Financial terms you need to know

For new entrepreneurs in particular, the world of business is not an easy place to step into on top of this there are a large number of financial terms you will need to know.

It is a world that will likely be unknown to you as of yet, and one of the biggest hurdles to jump over is the jargon being used by people on a daily basis.

You need to get to grip with the key terms you are going to be coming across almost every day, and you need to do it fast.

This is where we step in to help you out. Besides, you can’t be much of a business owner without knowing what others are saying to you.

Common business financial terms

When it comes to business and financial terms, there are a lot that get thrown around. understanding the meaning of these terms is essential to make informed decisions about your money.

During your business journey you will come across a number of common financial terms in the day to day running of your venture. We have put together a number of financial terms that will help any businessperson more easily navigate through the realms of business loans and investors.

Lets take a look at the following financial phrases for you:

Asset allocation

Asset allocation refers to how you distribute your investments across different asset classes, such as stocks, bonds, and cash. The right asset allocation for you will depend on your goals, risk tolerance, and investment time horizon.

Accounts Payable

Accounts payable is the money owed by a business to its suppliers. This is usually in the form of invoices for goods or services that have been received, but not yet paid for. Accounts payable is an important part of a business’s cash flow, as it represents money that will eventually need to be paid out. Keeping on top of accounts payable can be a challenge, especially for businesses with a large number of suppliers. However, there are a few key strategies that can help to keep the process manageable.

Accounts Receivable

Accounts receivable is the portion of a company’s revenue that represents money that is owed to the company by customers. This money may be owed for products or services that have been provided, or it may be owed as a result of a loan or other financial transaction. Accounts receivable is an important part of a company’s finances, as it represents money that the company is owed and can use to meet its obligations. However, accounts receivable can also represent a risk to the company if customers are unable to pay their debts. As a result, companies carefully manage their accounts receivable in order to minimize risk and maximize revenue.

Accrual Basis

The accrual basis accounting method is one in which revenue is recognized when earned, and expenses are recorded when incurred, regardless of when cash is actually received or paid out. The key advantage of this approach is that it provides a more accurate picture of a company’s financial health by matching revenues with the expenses incurred to generate them. This can give decision-makers a better understanding of the business’s overall profitability and cash flow situation.

The main downside of the accrual basis method is that it can make a company’s financial statements more complex and difficult to understand, especially for those who are not familiar with accounting principles. For this reason, many small businesses choose to use the cash basis method instead. However, for companies with large or complex operations, the accrual basis method is generally considered to be the more accurate and informative option.

Accruals

An accrual is an accounting method used to record revenue and expenses that have been incurred, but have not yet been paid. This system ensures that all financial transactions are recorded in the period in which they actually occur, regardless of when the money changes hands. For example, if a company orders goods from a supplier on credit, the cost of the goods will be recorded as an expense in the period in which they are ordered, even if payment is not made until the following period.

The accrual system is designed to give a more accurate picture of a company’s financial position, and is therefore the preferred method of accounting for most businesses. However, it can also be more complex than the cash basis of accounting, so businesses need to carefully consider which system is best for their needs.

Asset

An asset is anything that has the potential to generate future economic benefits. For businesses, assets can include cash, inventory, land, buildings, and equipment. In finance, the term is used more broadly to refer to anything of value that can be converted into cash. This can include investments such as stocks, bonds, and real estate. For individuals, assets may include savings accounts, retirement accounts, and homes. The key characteristic of an asset is that it has the ability to generate income or appreciation. This means that assets provide a measure of financial security and can be used to build wealth over time. While liabilities typically cost money (e.g., credit card debt), assets have the potential to generate income or increase in value. For this reason, assets are often seen as a foundation for financial stability and prosperity.

Articles of Incorporation

When you incorporate your business, you create a legal entity that is separate from yourself. This has many advantages, including limiting your personal liability for business debts and protecting your personal assets from business creditors. In addition, incorporating your business can make it easier to raise capital and attract investment. The Articles of Incorporation must include the name of the Limited Company, the address of the registered office, the names of the directors, and the purpose of the company. Once the Articles of Incorporation are approved, you will need to draft regulations inline with the companies act and elect a board of directors. These steps will ensure that your corporation is properly formed and registered with Companies House.

Annual Percentage Rate

The term “Annual Percentage Rate,” or APR, is used to describe the total cost of borrowing money. This includes not only the interest rate charged by the lender, but also any fees that may be required in order to obtain the loan. For example, if a borrower takes out a loan with an interest rate of 10% and is also required to pay a origination fee of 2%, the APR would be 12%.

When comparing loans, it is important to look at the APR in order to get an accurate picture of the total cost of borrowing. For example, a loan with an interest rate of 10% and an APR of 12% would have a lower total cost than a loan with an interest rate of 9% and an APR of 11%. By understanding the concept of APR, borrowers can make more informed decisions about which loans are right for them.

Balance Sheet

A balance sheet is a financial statement that shows the assets, liabilities, and equity of a company at a given point in time. The main purpose of a balance sheet is to give insights into the financial health of a company. By looking at the balance sheet, investors and creditors can get an idea of ​​the company’s ability to pay its debts and make a profit. The assets section of the balance sheet includes items such as cash, accounts receivable, inventory, and property.

The liabilities section includes items such as accounts payable, taxes payable, and long-term debt. The equity section includes items such as common stock and retained earnings. The balance sheet must be in balance, meaning that the total value of assets must equal the total value of liabilities and equity. If the balance sheet is not in balance, it means that something is wrong with the accounting records.

Bookkeeping-

Bookkeeping is the process of recording, classifying, and summarizing financial transactions to provide information that is useful in making business decisions. The primary purpose of bookkeeping is to ensure that financial records are accurate and up to date. Without accurate records, it would be impossible to know how much money a business has, what its expenses are, or how much profit it is making. Bookkeeping also provides valuable information for tax purposes and helps businesses track their progress over time.

Business Plan –

A business plan is a document that describes your business, its goals, and how you intend to achieve them. It is typically used to attract investors or secure funding from lenders. However, a business plan can also be useful for setting direction and keeping your business on track. Whether you’re just starting out or you’ve been in business for years, a well-crafted business plan can help you stay focused and improve your chances of success.

Business Credit Report –

A business credit report is a record of a company’s credit history. It includes information about the company’s creditworthiness, payment history, and current outstanding debt. Business credit reports are used by lenders to determine whether to extend credit to a company and at what interest rate. They are also used by landlords, suppliers, and other business partners to assess risk.

Most business credit reporting agencies will also provide a company’s credit score, which is a numerical representation of its creditworthiness. A high score indicates a low risk of default, while a low score indicates a high risk of default.

Businesses with strong credit scores are more likely to be approved for loans and lines of credit, and they often receive more favorable terms and rates. Conversely, businesses with weak credit scores may be denied for loans or lines of credit altogether. Therefore, it is essential for companies to regularly review their business credit reports to ensure accuracy and maintain a strong credit score.

Business Credit Score –

A business credit score is a number that represents the creditworthiness of a business. This score is used by lenders to determine whether a business is a good candidate for a loan. A business with a high credit score is more likely to be approved for a loan than a business with a low credit score.

There are several factors that go into determining a business’s credit score, including the payment history of the business, the amount of debt the business has, and the length of time the business has been in operation. Businesses can improve their credit scores by paying their bills on time, maintaining a good payment history, and keeping their debt levels low. Having a high credit score can make it easier for businesses to get loans, which can help them grow and succeed.

Bankruptcy

Sole traders in the UK can declare bankruptcy if they are unable to pay their debts. This is a legal process that allows them to be released from their debts and start fresh. Once a sole trader has been declared bankrupt, their assets will be sold off and the proceeds used to pay creditors. Any remaining debt will be written off.

However, sole traders who declare bankruptcy will lose their business and may find it difficult to obtain credit in the future. If you are a sole trader and are struggling to pay your debts, you should speak to a insolvency practitioner to see if bankruptcy is the right option for you.

Burn rate

If you are the owner of a start-up business venture, you will need to know all about burn rate. This basically refers to how quickly you are spending cash (burning through money). Start-ups often have to spend more money than they are making during the early stages of their careers to get things off the ground and keep the ship sailing.

Maintaining a careful watch on how much you are spending is a great way of knowing how close you are to being in financial trouble. This is something you will obviously want to avoid at all costs.

Bootstrapping

Bootstrapping is a technique used to create a new start-up business with limited resources. The term comes from the phrase “pulling yourself up by your bootstraps.” In other words, bootstrapping entrepreneurs start their businesses with little more than their own initiative and hard work.

They often use personal savings or credit cards to finance their ventures, and they may rely on family and friends for support. While bootstrapping can be risky, it can also be very rewarding. Many successful businesses have been started with very little capital. Bootstrapping entrepreneurs often have to be creative and resourceful, and they often develop a deep commitment to their businesses. When done correctly, bootstrapping can provide the foundation for a thriving enterprise.

Company Director –

Being a company director is a demanding job that requires a wide range of skills. From overseeing operations and developing strategy, to managing finances and building relationships, directors are responsible for ensuring that their business is successful. In order to be successful, directors need to be able to think both strategically and tactically, and they must be able to make difficult decisions quickly. They also need to be able to build strong working relationships with their team, as well as with other key stakeholders. If you are considering becoming a company director, it is important to make sure that you have the necessary skills and experience. However, with the right training and support, anyone can be a successful company director.

Compound interest-

Compound interest is the interest that accrues on both the principal amount of a loan and the accumulated interest from previous periods. over time, compound interest can have a significant impact on the total amount of interest paid on a loan.

Cost of goods sold (COGS) –

This is one of the key financial terms regarding production, so you’ll be all the better for knowing it. COGS refers to the overall cost of materials and labour your products and services require to be produced. So basically, COGS informs you of how much the things you sell cost to create.

Capital

Capital refers to the financial resources that a business can bring to bear in order to generate profits. These resources may include cash, investments, property, and equipment. In order to generate profits, a business must first invest capital in the form of resources and labor. The goal of any business is to generate a return on investment (ROI) that is greater than the initial investment. This can be done through a variety of means, such as increasing sales, reducing costs, or a combination of both.

A business that is able to generate a higher ROI will be more successful than one that is not. There are many factors that contribute to a business’s ability to generate a high ROI, but capital is certainly one of the most important. businesses that are able to effectively manage their capital will be well-positioned to generate long-term profitability.

Cash Flow Projections

Any business owner will tell you that cash flow is essential to the success of their enterprise. Without a steady inflow of cash, it can be difficult to pay bills, make payroll, and invest in new opportunities. That’s why cash flow projections are so important. By forecasting future cash inflows and outflows, businesses can get a better sense of when they might need to take out a loan or raise additional capital. Cash flow projections can also help businesses to plan for seasonal fluctuations in demand.

By understanding when income is likely to be highest and lowest, businesses can make sure they have enough cash on hand to weather any storms. Whether you’re a small business owner or a Fortune 500 CEO, cash flow projections are an essential tool for ensuring the financial health of your company.

Collateral

Collateral is an asset or group of assets that a borrower offers as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral to recoup its losses. The collateral serves as a cushion for the lender in case things go wrong. Many types of assets can be used as collateral, including cash, investments, real estate, and personal property.

The primary consideration for lenders is whether the collateral is likely to hold its value over time and whether it can be easily sold to repay the loan if necessary. Using collateral can be a helpful way to get access to capital, but it also entails some risk. If the value of the collateral falls, the borrower may not be able to repay the loan, and the lender may suffer losses.

Credit Limit

A credit limit is the maximum amount of money that a financial institution will allow a borrower to use at one time. This limit is normally based on the borrower’s creditworthiness, which is determined by factors such as their credit history and current income. Depending on the lender, the credit limit may also be influenced by the type of loan being taken out.

For example, secured loans usually have higher limits than unsecured loans because they are less risky for the lender. Credit cards typically have revolving limits, which means that the borrower can continue to use the card as long as they make regular payments. The size of the credit limit will generally increase as the borrower demonstrates their ability to repay their debts.

Diversification

Diversification is a key investing strategy that involves spreading your investments across different asset classes and even different geographical regions. Diversification helps to reduce risk by ensuring that you’re not too heavily invested in any one particular area.

Debt Consolidation –

Do you have multiple debts that you are struggling to keep up with? If so, debt consolidation may be a good option for you. Debt consolidation involves taking out a new loan to pay off multiple existing debts. This can be beneficial because it can help you to save money on interest and fees, and it can make it easier to manage your debt by giving you a single monthly payment.

However, debt consolidation is not right for everyone, and it is important to carefully consider all of your options before making a decision. If you are considering consolidation, talk to a financial advisor to see if it is the right choice for you.

Debt Financing –

Debt financing occurs when a company raises money by borrowing from lenders. The borrowed funds can be used for a variety of purposes, including expanding the business, funding daily operations, or investing in new projects. In exchange for the loan, the company agrees to make regular payments to the lender, usually with interest. Debt financing can be an attractive option for businesses because it allows them to access capital without giving up equity in the company.

However, it also comes with some risks, as the company is responsible for repaying the loan even if business conditions deteriorate. As a result, debt financing should be approached with caution and only used when it is the best option for the company.

Debt Service Coverage Ratio

The debt service coverage ratio (DSCR) is a financial ratio that measures a company’s ability to repay its debts. The DSCR is calculated by dividing a company’s net operating income by its total debt payments. A company with a DSCR of 1.5 or higher is considered to be financially sound and able to meet its debt obligations.

A company with a DSCR of less than 1.5 is considered to be financially unstable and at risk of defaulting on its debt payments. The DSCR is an important financial ratio for creditors and investors to consider when evaluating a company’s creditworthiness.

Equity Financing

Equity financing is a type of funding in which businesses raise money by selling shares of ownership in the company. This can be done through a variety of methods, including initial public offerings (IPOs), private placement, and venture capital. Equity financing can be a great way to raise capital without having to take on debt, but it does come with some risks.

For example, if a company’s stock price falls, shareholders may lose money. Equity financing can also dilute the ownership stake of existing shareholders. As a result, it’s important to carefully consider the pros and cons of equity financing before moving forward.

Fixed Interest Rate –

A fixed interest rate is an interest rate that does not change over the life of a loan. This type of interest rate is often used for mortgages, auto loans, and other types of long-term loans. Because the interest rate remains constant, monthly payments are easy to budget for and predict. In addition, a fixed interest rate can offer peace of mind in knowing that your payments will not increase unexpectedly. However, there are some potential drawbacks to a fixed interest rate.

If market rates rise, you will miss out on the opportunity to save money by refinancing your loan at a lower rate. In addition, if you decide to sell your home or car before the end of your loan term, you may end up paying more in interest than you would have with a variable interest rate loan. As with any financial decision, it is important to weigh the pros and cons of a fixed interest rate before making a commitment.

Floating Interest Rate –

A floating interest rate is an interest rate that changes over time in response to market conditions. The most common type of floating interest rate is the prime rate, which is the interest rate that banks charge their most creditworthy customers. The prime rate is used as a benchmark for other loans, such as credit card and mortgage rates.

When the prime rate goes up, so do other rates. Similarly, when the prime rate goes down, other rates usually follow suit. For borrowers, a floating interest rate can be both good and bad. On one hand, a floating interest rate allows borrowers to lock in a low interest rate when rates are low. However, when rates rise, borrowers may find themselves paying more in interest than they would with a fixed-rate loan.

As a result, borrowers should carefully consider both the risks and rewards of taking out a loan with a floating interest rate before making a decision.

Financial Statements

Financial statements are a key part of any business and are used to track the financial health of a company. There are four main types of financial statements: the balance sheet, the income statement, the cash flow statement, and the statement of equity. The balance sheet provides a snapshot of a company’s assets, liabilities, and equity at a given point in time. The income statement shows a company’s revenue and expenses over a period of time, typically one year.

The cash flow statement tracks a company’s inflows and outflows of cash, and the statement of equity shows the changes in a company’s equity over time. Financial statements are important tools for business owners, investors, and creditors to assess the financial health of a company. They can be used to make decisions about where to invest or whether to extend credit.

Franchise Agreement –

When you open a franchise, you are entering into a legal agreement with the franchisor. This agreement sets out the terms and conditions of your relationship, including your obligations and the franchisor’s obligations. It is important to understand the terms of the agreement before you sign it. If you have any questions, be sure to ask them before you sign. Remember that once you sign, you are legally bound by the terms of the agreement.

Gross profit

Your gross profit is your net sales revenue minus your COGS. You should aim to maintain a high level of gross profit, so that your business venture has more available cash to invest in certain areas or pay off liabilities. If you ever find your gross profit levels to be falling, you should look for cheaper ways to run production, such as using more affordable materials for the creation of your products or services.

Gross profit margin

This is where things can start becoming more confusing for newcomers, as many financial terms sound similar to one another. Therefore, it is key that you learn the minor differences, so that you can communicate effectively and work with a heightened level of confidence.

Gross profit margin is simply the next step after discovering your gross profit. Once you have found this, you can divide the number by the revenue to see your gross profit as a percentage. The gross profit will inform you on how much capital your company has retained on each £ of sales.

Guarantor –

A guarantor is a person who agrees to be responsible for another person’s debt or obligations if that person defaults. In most cases, a guarantor is legally bound to make payments on the debt if the primary borrower does not. This can be a risky proposition, as it puts the guarantor’s credit and financial stability at risk.

For this reason, it is important to consider all the potential risks and rewards before agreeing to act as a guarantor. However, in some cases, being a guarantor can be a way to help out a friend or family member in need. It can also be an opportunity to build good will and strengthen relationships. Ultimately, whether or not to act as a guarantor is a personal decision that should be made with careful consideration.

Interest Rate

An interest rate is the percentage of an amount of money that is paid for its use for a certain period of time. For example, if you borrow £100 from a bank for one year and have to pay back £110 at the end of that year, the interest rate is 10%. This means that for every pound you borrowed, you paid back 10 pence in interest. The amount of money that you have to pay back (the principal) plus the interest is called the loan’s maturity value. The maturity value is the face value of the bond plus accrued interest. The face value is the amount of money that was originally borrowed or lent. In other words, it’s the original principal. Accrued interest is the interest that has been earned but not yet paid. It’s like interest on your interest. When a bond matures, you get both the face value of the bond and any accrued interest.

Invoice Factoring or Financing

With invoice financing, businesses can sell their unpaid invoices to a third party at a discount. This provides the business with a cash infusion that can be used to cover operating expenses or take advantage of new opportunities. Invoice financing is a popular option for small businesses and startups that have difficulty accessing traditional forms of financing.

The main downside of invoice financing is that it can be expensive, as businesses typically have to pay a fee to the funding provider. Additionally, businesses may have to give up some control over their accounts receivable process, as the funding provider will often take over collection efforts. Overall, invoice financing can be a helpful tool for businesses in need of quick cash, but it is important to understand the costs and risks involved before entering into a financing agreement.

Liabilities

As previously touched upon, liabilities are the debts your company owes. This isn’t something for you to fear necessarily, as a liability isn’t always referring to a huge amount of debt. It can also be applied to your utility bills, or the monthly rent fee attached to your premises. If your liabilities continue to grow, you will need to formulate a plan of action on how to decrease them before it becomes too late.

Lien

A lien is a legal claim or right against someone’s property, typically for the satisfaction of a debt or other obligation. The property may be real estate, such as a house or land, or personal property, such as a car or jewelry. When a lien is placed on property, the owner is not allowed to sell or use the property as collateral until the debt is paid. Liens can be placed on property by creditors, the government, or even homeowners associations.

In some cases, a lien may be placed on property as security for a loan. If the borrower defaults on the loan, the lender may foreclose on the property and sell it to satisfy the debt. Liens can also be voluntary, such as when a homeowner places a lien on their own home to secure a home equity loan.

Line of Credit

A line of credit is a loan that allows you to borrow up to a certain amount of money. You can use the money for any purpose, and you only have to pay interest on the amount that you borrow. Lines of credit are typically used for short-term needs, such as making home repairs or paying for unexpected medical expenses. They can also be used for long-term needs, such as financing a college education. The interest rate on a line of credit is usually lower than the interest rate on a credit card.

And, unlike a credit card, you don’t have to make monthly payments. Instead, you can just pay off the amount that you borrowed, plus interest, when it’s convenient for you. Lines of credit are available from banks, credit unions, and other financial institutions. The application process is generally quick and easy. And, once you’re approved, you can borrow money whenever you need it, up to your limit.

Loan-to-Value

Loan-to-value is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. The loan can be for any amount, but all loans are structured in this way. This ratio is one way that lenders assess risk; the higher the loan amount relative to the asset value, the greater the risk to the lender.

For example, if a borrower wants to purchase a £100,000 house and takes out a £90,000 mortgage, the loan-to-value ratio would be 90%. In general, loans with higher loan-to-value ratios are considered to be more risky because there is a greater chance that the borrower will default on the loan. For this reason, lenders often charge higher interest rates on loans with high loan-to-value ratios.

Long-Term Debt

Long-term debt is a financial obligation that will not come due within the next 12 months. For example, a 10-year bond is a long-term debt. Long-term debt is often used to finance capital expenditures, such as the purchase of machinery or real estate. Long-term debt can also be used to finance the expansion of a business or to fund research and development projects. While long-term debt can provide a company with the funds it needs to grow, it can also be risky.

If a company is unable to make the required payments on its long-term debt, it may be forced into bankruptcy. As a result, investors should carefully consider the risks and rewards of investing in companies with large amounts of long-term debt before making any investment decisions.

Merchant Cash Advance

A merchant cash advance is a type of financing that allows businesses to borrow money based on their future sales. Unlike a traditional loan, a merchant cash advance does not have fixed payments—instead, the business repays the loan by giving the lender a percentage of its daily credit card sales.

This type of financing can be useful for businesses that need quick access to cash but may not qualify for a traditional loan. Merchant cash advances are typically more expensive than other types of financing, but they can be a good option for businesses that need fast funding and don’t have time to wait for a traditional loan to be approved.

Microloan

A microloan is a small loan that is typically given to entrepreneurs and small business owners who may have difficulty qualifying for a traditional bank loan. These loans are usually for relatively small amounts of money, and they often need to be repaid within a year or two. While the interest rates on microloans can be high, they can still be a valuable source of funding for many businesses.

In addition, because microloans are typically given to business owners who are starting up or expanding their businesses, they can often help to create new jobs. As a result, microloans can play an important role in supporting economic development.

Net Worth 

Net worth is the total value of your assets minus the total of your liabilities. Your assets are everything you own and can use to pay your debts. They include cash, savings, investments, housing, and personal possessions. Your liabilities are what you owe—money you have borrowed from others or money you have promised to pay in the future. To calculate your net worth, simply subtract your total liabilities from your total assets. This figure can be a useful tool in planning your financial future.

Net income –

Net income is going to be one of the most important terms you’ll come across throughout your entire career. Your net income simply refers to your total earnings. This can also be called profit, and if your net income rises, it is a positive thing, not only for you, but also for your shareholders and staff members.

Personal Guarantee –

A personal guarantee is a formal promise to repay a debt or obligation if the original borrower fails to do so. In many cases, personal guarantees are used by lenders when extending business loans to small businesses or startups. By requiring a personal guarantee, the lender can increase the chances of being repaid, even if the business itself is not financially successful. As a result, personal guarantees can be an important tool for protecting the lender’s investment.

However, they also create significant financial risk for the individual guarantor. If the business loan is not repaid, the guarantor may be held responsible for repaying the debt, often using personal assets such as a home or savings account. For this reason, it is important to carefully consider the risks and rewards of signing a personal guarantee before doing so.

Principal

In business, a principal is an individual or organization that owns assets, invests capital, and takes on financial risks in order to generate profits. The term can also refer to the individual or organization that provides the funding for a business venture. In either case, the principal typically has a significant stake in the success or failure of the enterprise.

While principals may hire managers to run their businesses, they are ultimately responsible for ensuring that their investments are profitable. As such, principals must have a keen understanding of the markets in which they operate and the ability to make sound decisions about where to allocate their resources.

Risk tolerance-

Risk tolerance refers to your willingness to accept volatility in your investment portfolio. investors with a high risk tolerance are typically more comfortable with investments that have the potential for higher returns, even if they also carry more risk. Before making any investment decisions, it’s important to

Revenue –

Revenue is key to keeping a business afloat and will indicate how successfully you are making money. Revenue is the income generated through regular business operations, such as sales, etc.

Retained Earnings –

A company’s retained earnings are the portion of its profits that it keeps rather than pays out as dividends. Retained earnings can be used to finance the company’s growth or to pay down debt. They can also be held in reserve to cover unexpected expenses or losses. While retained earnings can be a valuable source of funding, they can also tie up a company’s resources and limit its flexibility. As a result, companies must carefully consider how to use their retained earnings in order to maximize their value.

Runway –

If you come across the word ‘runway’ in a financial setting, it will be referring to the amount of time an organisation has before it runs out of cash. For instance, if a new business has a runway of two years, it means they have enough money to operate for the next 24-month period. Beyond this point, they will become insolvent without a further injection of funding. If you are new to the world of business, this needs to be one of the earliest terms you learn.

Runway gives your business an end point if no more money comes its way, so as you approach the end, you will know you need cash and fast.

Revolving Line of Credit –

A revolving line of credit is a type of loan that allows borrowers to access a specified amount of funds, up to a predetermined limit. The funds can be used for any purpose, and the borrower only pays interest on the amount of money that is actually borrowed. Revolving lines of credit are typically used for short-term financing needs, such as covering the costs of unexpected repairs or medical bills. They can also be used to consolidate higher-interest debt into a single, lower-interest loan.

One of the main advantages of a revolving line of credit is that it provides borrowers with flexibility and peace of mind, knowing that they have access to funds if they need them. Another advantage is that, since interest is only paid on the amount borrowed, borrowers can save money by only borrowing what they need.

Secured Loan –

A secured loan is a loan backed by an asset, such as a house, car, or savings account. This gives the lender security in case the borrower is unable to repay the loan. A secured loan often has a lower interest rate than an unsecured loan and may be easier to qualify for. However, if you default on a secured loan, the lender can take possession of the asset that was used as collateral. For this reason, it is important to carefully consider the risks and benefits of taking out a secured loan before making a decision.

Solvency –

Solvency refers to the possession of assets in excess of liabilities; in other words, the ability to pay your debts. If your business is solvent, it is alive and kicking, with at least some level of financial stability. Indeed, being solvent is the be-all and end-all of any business venture of the planet, so it is a rather scary term for us to end on.

If your company becomes insolvent, with will enter administration and eventually close down completely.

Term Loan –

A term loan is a type of loan that is typically repaid over a fixed period of time, usually between one and five years. The repayment schedule for a term loan is typically set in advance, and the borrower is typically required to make regular payments, either monthly or quarterly. The interest rate on a term loan is usually fixed, which means that the borrower knows exactly how much interest they will need to pay over the life of the loan. Term loans can be used for a variety of purposes, including the purchase of equipment, real estate, or working capital. They are often used by businesses to finance expansion or other major projects.

When used wisely, term loans can be an excellent way to finance business growth. However, because they are typically repaid over a relatively short period of time, they can also be a risky form of financing. If a business is unable to repay a term loan on time, it may be forced to declare bankruptcy. As a result, borrowers should carefully consider the risks and benefits of term loans before signing on the dotted line.

Unsecured Loans –

Unsecured loans are loans that are not backed by collateral. This means that if you default on the loan, the lender will not be able to seize your property. Unsecured loans are often used for small purchases, such as cars or home repairs. They can also be used for debt consolidation or other expenses. The interest rate on an unsecured loan is typically higher than the rate on a secured loan, because the lender is taking on more risk. However, unsecured loans can be a good option for people who don’t have collateral or who want to avoid the hassle of going through a collateral assessment process

Don’t Be Overwhelmed by Business and Finance Terms

Many people feel intimidated by business and finance terms, thinking they are too complicated to understand. However, there is no need to feel overwhelmed. With a little bit of patience and practice, anyone can learn the basics of business and finance. The most important thing is to take things one step at a time.

Start by familiarising yourself with the most common terms. Once you have a basic understanding of the vocabulary, you can begin to piece together how the different concepts fit together. With time and effort, you will be able to understand even the most complex financial reports. So don’t be discouraged – with some perseverance, you can master business and finance!