Financial Terms You Should Know
Bootstrapping: Using your own money to finance the start-up and growth of your small business. Think of it as being your own investor. Once the business is up and running successfully, the business finance term and definition bootstrapping refers to the use of profits earned to reinvest in the business.
Business Credit Report: Just like you have a personal credit report that lenders look at to determine risk factors for making personal loans, businesses also generate credit reports. These are maintained by credit bureaus that record information about a business’s financial history. Items like how large the company is, how long has it been in business, amount and type of credit issued to the business, how credit has been managed, and any legal filings (ie bankruptcy) are all questions addressed by the business credit report. Lenders, investors, and insurance companies use these reports to evaluate risk exposure and financial health of a business.
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Business Credit Score: A business credit score is calculated based on the information found in the business credit report. Using a specialized algorithm, business credit scoring companies take into account all the information found on your credit report and give your small business a credit score. Also called a commercial credit score, this number is used by various lenders and suppliers to evaluate your creditworthiness.
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Collateral: Any asset that you pledge as security for a loan instrument is called collateral. Lenders often require collateral as a way to make sure they won’t lose money if your business defaults on the loan. When you pledge an asset for collateral, it becomes subject to seizure by the lender if you fail to meet the requirements of the loan documents.
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Credit Limit: When a lender offers a business line of credit it usually comes with a credit limit, or a maximum amount that you can use at any given time. It is said that you reach your credit limit or “max out” your credit when you borrow up to or exceed that number. A business line of credit can be especially useful if your business is seasonal or if the income is extremely unpredictable. It is one of the fastest ways to access cash for emergencies.
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Debt Consolidation: If your small business has several loans with various payments, you might want to consider a business debt consolidation loan. It is a process that lets you combine multiple loans into a single loan. The advantages are possibly reducing the interest rates on the borrowed funds as well as lowering the total amount you repay each month. Businesses use this tool to help improve cash flow.
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Debt Service Coverage Ratio: The business finance term and definition debt service coverage ratio (DSCR) is the ratio of cash your small business has available for paying or servicing its debt. Debt payments include making principal and interest payments on the loan you are requesting. Generally speaking, if your DSCR is above 1, your business has enough income to meet
its debt requirements.
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Debt Financing: When you borrow money from a lender and agree to repay the principal with interest in regular payments for a specified period of time, you’re using debt financing. Traditionally, it has been the most common form of funding for small businesses. Debt financing can include borrowing from banks, business credit cards, lines of credit, personal loans, merchant cash advances, and invoice financing. This method creates a debt that must be repaid but lets you maintain sole control of your business.
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Equity Financing: The act of using investor funds in exchange for a piece or ”share” of your business is another way to raise capital. These funds can come from friends, family, angel investors, or venture capitalists. Before deciding to use equity financing to raise the cash necessary for your business, decide how much control you are willing to share when it comes to decision-making and philosophy. Some investors will also want voting rights.
Source— Sunday Mail