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Glossary of Terms

Below is a list of common small business lending terms (and their definitions) often seen and heard in the loan process, to help you better understanding the nuts and bolts of a loan, business financials, and other related information.


Accounts payable are often referred to as “payables”. It represents a small business’s obligation to pay off a short-term debt to its suppliers/creditors for goods or services. These typically take the form of invoices. The accounts payable entry is typically found on a balance sheet under the heading current liabilities.
Money owed by customers to your small business in exchange for goods or services that have been delivered or used, but not yet paid for. Accounts receivable are typically recorded as an asset (current or non-current) because this represents a legal obligation for the customer to remit cash for their short-term debts.
The method of accounting in which revenue is recorded in the period it is earned, and expenses are reported in the period when they are incurred.
Current liability that represents expenses that have been incurred but are not yet recorded. Examples include wages and payroll taxes.

The paying off of debt with a fixed repayment schedule in regular installments over a period of time.

Amortization can also be found on the balance sheet, as a way to spread the cost of an intangible asset over its useful life, or the life of the intangible asset in the business. Examples include: loan costs, goodwill, patents, etc. Amortization reduces a company’s assets and net worth (equity) on its balance sheet.

The annual rate that is charged for borrowing capital. This number represents the actual yearly cost of funds over the term of a loan.

A professional opinion, usually written, of market value. There are typically three types of appraisals that may occur during the small business loan process:

  • real estate
  • equipment
  • business (the value of the business)
A set of formal documents filed with a government body to legally document the creation of a corporation.
Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.


A financial statement that summarizes a company’s assets and liabilities at a specific point in time.
A loan that is repaid with a series of regular payments and one much larger payment at the end.
The final installment of a loan to be paid in an amount that is disproportionately larger than the regular installment.
Bankruptcy is a federal law that allows individuals or businesses with financial difficulties to either work out a plan to repay the money over time or completely eliminate most of the bills.
An essential roadmap for business success, a business plan is a written document that describes in detail how a business is going to achieve its goals from a marketing, financial and operational perspective.


The difference between the available cash at the beginning of an accounting period and that at the end of the period.
Your cash flow projections are predictions that are based on the past performance of your business.
Assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default.
A measure of credit risk calculated, using a standardized formula, by one of the three credit bureaus (Equifax, TransUnion, and Experian). Factors that can damage a credit score include late payments, absence of credit references, and unfavorable credit card use.
Cash and other assets that are expected to mature into cash within a year. Cash, accounts receivable and inventory are examples of current assets.
Obligations due to be paid within the next twelve months. Accounts payable and accruals are examples of current liabilities.
The amount of long-term debt (principal) that is scheduled to be paid in the next twelve months.


The replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period.
List of all the debts your business currently owes. This can include loans, leases, contracts, notes payable, credit cards, and other miscellaneous payables.
A measurement of a business’s ability to generate enough revenue to cover the cost of its mortgage payments. It is calculated by dividing the net operating income by the total debt service.
Reduction in the value of an asset with the passage of time, due in particular to wear and tear. There are various methods of depreciation, such as straight-line depreciation and accelerated depreciation.


An EIN is a unique identification number that is assigned to a business entity so that they can easily be identified by the Internal Revenue Service. When you receive your EIN number this certificate is mailed to your location.

An investment of capital generally in the form of cash, equity or assets – into a company or institution.
Financing secured by selling ownership interest to investors.


The selling of a company’s accounts receivable, at a discount, to a factoring company, who then assumes the credit risk of the account debtors and receives cash as the debtors settle their accounts. This is also called accounts receivable financing.
A type of credit score that makes up a substantial portion of the credit report that lenders use to assess an applicant’s credit risk and whether to extend a loan. FICO is an acronym for the Fair Isaac Corporation, the creators of the FICO score.
A written report which quantitatively describes the financial health of a company. This includes an income statement and a balance sheet, and often also includes a cash flow statement. Financial statements are usually compiled on a quarterly and annual basis.
A long-term, tangible asset held for business use that is not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture.
Contract between business and Franchise that gives the business the right of operating as a franchisee for a given period of time.


Calculated as sales minus all costs directly related to those sales. These costs can include manufacturing expenses, raw materials, labor, selling, marketing and other expenses.
A person who guarantees to pay for someone else’s debt if he or she should default on a loan obligation.



An accounting of sales, expenses, and net profit for a given period. This is also known as a profit and loss statement.
Non-physical asset having a useful life greater than one year. Examples include: loan costs, goodwill and patents.




Security interest in an asset, such as a mortgage on real estate or a UCC filing.
A specified amount of unsecured credit extended to a specified borrower for a specified time period.
The ability of an asset to be converted into cash quickly and without any price discount.
The ratio of the fair market value of an asset to the value of the loan that will finance the purchase. Loan-to-value tells the lender if potential losses due to non-payment may be recovered by selling the asset.
Loan(s) whose maturity exceeds one year. Long-term debt is a non-current liability.


Merchant cash advances give businesses money in return for a cut of future credit card sales, The borrower must return the principal sum and a fee. Each week the seller receives a transfer from the buyer’s merchant account — so the payment schedule depends in part on how well the buyer’s company does each week. This is one of the most costly ways to finance a business. Because cash advances are generally repaid within a year, the effective annual percentage rate on purchase often goes into the triple digits.
A loan of up to $50,000 available through nonprofit community-based organizations.


Net Worth is the excess of assets over liabilities (Assets – Liabilities = Net Worth).
Assets that mature into cash in more than one year.
Obligations that are due in more than one year.



Permanent working capital is also called fixed working capital. Permanent working capital does not depend on the level of production or sales.

Promise made by an entrepreneur, which obligates him/her to personally repay debts his/her corporation defaults on.
A charge levied on someone who repays a loan such as a mortgage before it is due.
A profit and loss statement (P&L) is a financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year.



The act of paying off an existing loan using the funding gained from a new loan.
Profits earned and retained in the business.
An agreement to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid.




What the funds from your loan will be used for, i.e., equipment, real estate, working capital.



Working capital measures your current assets minus your current liabilities. The number can be positive or negative, depending on how much debt the company is carrying.

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