Usually taking the form of an invoice, an account receivable documents the money owed for goods or services provided to a customer on credit.
Amortization refers to paying of a debt via a fixed repayment schedule. Payments are made in regular installments over a period of time approved by the lender.
An angel investor provides capital for a business, typically a start-up and usually in exchange for convertible debt or ownership equity.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment. It is expressed as a percentage and represents the actual yearly costs associated with borrowing money, including closing costs and other fees.
An asset is a resource with economic value owned by an entity with the expectation that it will provide future benefit.
A bad debt is a debt that cannot be recovered by the creditor.
A balloon loan does not fully amortize over the term of the loan, and as such, requires a significant payment, called a "balloon payment", at the end of the term to pay the remaining balance.
A balloon payment is a large payment due at the end of a balloon loan's term.
Bankruptcy is a process involving an individual or company that is unable to repay its debts. A petition is filed by the debtor or on behalf of their creditors. After the debtor's assets are evaluated, they may be liquidated and used to pay outstanding debt.
Breakeven Point (BEP)
The breakeven point (BEP) occurs when a business's expenses and revenue are equal.
A business acquisition is the formal purchase of all, or a controlling interest in, another company. Acquisitions may be made as part of a company's growth strategy when it makes more financial sense to acquire an existing entity than it would to expand organically.
Business Credit Record
Like a personal credit record, a business credit record is based on a variety of data, including the date a company started, number of employees, annual sales, experience of management, etc. Past data (such as a company's ability to pay bills on time) is used to determine the probability of future behavior.
Together with personal goodwill and intellectual goodwill, business goodwill is a representation of the time and energy spent growing a businesses. Although intangible assets like goodwill have no physical form, they increase the value of a business and its selling price.
Capital is wealth in the form of money or other tangible assets owned by a person or organization.
A capital gain is the positive difference between the price obtained when an asset (investment or real estate) is sold compared to the original purchase price.
Short-term (one year or less) and long-term (more than one year) capital gains must be claimed on income taxes.
Capital Gains Tax (CGT)
A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property.
Capital loss is the negative difference between a lower selling price and a higher purchase price, resulting in a financial loss for the seller. The IRS states, "If your capital losses exceed your capital gains, the excess can be deducted on your tax return." Limits on such deductions apply.
Cash Basis Accounting
Cash basis accounting is the method of recording revenues when they are received (rather than when they are earned or billed) and recording expenses when they are paid (rather than when they are owed).
Cash flow is the total amount of money being transferred into and out of a business, especially as it affects liquidity.
Certificate of Deposit (CD)
Generally issued by commercial banks, Certificates of Deposits (CDs), are savings certificates with fixed maturity dates and interest rates.
Certificate of Incorporation
A certificate of incorporation is a legal document relating to the formation of a company or corporation. It is a license to form a corporation issued by state government. Its precise meaning depends upon the legal system in which it is used.
Certified Public Accountant (CPA)
Certified Public Accountant (CPA) is the title given to accountants who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for membership in their respective professional accounting bodies.
Collateral is an asset pledged as security for repayment of a loan, to be forfeited in the event of a default.
A corporation is a legal entity, separate from its owners, that has most of the same rights and responsibilities as an individual. For instance, a corporation can borrow and loan money, sue and be sued, own assets, pay taxes, and enter into contracts.
Credit Card Receivables
Credit card receivables are the amounts a company expects to receive at a given point in time from customers paying via credit cards. Companies may sell their receivables to other entities to secure financing in a process called a "merchant cash advance" or credit card "factoring."
Credit Card Vendors
Credit card vendors are lenders and other institutions that process credit card transactions.
A credit score is a numerical representation of a person or entity's level of creditworthiness, generated through an analysis of their credit report.
Crowdfunding is the practice of raising funds for a project or venture by eliciting contributions from a large number of people. Although most funds are collected via online platforms, funds may also be raised through benefits, mail-order subscriptions, etc.
Cs of Creditworthiness
Lenders use the five Cs of Creditworthiness to evaluate potential borrowers: character, capacity, capital, collateral and conditions.
Debt Consolidation is the practice of securing a new loan to pay off a number of existing debts, typically to secure more beneficial terms for the borrower like a lower interest rate and/or lower payments.
Debt-service Coverage Ratio (DSCR)
The debt-service coverage ratio (DSCR) compares the cash a business has available (net operating income) to its debt service obligations (interest, principle, sinking fund and lease payments).
The Data Universal Numbering System, created in 1962 by Dun & Bradstreet (D&B), is a copyrighted and proprietary means of identifying over 100 million entities worldwide. It assigns a unique nine-digit number to each physical location of a business.
Earnings before interest, tax, depreciation and amortization (EBITA) measures a company's operating performance by excluding financing decisions, accounting decisions and tax environments. As such, it can be used to compare profitability across companies and industries.
Economic growth and investment is encouraged in a specific geographic area, called an enterprise zone, by offering tax concessions and other incentives to businesses willing to locate within the zone.
Factoring occurs when a business sells its outstanding accounts receivables at a discount to a factoring company in order to meet its immediate cash needs.
A FICO score is calculated by software from the Fair Isaac Corporation (FICO). It analyzes and assigns numerical values to information provided by credit bureaus. Lenders and other entities use FICO scores to determine creditworthiness and predict future behavior.
A filing receipt is a document provided to a company after it registers with the state in which it is located. It records the name and address of the registered agent and the date of incorporation. A filing receipt is required for unsecured and secured lines of credit against the business.
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) was designated as the organization responsible for setting accounting standards for US companies by the Securities and Exchange Commission (SEC).
A financial projection is a prospective financial analysis of the future performance of a company. It analyses internal and external revenue and expense data and is used for creating budgets, forecasting cash flow, and strategic planning.
Finished goods are manufactured products that are in stock and ready for sale but have not yet been purchased by customers. Finished goods are considered an asset on an income statement.
First In, First Out (FIFO)
First-in, First-out (FIFO) is a method of inventory valuation that assumes goods are used or sold in the same chronological order in which they are purchased. The cost of goods purchased first (first-in) is the cost expensed first (first-out).
Fixed assets, such as land, buildings and equipment, are long-term tangible assets used in the production of income. Fixed assets are not expected to be consumed or converted to cash any sooner than at least one year's time.
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) is a collection of accounting standards, rules and procedures for financial reporting. Set by the Financial Accounting Standards Board (FASB), GAAP ensures financial reporting is consistent and transparent. In the US, the Securities and Exchange Commission (SEC) requires financial reports follow GAAP requirements.
Gross profits are the result of deducting the costs associated with producing and selling goods, or providing services, from the total revenue generated by selling those goods or services. Variable costs that fluctuate with output levels are taken into consideration while fixed costs, which do not fluctuate, are not considered.
Gross sales is the measurement of overall sales without adjustments for discounts or returns.
A holdback is an amount withheld from payment until certain conditions are met.
Otherwise known as a profit and loss statement, an income statement reports a company's financial performance over a specific time period and includes data on net income, revenues and expenses.
Inventory is an asset and includes finished goods, partially finished goods, and raw materials.
Last-in, First-out (LIFO)
Last-in, first-out (LIFO) is a method of inventory valuation that assumes goods acquired last are used, sold or disposed of first. The cost of goods purchased last (last-in) is the cost expensed first (first-out).
A business liability is a financial and/or legal obligation that arises during the course of business operations. Examples include mortgages, accounts payable, tax liens and settlement charges.
A lien is the legal right to retain possession of another's property in order to secure payment of a debt or fulfillment of an obligation.
Limited Liability Company (LLC)
A limited liability company (LLC) is a corporate structure which combines characteristics of a corporation with a partnership or sole proprietorship. A LLC is owned by a limited number of shareholders who cannot be held personally responsible for the LLC's debts or liabilities.
A limited partnership is a corporate structure including one or more general partners and at least on limited partner. General partners are personally liable for business debts and legal proceeding. The liability for limited partners is limited to their share of ownership.
A line of credit (LOC) is a type of financing, secured or unsecured, between a financial institution and a customer that establishes a maximum loan balance available to the borrower over a predetermined amount of time. The borrower may choose to withdraw the entire amount at one time or make a number of withdrawals. Interest payments are only due on the amount withdrawn.
Liquidation is the conversion of assets into cash. Liquidation occurs when a company, in preparation for going out of business, sells its assets and uses to proceeds to repay its creditors. Remaining funds from the sale of assets are distributed to shareholders.
Also called abandonment value, liquidation value is the net amount remaining after an asset is sold and all debt associated with it is repaid.
Liquidity is a characteristic of an asset referring to how quickly the asset can be converted into cash without significantly impacting its value.
The liquidity ratio is determined by dividing a company's total cash and liquid assets by the total of its short-term obligations. This ratio is used by financial institutions to analyze an applicant's ability to repay a loan.
Loan brokers assist individuals and entities with obtaining loans. They are typically paid a commission for this service.
Loan-to-value Ratio (LTV)
The loan-to-value (LTV) ratio is obtained by dividing the outstanding loan amount by the current value of the asset used to secure the loan.
Lower of Cost or Market (LCM)
Lower of cost or market (LCM) is a GAAP rule stating that a business must record the value of an asset at whichever cost is lower - the price paid to obtain the asset or its current market price. The situation arises when an asset has become obsolete, deteriorated or its market price has dropped.
A merchant cash advance is a type of alternative lending where a merchant sells its future debit and credit card receivables at a discount to a merchant cash advance provider in exchange for immediate funding. The term has grown to include a variety of alternative short-term lending options with regular small payments.
In general terms, a microloan is a small loan typically used to finance a new or expanding business. In the US, the SBA works with designated lenders to provide funds for
equipment, inventory, etc. Although the SBA guarantees loans up to $100,000, the typical SBA microloan is 13,000 with a six-year term.
Modified Accrual Basis Accounting
Modified accrual basis accounting recognizes revenue when an invoice is issued; expenditures are recognized when they are incurred.
A mortgage is a pledge of an asset, typically real property (land and buildings), as security for repayment of a debt or performance of an obligation. When all conditions of the agreement are met, the mortgage is voided.
Mutual agency, also called unlimited liability, is a legal partnership agreement in which each partner has the power to act as an agent for the normal business operations of a company, such as entering the partnership into business contracts. Each partner is held responsible for their partner's business-related actions.
In accounting, net assets are equal to total assets minus total liabilities.
Net Operating Loss
A net operating loss occurs when total revenues are less than total operating expenses within a specific amount of time, typically a quarter or a year. A company can opt to carry forward or carry back operating losses for a certain amount of years in order to reduce their tax liability.
An operating lease is a short-term agreement where the lessee makes payments to use an asset, and the lessor maintains ownership of the asset and is responsible for maintenance and servicing costs.
The amount of operating leverage a company has is determined by how dependent it is on individual sales to cover operating expenses. A company dependent on a smaller number of sales to cover its operating expenses has a higher operating leverage, while a company with a higher number of sales may sell more or less products without significantly affecting its profitability.
Operating Performance Ratio
Also known as gross profit margin or net profit margin, the operating performance ratio is a calculated by dividing profits by revenues. The ratio is used to determine how well a company controls its costs.
Used to determine a company's creditworthiness or possible sale price, owner's equity is determined by deducting liabilities from total assets. Intangible assets and liabilities are included in the calculation.
Granted by the government, a patent protects the rights of the patent holder to use documented intellectual property or processes to produce, market and sell a product exclusively for a given amount of time. In the US, patent length is 20 years.
A personal guarantee is a written promise guaranteeing payment for a debt. A personal guarantee is unsecured, and as such, is not connected to a specific asset.
Petty cash is a small amount of money kept on hand by a business to cover small expenditures.
In financial terms, a pledge is an object of value given or held as security to guarantee payment of a debt or fulfillment of an obligation.
Present value represents the current value of a future income, discounted by a predetermined rate of interest.
Profit and Loss Statement
A profit and loss statement provides data on a company's financial state over a given period of time (monthly, quarterly or yearly). Information on revenue, expenses and earnings are included in the statement.
A public company is a company whose shares are traded publicly on the open market. Such companies are regulated by federal securities laws and must submit periodic filings.
Raw materials are the unfinished goods used in the manufacture of a finished product.
The recovery period is the length of time an asset can be depreciated until the end of that asset's useful life. The IRS sets recovery periods for various assets.
A refinance loan is taken out to repay another loan, typically to secure a lower interest rate or better terms for the borrower.
The residual value of an asset is the market value that remains at the end of the asset's depreciation.
Retained earnings refers to the portion of net income that is not paid out as dividends. These earnings are typically re-invested into the company.
Return on Investment (ROI)
Return on investment (ROI) is calculated by dividing net profits (after taxes) by total assets. It is widely used to make investment decisions because of the ease of calculation.
A revolving line of credit is a flexible source of funding between a borrower and a lender. The borrower may access an amount of funds (up to a previously agreed upon maximum amount) at any time over a period of serval years. The line of credit is referred to as "revolving" because once the principle amount borrowed is paid back, it again becomes available to borrow.
An SBA backed lender has been certified by the Small Business Administration. The SBA will guarantee up to 80 percent of the loan principal provided by an SBA backed lender.
As a legal corporate structure, an S-corporation allows an entity to benefit from some of the advantages of incorporation without all of the responsibilities. With no more than 100 shareholders, an S-corporation is not responsible for corporate taxes on its profits. Income and losses are passed through to the shareholders, who report them on their individual returns.
A secured line of credit is backed by a lien against a hard asset belonging to the borrower. That asset may be seized and liquidated by the lender if the borrower defaults.
A sole proprietorship is a business ownership structure where one person is solely and personally responsible for all the losses and debts incurred by the business. Likewise, the sole proprietor is also the only person who receives profits. Profits and losses are included on the owner's personal tax return.
Tax Identification Number
Issued by the IRS, a tax identification number is a unique nine-digit number given to a company mainly to ensure that companies and organizations with the same or similar business name are each billed for their own taxes. This number is required for such activities as opening a business account or applying for financing.
A trade credit is given to a customer in order for the customer to receive goods from a company without having to immediately pay for those goods.
A trial balance is the record of a company's general ledger account titles and their corresponding debit and credit balances. It's prepared at the close of an accounting period.
Also known as a financing statement, a UCC-1 form is filed by a lender with the Secretary of State's office in the state of its debtor's business. It establishes a lender's security interest in the collateral used to secure a loan. If multiple UCC-1 forms have been filed against the same piece of collateral, the Secretary of State's office determines priority by the date and time the form was received.
Uniform Commercial Code (UCC)
The Uniform Commercial Code (UCC) governs commercial and business transactions between US states and territories. It was created to streamline interstate commerce.
An unsecured line of credit is funding extended to a borrower without the requirement of an asset as collateral. The lender extends credit after evaluating the goodwill of the business and the borrower's personal and business creditworthiness.