During a loan term, the payments are set up to be paid however often the loan is designed for. For example, if you get a $10,000 loan, your loan term might be 24 months paid monthly, so you’ll be paying about $417 per month during your loan term of two years.
The prime rate is the interest rate that commercial banks charge their customers with the best credit. It’s largely determined by the federal funds rate set by the government. It serves as a base to determine most interest rates for borrowers.
Your principal amount is the starting amount of your loan, and id usually the amount of money you receive.
Working Capital is the difference between a company’s current assets (cash, accounts receivables, inventories, etc) and their expenses or liabilities. It’s the amount of capital a business is operating on, and if its assets are less than its liabilities, the business has a working capital deficit.
Assets – liabilities = working capital
An underwriter determines if a business gets a loan. The underwriting process is what a business goes through to get a loan. An underwriter assesses the risk a business may be to a financial institution and determines whether or not they are worth lending to or not, based largely on their credit history and financial health.
Unsecured vs. secured loan:
Secured loans require collateral in order to receive them. Unsecured loans do not require collateral, but will often require a better credit history.
FaaSfunds helps you out with all this complex information, and shows you all the things you need to know when it comes to getting a loan. Reach out to us today to learn about the best funding options for your business. Don’t let the banks confuse you – get FaaSfunds.