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Ability to Pay- the ability to repay a loan(s) from the business’ income.

Accounts Payable (A/P)- expenses incurred and purchases made, but not paid for.

Accounts Receivable (A/R)-  sales made but not collected.

Accounts Receivable Financing – short-term financing obtained by pledging receivables to the lender (as collateral for a loan). This enables a business owner to draw against an established line of credit, dictated by a formula (a percentage of accounts receivable).

Accrual Basis- an accounting method.

Accrual 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.

Accrued Assets — These do not include cash and fixed assets such as real estate, machinery and equipment. These include accounts receivable, goodwill and prepaid expenses.

Accrued Liabilities — These are balance sheet liabilities such as accounts payables, interest and taxes that are owed but not yet paid.

Advance – money withdrawn from a pre-approved line of credit.

Amortization — The amount of repayment on a loan or debt.

Amortization Schedule- a chart or table that breaks a monthly loan payment into two categories; principal and interest. It also reports the balance due.

Annual Interest Rate – This is the simple interest rate on a loan and may not reflect the true cost of the loan.

Annual Percentage Rate-  This is the rate of interest that includes the effects of the compounding of interest. The APR generally reflects the true cost of the loan over its full term.

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 in one year. Non-current assets take one year or more to turn into cash.

Asset Based Financing – This is term loans secured by assets such as accounts receivable, real estate, equipment and inventory.

Asset-based Lending- financing secured by pledging assets (inventory, receivables, or collateral other than real estate).

Available Credit- the unused portion of a line of credit.


Breakeven Point- when a company has neither a profit nor a loss. It’s considered to be at the breakeven point. One dollar more and the company has a profit; one dollar less and the company shows loss.

Bridge Financing — A bridge loan is a short-term loan that is used by business borrowers until a longer term loan can be arranged.

Business Credit- loans made to businesses in the form of a term loan or line of credit.

Business Line of Credit – This is a commercial loan that provides for working capital needs of a business.

Business Credit Report – This contains information such as payment history that lenders examine when evaluating a business loan application.

Business Plan- An overview put together by new companies and existing companies that are trying to obtain a loan. It includes all aspects of a business and financial statements.

Business Valuation — The process of determining the economic value of a business.


Call- if the loan covenants (rules) are broken or if the maturity is reached, “calling” a loan means it must be paid in full.

Cap- a cap limits a loan’s interest rate from rising beyond a certain rate. A 10% loan with a 2% cap will only rise to 12%.

Capacity- borrower’s ability to repay a debt.

Capital or Net Worth- assets less liabilities. The amount of money invested in the business plus the retained earnings. A business can have a negative balance.

Cash Basis- a type of accounting system that recognizes cash when it is received and expenses when they are paid.

Cash Collateral- bank deposits and similar assets that can be converted to cash quickly.

Cash Flow- money available from a business’ operations to satisfy cash needs. The primary source for monthly payments on a loan.

Collateral- assets pledged to support a loan. The money received from liquidating the assets is the secondary source of a loan repayment.

Collateral Value- value of pledged asset(s) as determined by an appraisal or other methods of valuation. Lenders often discount collateral by a certain percentage.

Commercial Mortgage- a loan for a business’ real estate. Rates and terms are negotiated and the finance charge is usually related to the prime rate.

Commitment- when a lender agrees to lend a specific amount, with rates, terms, conditions and covenants…in writing.

Community Development Bank- locally-operated commercial bank which lends money to the local community.

Compound Interest – This is when the interest due on a business loan is added to the principal amount and that amount also accrues interest.

Concentration- when a lender’s loan portfolio is heavy in a particular industry or type of business.

Conventional Loan — A loan secured by a mortgage.

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

Cosigner- a person who signs and guarantees a loan for someone else.

Contingent Liabilities- money you agreed to repay by singing notes, or by being a co-maker or guarantor of loans. Lenders want to know how much money you are liable for if the loan results in legal actions or contested taxes.

Cost of Goods Sold- cost to make a product, including materials, labor and related overhead.

Covenant- loan agreement to provide funds or apply money to an account owned by the customer.

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 a borrower for a predetermined period of time.

Credit Rating- an individual’s worthiness for credit as determined by a credit reporting agency. In addition to the information these agencies provide, lenders use tax returns and other financial statements to determine your credit worthiness.

Credit Reports — A report containing detailed information on a person’s credit history, including identifying information, credit accounts and loans, bankruptcies and late payments.It can be obtained by prospective lenders with the borrower’s permission, to determine his or her creditworthiness.

Credit Score — Often referred to as the FICO score, it is a numerical rating determined by an analysis of your credit reports. The FICO scores range between 300 and 850, with the lower number representing a greater credit risk.

Credit Scoring- a predetermined process of scoring which is used to approve or reject loan applications.

Current Assets- assets that can be converted into cash in one year. Non-current assets take one year or more.

Current Liabilities- Liabilities due within one year.


Debt Service — The amount of principal and interest owed on a loan.

Debt Service Coverage Ratio — The amount of cash flow available to pay annual principal and interest on business loans.

Delinquency- Failure to make a loan payment when it’s due.

Depreciation- Except for land, assets wear out. The value goes down and can be deducted from your business as an expense. Present values of assets are shown as original cost less depreciation. Market value, or the price you could sell it for, could differ from this figure.

Draw Down- Activating a line of credit. For example, when you “draw down” a line of credit, you activate it.


EBITDA – One of the measures that lenders use to evaluate a business’s creditworthiness and its ability to repay a loan. It is calculated by taking the net earnings of the company (revenues minus expenses) and adding back interest costs, taxes, depreciation and amortization.

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

Escrow – An account used to pay real estate taxes and insurance premiums.


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 (such as one year). Lenders review the Balance Sheets and Income Statements.

Fixed Assets- Assets like furniture, fixtures, equipment, machinery, and real estate.


General Partner- When a business is a partnership, every owner who holds a share (a percentage) of the company share in the profits and losses. General partners are responsible for total liabilities.

Gross Profit-  This is the revenue generated by the business minus the cost of acquiring and producing the goods sold or providing the service performed. It generally does not include costs attributable to indirect labor, taxes, rent, utilities and interest.

Gross Revenue – The income generated by a business or property before deducting expenses.

Gross Sales- Revenue or income from sales before returns and allowances.

Guaranty (or 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. If the loan goes into default and is not paid by the signer(s) of the loan, the guarantor is responsible.

Goodwill- the difference between value of the hard assets and the business’ selling price. Also called “blue sky.”


Income Statement- Financial statement showing a business’ profit and loss over a period of time (usually a month or a year).

Intangible Assets — Assets that are not physical assets, such as trade secrets, patents, trademarks and copyrights.

Interest Expense — The interest on existing business debt that is paid to banks and creditors.

Interest- Money paid (cost of credit) for the use of money.

Inventory- Assets held for eventual resale. May be in the form of raw materials, work in progress, or finished goods.


Key Man Insurance – An insurance policy taken out by a business to compensate that business for financial loses that would arise from the death or extended incapacity of an important member of the business (for small business, this is usually the owner).


Lease- Contract giving a business owner the right to use an asset for a specified period of time. The asset owner is called the lessor and the owner using the property is called the lessee. Can be used for a building, equipment or machinery.

Leasehold Improvements- improving your leased business location, at your own expense.

Letter of Credit (L/C) – payments to a third party by the lender, on the owner’s behalf.

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). A partner’s liability is limited by the amount of his or her investment. A limited partner does not have any management authority in the operation of the business; the roll is purely that of an investor.

Limited Liability Company/LLC- A form of business that is a hybrid between a corporation and a partnership.

Liabilities- How much the company owes. Current liabilities are those due within one year. Long-term liabilities are due after one year.

Line of Credit (LOC) – a short-term loan.

Liquid Asset- asset that can be turned into cash quickly.

Liquidity- a company’s ability to pay its expenses. The ability to turn an asset into cash (such as selling a piece of machinery).

Loan Agreement- the document or contract of the parties that reflects the commitment.

Loan Committee- team that evaluates, approves or denies loan applications. Whether a loan officer or a loan committee decides on a loan request may vary by type if loan and lender.

Loan Grading- system of classification that evaluates risk by assigning a number according to risk. Loan grading is used by lenders, and helps lenders to evaluate loan applications and manage loans.

Loan Package Documentation- documents for the commercial loan contract including financial statements, a business plan, and a credit report. It includes legal documents that show the debt, notes, mortgages/leases, and loan agreements.

Loan Packaging Fee — Any fee charged to the borrower for assembling a business loan application and supporting documentation.

Loan to Value — The amount of the loan divided by the value of the collateral taken as security for the loan.

Long-Term Liabilities- Expenses, loans, and payables due after one year.


Marketing- activities used to sell a product or service to the purchaser.

Market Value-  the price an asset, product or service will bring in a current, competitive market.

Merchant Agreement- written agreement between a credit card processing bank and merchants (who allow clients to use credit cards). The bank turns the credit card sale into deposits for the merchant and charges a processing fee.


Net Cash Flow — The amount of the changes in a company’s cash balance over a given period of time. It can consist of cash generated from operations, investments and financings minus expenses.

Net Income – This is a company’s gross revenues minus its expenses – otherwise known as profit.

Net Operating Income – This is income and earnings after operating expenses have been deducted but before deducting income taxes and financing expenses.

Net Profit- money left after all expenses have been paid. Used to pay loans and to grow the company.

Net Sales- revenue or income from sales after returns and allowances are deducted.

Net Worth- assets lee liabilities.

Non-Current Assets- assets that take one year or more to turn into cash.

Notary Public- person authorized by the state to administer oaths and witness documents, a notary’s seal and signature authenticates a document.

Notes Payable – Loans and other debts that mature later than one year.


Origination Fee or Points – This is a fee charged by a lender for processing and committing to make a loan. A 1 percent fee on a $2 million loan will cost the borrower $20,000.

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

Overdraft- when the amount of a check exceeds the available balance. Overdraft protection allows business owners to write checks for more than the account balance without the checks being returned. This service must be approved by the bank.

Owner Draw — The amount of money that the business owner takes out of the business. When analyzing a small loan request, lenders will often review the owner’s salary and personal living expenses.

Owners’ Investment- the money owners have invested in a business.


Personal Property — Any assets other than real estate.

Prepayment Penalty – This is a fee paid if a loan is paid off early to compensate the lender for lost interest fees.

Prime Rate- the rate of interest per annum announced by the lender from time to time. Most business owners are charged the printed rate plus a percentage (if the prime rate is 6%, the borrower is charged “prime + 2” or 8 %.)

Pro Forma- Forecasting future income, expenses, or cash flow with projections.


Retained Earnings- net profits accumulated through the company’s life and reported in the net worth or equity section of the balance sheet. Note: can be negotiated if losses occur.

Rate of Interest- Fixed: interest rate remains the same for the length of the loan. Variable: interest rate depends upon an index and increases or decreases (for example, the prime rate of the Treasury Bill index).

Ratios- ratios are your business’ “scores” that come from your Income Statement and Balance Sheet, not the Cash Flow Statement.

Refinancing- Replacing existing loans with new loans that have different terms. Often called “refi.”

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 (which will be liquidated if the borrower defaults on the loan).

Small Business Administration- See page 12

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. Trademarks, goodwill, or accounts receivable are not considered tangible assets.

Tangible Debt to Worth Ratio – This measures a business’ ability to absorb losses, without reducing its ability to service existing debt.

Term- A loan’s maturity, stated in months or years.

Term Loan- Loan, giver in one lump sum, is provided at the closing. Repayment is monthly.

Title Insurance – This protects the owner and mortgage holder if there is a problem with the title.

Trend Analysis- a process by which lenders examine business statements and financial ratios to determine if the financial strength is improving r weakening.


Working Capital- difference between current assets and current liabilities. An indication of liquidity and the ability to meet current obligations.


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