Glossary

Not sure what a guarantor is? Confused by the definition of assets? Not sure what an advance is? Our glossary of lending terms can help!

Ability to Pay

Ability to pay loans from the business' income.

Accounts Payable (A/P)

Expenses incurred and purchases made, but not paid for.

Accounts Receivable (A/R)

Sales made but payment not yet collected.

Accrual Basis

An accounting method. Accrual-basis accounting records financial events based on events that change your net worth (the amount owed to you minus the amount you owe others). Standard practice is to record and recognize revenues in the period which they incur and to match them with related expenses in a process known as matching or expense matching. Even though cash is not received or paid in a credit transaction, they are recorded because they are consequential in the future income and cash flow of the company. Accrual-basis is GAAP compliant.

Adequate Notice

The length of time required to notify your lender of business action such as cancellation of a lease or prepayment of a loan. Adequate notice is predetermined in writing.

Advance

Money that is withdrawn from a pre-approved line of credit.

Amortization Schedule

A chart or table that breaks a monthly loan payment into two categories; principal and interest. It also shows the balance due.

Annual Percentage Rate

Yearly credit cost rate.

Articles of Incorporation

Legal document filed by a prospective corporation's owners in a designated state that explains the purpose of the corporation, its directors, and the distributed shares of stock. When approved by the state, the corporation then becomes a legal entity.

Assets

What the company owns. Current assets can be converted into cash on one year. Non-current assets take one year or more to turn into cash.

Asset-Based Lending

Financing secured by pledging assets (inventory, receivables, or collateral other than real estate).

Available Credit

Unused portion of a line of credit.

Breakeven Point

When a company has neither a profit or a loss.

Business Credit

Business loans in the form of a term loan/lease or a line of credit.

Business Plan

An overview containing all aspects of a business its location and owners along with its financial statements. Often used by companies trying to obtain a loan or lease and often reviewed at it's most difficult start up phase.

Call

If the loan/lease rules are broken or if the maturity is reached, "calling" means the loan must be paid in full.

Capacity

Borrower's ability to repay a debt.

Capital or Net Worth

The amount of money invested in the business plus the retained earnings.

Cash Basis

A type of accounting system that notes when cash is received and when expenses are paid.

Cash Flow

Money supplied from a business' operations to meet cash needs.

Collateral

Assets pledged to support a loan.

Collateral Value

Value of pledged assets.

Commercial Mortgage

A loan for a business' real estate.

Commitment

When a lender agrees to lend a specific amount of money, with rates, terms, conditions and covenants...in writing.

Concentration

When a lender's loan portfolio is heavy in a particular industry or type of business.

Corporation

A form of business registered with the state as a legal entity.

Co- Signer

A person who signs and guarantees a loan for someone else.

Contingent Liabilities

Money you agreed to repay by signing notes, or by being a co-maker or guarantor of loans.

Cost of Goods Sold

Cost to make a product.

Covenant

Loan agreement rules for the borrower as dictated by the lender.

Credit

Lender's agreement to provide funds or apply money to an account owned by the customer.

Credit Line

Certain amount of money available to borrower for a prearranged set of time.

Credit Rating

A person's financial worthiness for credit as determined by a credit reporting agency.

Credit Scoring

A preset process of scoring; used to approve or reject loan applications.

Current Assets

Assets that can be converted into cash in one year.

Current Liabilities

Liabilities due within one year.

Delinquency

Failure to make a loan payment on agreed deadline.

Depreciation

Except for land, assets wear out. The value goes down and can be deducted from your business as an expense.

Draw Down

Activating a line of credit.

Equity

Difference between the total assets of a business and total liabilities.

Factoring

Short-term financing from the sale of accounts receivable to a third party.

Financial Statement

Reports showing the financial condition of a business on a particular date or for a period of time.

Fixed Assets

Assets such as furniture, fixtures, equipment and real estate.

General Partner

When a business is a partnership, every owner who holds a share of the company shares in the profits and losses.

Gross Profit

Gross sales less cost of goods sold. This is your mark-up.

Gross Sales

Revenue or income generated from sales returns and allowances.

Guarantee

Agreement by a third party to pay debt if the borrower does not.

Guarantor

A guarantor has the same responsibilities as a co-signer.

Goodwill

The difference between the value of the hard assets and the business' selling price.

Income Statement

Financial statement showing a business' profit and loss over a period of time.

Interest

Money paid for the use of money.

Interest Rate

An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. Interest rates are normally expressed as a percentage over the period of one year.

Inventory

Assets held for eventual resale.

Lease

Contract giving a business owner the right to use an asset for a specified period of time.

Leasehold Improvements

Improving your leased business location, at your own expense.

Letter of Credit

A letter of credit, often abbreviated as an LOC or LC, and also referred to as a documentary credit, is a document issued by a financial institution which essentially acts as an irrevocable guarantee of payment to a beneficiary. This means that once the beneficiary has presented to the issuing or negotiating bank documents complying with the LC terms, the bank is obliged to pay irrespective of any instructions of the applicant to the contrary. In other words, the obligation to pay is shifted from the applicant to the LC issuing bank.

Lien

A claim against a business' assets to secure payment of a debt.

Limited Partnership

Partner that invests in a business and receives a share of the profits or losses.

Limited Liability Company/LLC

A business that is a mix of corporation and a partnership.

Liabilities

How much the company owes.

Line of Credit (LOC)

A short-term loan.

Liquid Asset

An asset that can be turned into cash quickly.

Liquidity

A company's ability to pay its expenses.

Loan Agreement

The document/contract of the parties that reflects the commitment.

Loan Committee

Team that evaluates and approves or denies a loan.

Loan Package Documentation

Documents for the commercial loan contract including financial statements, a business plan, and a credit report.

Loan Grading

System of classification that evaluates risk by assigning a number according to risk.

Long-Term Liabilities

Expenses, loans and payables due after one year.

Marketing

Activities used to sell/promote a product or service.

Market Value

The price of an asset, product or service in relation to what it will bring on the current marketplace.

Merchant Agreement

Written agreement between a credit card processing bank and merchants.

Net Profit

Money left all expenses have been paid.

Net Sales

Revenue or income from sales after turns and allowances are deducted.

Net Worth

Assets less liabilities.

Non-Current Assets

Assets that take one year or more to turn into cash.

Notary Public

Person authorized by the sate to administer oaths and witness documents.

Outstanding Checks

Checks that have been sent for payment but are still in the process of being collected by a bank.

Overdraft

When the amount of a check exceeds the available balance.

Owner's Investment

The money owners have invested in a business.

Prime Rate

The rate of interest per annum announced by the lender.

Pro Forma

Forecasting future income, expenses, or cash flow with projections.

Retained Earnings

Net profits gained through the company's life and reported in the net worth or equity section of the balance sheet.

Rate of Interest

The rate of interest in effect for the monthly payment due.

Ratios

Ratios are your business' scores that come from your Income Statement and Balance Sheet.

Refinancing

Replacing existing loans with new loans that have different terms.

Rescheduling

Extending the length of time required to pay the loan which adjusts the monthly payment.

Release

Releasing collateral when a loan has been paid off or substituted by other collateral.

Secured Loan

Loan secured by collateral.

Subchapter S Corporation

A legal form of business that is incorporated but taxed at the business owners' individual rate of return.

Tangible Asset

Real property such as buildings and machinery.

Term

A loan/lease maturity, stated in months or years.

Term Loan

Loan, give in one lump sum, is provided at the closing.

Trend Analysis

A process by which lenders examine business statements and financial ratios to determine if the financial strength is improving or weakening.

Working Capital

Difference between current assets and current liabilities.