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ForwardLine’s Small Business Financing Glossary

Looking to understand what a particular industry term means? We have made it simple! Our glossary of terms allows you to have a better understanding of the different types of financing definitions and business financing terms that are used in our industry. 

Types of Financing Definitions

Angel Investors

Are generally accredited investors (as defined by the Securities and Exchange Commission typically with a net worth of at least $1 Million) who support entrepreneurs with capital because they have a strong interest in seeing the entrepreneur succeed. Angel investors invest in early stage or start-up companies in exchange for an equity ownership interest.

Balloon Loan

Is a loan that does not fully amortize and therefore requires a large payment at the end of its terms to pay off the outstanding balance of the loan. The payments on this type of loan are typically lower in the time before the balloon payment comes due and the borrower will owe a larger amount at the end of the loan, called a balloon payment.

Bank Loan

Is a type of loan that a business acquires from a bank and typically requires significant documentation, a large minimum loan size, and assets to collateralize the loan.

Business Grant

Is business financing from state and local programs, non-profit organizations and other groups available to specialized businesses. For example, businesses whose focus is on science and research may obtain a business grant so long as they meet federal research-and-development goals, and have a high potential for commercialization. 

Crowdfunding

Is when a website is created to allow small businesses to obtain small investments from multiple investors at the same time. Some sites have payment-processing fees or require businesses to raise their full stated goal to keep any of the money raised.

Equipment Leasing

Is an extended rental agreement where an owner of specific equipment(s) allows a business to operate and use the equipment in exchange for periodic lease payments. 

Equity Financing

Is a method of raising capital by selling a percentage of ownership interest to external investors. 

Merchant Cash Advance

Is a type of small business financing that involves the sale of future receivables for a discounted upfront payment. This type of financing is characterized by short terms (generally under 24 months) and smaller regular payments (typically paid each business day) as opposed to the larger monthly payments and longer payment terms associated with traditional bank loans. A merchant cash advance is also characterized by limited recourse against the owner of the business.

Microloan

Is a small dollar loan designed for a start-up business or a small business looking to expand. This loan is useful for small business owners who have a limited credit history or those who just want to borrow a small amount which commercial banks usually don’t lend. These loans can be as small as $100 to $25,000.

Revolving Line of Credit

A flexible source of debt financing in which a business receives access to a certain amount of capital that they can pull funds from as needed. These are sometimes referred to as a “revolver” because when payments are made, the principal paid back is made available for borrowing again.  This type of financing allows for businesses to borrow money up to a certain amount and the interest is only paid on the actual money borrowed. A line of credit works more like a credit card rather than the traditional small business loan. 

SBA Loan

The US Small Business Administration (SBA) created this loan program to help start-ups and existing businesses obtain affordable financing for the growth of their company. To qualify, a business has to meet certain specific criteria including those related to cash flow and income.

Term Loan

Provides a specific amount of money to the business all at once in one transaction and is repaid in regular installments (daily, weekly, or monthly) over an agreed set period of time or term. These types of loans are usually used for expansion capital like purchasing inventory or equipment or hiring employees. This type of loan is best for business owners who know exactly the amount of capital they need to achieve their business goals.

Unsecured Small Business Loan

Is a loan based purely on the borrower’s creditworthiness, with no collateral involved and has no lien filed against the business’s assets. Unsecured loans are less tangible—and have a higher risk to the lender.

Venture Capital

Is a type of equity financing where money is provided by investors in exchange for a portion of the company’s equity and in some cases these venture capitalist have a say in company decisions.

Bootstrapping

Is when a business uses the owner’s personal finances and revenue from the business to fund startup operations and growth. This method of financing is difficult but gives the business owner more control over business decision-making. 

Business Financing Terms

Bankruptcy

Is a legal proceeding that happens when a business can’t pay their outstanding debts.

Collateral

Is additional security pledged by a borrower to help secure a loan. Most often collateral is specific assets that have monetary value, such as equipment or real estate that can be liquidated by a lender if a borrower defaults on a loan.

Debt Consolidation

Is a form of debt refinancing where one takes out a new loan to pay off existing loans to be able to consolidate all of their loans into one, making it easier to manage. The amount of debt does not change, but the consolidation changes the structure and perhaps the terms of that debt. 

Debt-Service Coverage Ratio (DSCR)

Is the measure of the cash flow available to pay current debt obligations. It is the ratio of cash a business has available for servicing its debt, which includes making payments on principal, interest, and leases. To calculate this divide your business’s cash flow (net operating income) by the debt service payments which include loan and lease payments.

Factoring

Is a transaction in which a business sells its outstanding receivables to a factoring company in exchange for an upfront cash payment and in many cases, the factoring company takes over the collection of these receivables.

Holdback Amount

Is the portion of the purchase price that is not paid at the closing date. This amount is usually held in a third party escrow account (usually the seller’s) to secure a future obligation, or until a certain condition is achieved.

Loan Broker

Is an individual or company who specializes in assisting businesses with obtaining loans. Typically there is a commission charge for helping their clients get the financing they need.

Loan-to-Value Ratio

Is the measure of financial risk that compares the loan amount to the value of the asset that the loan is being used to acquire. To calculate this divide the loan amount by the value of the asset.

Lockbox

Also known as “remittance services” or “remittance processing” is a type of service offered by commercial banks to business owners where a customer’s payments to a business are collected and processed directly by the bank at a specific collection location or address that is accessible by the bank.

Personal Guarantee

Is an agreement in which an individual agrees to be responsible for the debt obligations of a business or another person in the event of a default. 

Uniform Commercial Code (UCC)

Is a set of laws that governs commercial and business transactions that happen between different states within the USA. A UCC lien usually results when an entity lends money to a debtor, and the debtor pledges collateral to the lender in exchange for the loan.

Total Cost of Capital

Is the cost of funds used for financing a business. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk. 

ACH Repayment

Known as the Automated Clearing House, is an electronic network for financial transactions in the United States. It is used as a form of payment where a specific amount is automatically transferred from one bank account to another. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit, payroll and vendor payments. 

Loan Stacking

Is where a business owner has multiple loans against his or her business. The business owner has fallen into the trap of having taken out additional unsecured loans or cash advances on top of the loan or advance that is already in place.

Cash Flow

Is the amount of money going into and coming out of a business. The difference between the available cash at the beginning of an accounting period and that at the end of the period. Having more money going into a business than coming out of it, is positive cash flow

Origination Fee

Is an upfront fee added to the loan amount. In some cases, the origination fee is calculated into the repayment amount.

Maturity Date

Is the time in which both the principal and interest on a loan is due in full to the lender. At the time of the maturity date, the business owner can either pay off the full amount or refinance or renew the debt. 

ForSight™ Score

Is ForwardLine’s proprietary scoring algorithm used to determine if a business qualifies for a loan and what kind of loan options fit the business’s needs. 

Business Credit Report

Is a record of a business’s credit history prepared and provided by the credit bureau. Lenders and investors use business reports to evaluate the risk and financial health of a business.

Business Credit Score

Is a business’s score calculated by the credit bureau based on the business’s credit and repayment history, legal filings, size, and length of time in business. The three major business credit scoring companies include Equifax, Experian, and Dun and Bradstreet. Also called a commercial credit score.

Working Capital

Is the capital used by a business for its day-to-day operations. It is calculated as the current assets minus the current liabilities and is typically the sum of cash, accounts receivable and inventory minus accounts payable and accrued expenses.

Lien

Is the legal claim and right of the creditor to the collateral of a debtor who does not meet the obligations of their signed contract. 

Principal

Is the amount of money the lender lends to the borrower, excluding the interest.

Interest Rate

Is the amount charged, typically a percentage of the principal, by a lender to a borrower.

Fixed Rate Loans

Is when the interest rate provided and negotiated at the beginning of the loan agreement does not fluctuate during the term of the loan. This allows the borrower to predict their future payments accurately.

Variable Rate Loans

In contrast to fixed rate loans, variable rate loans are loans that have a fluctuating interest rate where the interest cost can rise and fall depending on market interest rates as well as other factors. They generally have lower starting interest rates than fixed rate loans, but the interest rate and payment amounts can change over time. Sometimes also known as floating rate loans.

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