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11 Nov

50 Business Financing Terms You Need To Know As An Entrepreneur

  • By Editorial Team
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If you are an upcoming entrepreneur looking for the ideal way to fund your business, you may have come across a number of terms that has you running to Google. Every time we venture into a new field, the lack of understanding of jargon can be quite overwhelming. This is especially true in the field of business finance.

In order to make the best decisions for the future of your business, it is imperative that you have a clear understanding of what some of the commonly used business finance terms mean. Here is a list of 50 business financing terms that will help you negotiate your journey as an entrepreneur with ease.

  1. Cost of Capital: It is the rate of return which a business must generate to create value. In other words, it is the cost at which a business can raise money.

  2. Debt financing: Financing a business with the money obtained from a financial institution at a predefined rate of interest is called debt financing. The interest paid is considered an expense and is tax deductible. Funding a business with debt allows full control to the entrepreneur. After the repayment of loan amount, the relationship between the lending institution and business ends.

  3. Equity financing: Equity financing involves the transfer of (part of) the ownership of business in exchange for funding. The best part of this form of finance is that there is no obligation to return the money used to finance the business. On the other hand, the entrepreneur ends up losing part of the control of the business. Venture Capitals and Angel Investors are best examples of this type of financing.

  4. Bootstrapping: Financing from your own pocket without any external reliance is called bootstrapping a business. This way of financing gives the founder complete control over all the decisions to be made. On the flip side, the growth of the business may not come at a desired pace as this type of funding is usually insufficient to scale the business aggressively and also puts the entire financial risk on the founder.

  5. Line of Credit: It is a credit facility provided by a bank to creditworthy customers that permits the borrower to withdraw funds within a maximum allowable limit. Interest is charged on the amount withdrawn. A line of credit is best meant to serve the working capital requirements as opposed to investments in fixed assets. It can be secured against currents assets of a business or may even be unsecured.

  6. Crowdfunding: Crowdfunding is a way of obtaining small amounts of funding from a large pool of individuals to finance a business. Crowdfunding platforms bring together founders and individuals with an aim to facilitate funding with rewards to small investors. Founders pitch for their company and offer rewards for investing in their company. Crowdfunding also serves as a source of marketing for businesses, but it can be difficult for the business to gain massive public appeal to get funded.

  7. Venture Capital: Venture Capitals are professionally managed funds that invest especially in start-ups that has a bright potential. A Venture Capital invests in a business in exchange for equity. They give mentorship and direction and provide fuel to scale up. While VCs are good from a funding perspective, founders lose part of the company’s control to VCs.

  8. Private Equity: Private equity represents ownership in firms that are not listed. Private equity is different from Venture Capital firms with respect to size of the company, amount of money invested, and percentage of equity claimed in the companies in which they invest. Private equity firms buy equity in established firms while a VC firm invests in start-ups

  9. Angel Investors: Angel Investors are usually high networth individuals (HNIs) with surplus cash and a high-risk appetite for greater returns. They operate in networks with others and collectively invest in small businesses. They may also offer mentorship and guidance to a start-up. The funding amount is usually less than that of a VC.

  10. Incubators/Accelerators: These are companies that help a business at all stages of development with mentorship and resources that help it succeed.

  11. Seed funding: External funding of a business during its initial stages may be termed as a seed fund. It is usually done by Angel Investors in exchange for a stake in the business through equity.

  12. Series A, B, C: This refers to the investment process at various levels during a business growth. Series A is the first significant round of funding in which a company raises capital by selling shares. Series B and Series C are similar steps in the subsequent process.

  13. Pre-money valuation: The value of a business before raising capital is its pre-money valuation.

  14. Post-money valuation: The value of the business after raising the capital is known as its post-money valuation.

  15. Initial Public Offering (IPO): The process through which a business raises public money for the first time in which it gets listed on a stock exchange, is termed as IPO. Prior to the IPO, the business may have taken the help of professional investors like Angel investors or VCs. If the business succeeded in growing as per the expectations set by a country’s regulatory authority, it is eligible to raise public money through an IPO.

  16. Alternative Investment: It is an asset class which does not fall under conventional investment class like equity, bonds or cash. Examples of alternative investment classes include private equity, hedge funds, art, commodities, derivatives etc. The main characteristic of an alternative investment is a high minimum investment making them inaccessible to the general public.

  17. Franchise: In a franchise, two parties (Franchisee and Franchisor) come to an agreement where the license to use proprietary knowledge, brand name and other USPs is taken up by Franchisee for the allowance to sell products or services under the brand name. In return, the franchisee pays an annual fee to the franchisor.

  18. Joint Venture: Joint Venture is a separate legal entity formed from an agreement between two businesses to pool resources to achieve set business goals. Joint Ventures are particularly beneficial if either business has some expertise that the other does not have. The resultant JV has the expertise that is a combination of the expertise of the two businesses allowing it to develop a distinct competitive advantage in the market.

  19. Strategic Alliance: Businesses enter strategic alliances with an aim to expand into new markets. Strategic alliances allow businesses to mutually benefit from each other’s expertise while retaining their independence. Also, it is a less complex agreement unlike a joint venture where the companies have to pool resources together.

  20. Merger: In a merger, two businesses combine into a single entity. Mergers are usually done to help the combined entity expand into new markets and gain market share. Positive synergy resulting from the merger will help the new company have a higher valuation than the combined valuation of the individual entities.

  21. Acquisition: Acquisition, as the name implies, is where one business acquires another business, either with or without the approval of the target company. Acquisitions help the acquirer to gain control over the acquired company. Acquisitions happen due to a variety of reasons like expand to new markets, improve the product lines, gain resources and niche offerings.

  22. Partnership: In a partnership, multiple businesses work together to operate and share profits and losses. There can be several different types of partnerships, where some share liabilities equally, while others have limited liability.

  23. Private Label: Private label products are those that are manufactured by one business but sold under a well-known brand name of another business entity. Businesses opt for this to avoid the additional burden of marketing and branding in order to focus only on producing the product.

  24. Liquidity: Liquidity represents the ease with which the assets of a business may be quickly converted into cash without losing their intrinsic value in the process. Liquidity is important, as it is a measure of short-term financial health of a business. It measures how well a company can handle its working capital obligations. Among all assets, cash is considered the most liquid of assets.

  25. Collateral: It represents the assets pledged by the business to make a loan secure. It can be inventory, account receivables, machinery, buildings or anything a lender could liquidate if a business defaults on the loan payment.

  26. Assets: An asset is anything of value owned by a business. It may be tangible or intangible but can be owned and controlled in order to generate value.

  27. Liabilities: A liability is anything owed by the business. In other words, legal financial obligations are termed as liabilities.

  28. Current Assets: Assets that can be converted into liquid cash in less than a year comes under current assets

  29. Current Liabilities: Liabilities that can be cleared in less than a year fall under current liabilities.

  30. Working Capital: Capital required for day to day operations of a business is called Working Capital. Mathematically, it can be expressed as the difference between Current Assets and Current liabilities

  31. Account Receivables: A/R are claims for payment that are held by the business for the delivery of products and/or services that the client hasn’t paid for yet.

  32. Profit & Loss statement: A Profit & Loss statement provides a summary of revenue, costs and profit or loss during a specified period, which is usually a fiscal year. It is also known as the Income Statement. It indicates the company’s ability to generate profits by improving revenue and decreasing costs.

  33. Net Profit: Net profit is the difference between total revenue generated by the business and the costs incurred in a specific period.

  34. Cash Flow statement: Cash Flow statement depicts the cash inflow as well as outflow of a business. Cash flow is very important to a business as it is an indicator of the short-term financial health as well as in value generation to shareholders.

  35. Balance Sheet: It is a statement that reports assets, liabilities and equity at a specific point in time. It adheres to the basic accounting equation “Assets = Liabilities + Shareholder’s Equity”. It is an indication of a company’s finances at a given point in time.

  36. Burn rate: It is expressed as cash spent per month. It represents how fast a business is spending the funding money it received.

  37. Return on Investment: Return on Investment or ROI is the measure of the business with respect to the return on the investments it generated. It is calculated as the return on a certain investment divided by the cost of that investment.

  38. Sweat Equity: It refers to the non-monetary effort put in by company’s founders to help the business succeed.

  39. Run Rate: Run rate is an assessment of financial performance of a business, based on the extrapolation of current financial performance. It assumes that the current conditions will hold in the future too.

  40. Depreciation: Decrease in the value of an asset as it ages is called Depreciation.

  41. Salvage Value: Final value of an asset at the end of its life cycle is called salvage value. It is calculated after the product is fully depreciated, and it is no longer useful.

  42. Actual values: Actuals represent how much a business driver (like Sales or revenue) actually generated.

  43. Forecasted or Budgeted values: Forecasted or budgeted values represent how much a business driver (like Sales or revenue) is projected as per the planning process.

  44. Variance: The difference between the actuals and the forecasted values represents variance. The lesser the variance, the more effective the planning process of a business is considered.

  45. Tax Lien: It is a legal obligation for a business to pay taxes to the designated authority. In case of failure to do that, the business must undergo some consequences like liquidation of business assets or penalties.

  46. Business Model: A business model is a detailed structure that explains how the business is going to create and deliver value. The viability of the product, the addressable market of business, the target customer base, the resource availability and how the business operates to achieve its vision are detailed in the business model.

  47. Articles of Incorporation: A set of formal documents depicting the legal corporation of a company are called Articles of Incorporation.

  48. Secured/Unsecured loan: Secured loans are those loans that are backed by a collateral while unsecured loans are not backed by a collateral. Secured loans can be borrowed in large sums at a lower interest rate while unsecured loans can only be borrowed in relatively smaller amounts at a higher interest rate.

  49. Debt Consolidation: Debt consolidation is the process of simplifying the existing loan structure by combining several loans into a single, large debt. This is usually done to avail the benefits of a reduced interest rate and lower monthly payments etc.

  50. Bankruptcy: It is a legal process through which businesses seek relief from existing debts when they are in no situation to repay them. It is initiated by a court order often via debtor.

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Did You Know

Loan to Value Ratio (LTV)

LTV or Loan to Value Ratio is the ratio of the loan amount to the value of the property or any other asset being purchased. A high LTV means that the borower is taking a risk and borrowing a major portion of the asset value. So the lower the LTV, the more easily a borrower will get the loan. But a good credit rating can help a borrowers to get a high LTV loan.

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