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Financial keywords that matters
As an entrepreneur, having a good grasp of financing terms are paramount to understanding what you are getting into and comprehending what the fine print means. Though daunting, these terms will just be terms once you know what they mean and understand what they indeed are.
As such, to help out the finance newbies, we have compiled a list of financing terms that you will come across at some point in business funding, and we will do the manual labor of explaining them in layman terms for you.
And after you’ve gotten the hang of such conditions, the next step is exploring financing tools that will make your business processes more efficient. For instance, here is a check stub template variety for all your invoicing needs.
The acronym mostly stands for “Annual Percentage Rate,” and it is something quite fundamental in the world of business funding. APR consists of all the associated fees involved in applying for a loan, and since it is calculated according to each year, it represents the actual cost that you will need to borrow per year.
Though most lenders are required by law to reveal the APR for their money lending schemes, you can calculate yourself using the online calculators available as well.
Though it sounds incredibly complicated and intimidating, it represents a straightforward concept, which is dividing up the cost of something over a particular stipulated time.
In terms of business funding, the amortization schedule signifies the period you will need, the amount to be paid, and the frequency of your payments in any sort of loan. At the initial phase, a higher proportion of your payments will go to your interests, while subsequently, as you start being consistent in your payments, a large portion will go to your principal.
3. Business Credit Score
Just like how an individual has a personal credit score, businesses do have their credit scores for banks to determine how financially responsible you are as a company.
This credit score will be judged based on your ability to pay back loans well within the due date, the length of your company in the business, as well as any records of getting into trouble with creditors. Though personal credit scores usually fare between a range of 300 to 850, business credit scores fall within a scale of 0 to 100.
4. Credit Bureaus
Linked to the point above, business credit scores are usually calculated by companies that are called credit bureaus. They are mostly in charge of monitoring and overseeing each company’s financial responsibility and analyzing data on consumer credit.
The lender engages the specialties of credit bureaus to decide if the company that is applying for a loan is eligible and show the potential to make repayments on time.
5. Debt Consolidation
This is a process usually done by companies where they have many loans and debts to keep track of. Since it will be easier to monitor a single mortgage, companies tend to consolidate business debt by collating several forms of debt into a single new loan, making your loan monitoring much more comfortable and more convenient. This could also result in a lower APR for future investments.
6. Debt Financing
Debt financing is one of the most viable solutions to one of the most prominent problems in every business — if your business suffers from cash flow problems. Still, you do not want to give up a portion of the company in exchange for more funding.
Hence, debt financing comes into play whereby a loan is taken to help with monetary issues, though an interest rate still applies. Debt financing can typically help with short-term cash flow issues and even long-term investment opportunities, with a multi-year loan incurred.
An acronym that stands for Debt Service Coverage Ratio (DSCR), it is the formal calculation of a lender to determine a business’s capability to repay a loan. It is derived from the amount by dividing a company’s annual net income by their “annual debt service,” which is essentially the amount that is needed to be repaid over a year.
The higher ratio, the better, as it signifies that your company possesses the financial capacity to repay loans despite normal fluctuations in cash flow each month. A typical good ratio would be above 1.25, though different money lending companies have different minimum rates to qualify for a loan.
8. Balance Sheet
Balance sheets give you a comprehensive overview of your company’s financial standing. It comprises of your asset, equity, and liability held at every given point in time.
The term balance sheet requires the assets to be balanced out with your investments and responsibilities when you are done calculating. A balance sheet is a good piece of document to consistently update to keep track of your company’s financial situation.
9. Cash Flow Statement
A cash flow statement is a document outlining where the money is coming in from and where it is going out to. The cash flow statement helps your business to discern where your standing is at financially, and the amount of available cash on hand to start on your next profit or to fund new equipment.
Cash flow statements typically consist of three parts: the investment, the operations, and financial activities, and also includes the details and exact dates of each transaction made.
10. Income Statement
Also known as a profit and loss statement, it is a very straightforward document that reflects the companies’ expenses, profits, revenue, and losses during a stipulated time frame. Just like the cash flow statement, it gives you a rough idea of how your company is faring financially according to the sales and losses made.
11. Net Income
Net income is primarily the profits made after deducting all the expenses made in a stipulated period. These net deductions that you will have to exclude from your benefits include expenses like taxes, depreciation, and COGS (cost of goods sold).
Your company may seem to be booming in sales, but it is also possible for your net income to be harmful if you have spent a ton of money on other expenses. So the next time you see a 7-figure digit on your sales report, do not celebrate too early just yet!
Though the list is not exhaustive, it covers many popular terms that you will come across when you deal with your business’ financial matters. They may seem incredibly intimidating at the start, but understanding the simple concepts behind such complicated words will put your mind at ease. Once you tackle these standard terms, you will soon be on your way to confidently handle your company’s accounts and statements
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