Financial Jargon for Entrepreneurs: 150+ Terms Decoded

Learning financial jargon for entrepreneurs is a lot like picking up a whole new language. The good news is that there are surprisingly few financial terms new business owners need to know right away. The rest you can pick up as you go.

Basic Accounting Terms Explained

The list of what new entrepreneurs should know about finances can seem infinite, but it really comes down to understanding the basics, so you know how to read financial statements and can gauge your financial health. We’ll start with these essential terms in the financial glossary below.

Accounting Method

An accounting method is the system your company uses to decide when to record income and expenses. It sets the timing for your financial records, marking whether a transaction counts when the money actually moves or when the work is completed.

Accrual-Basis Accounting Method: Often shortened to accrual accounting, the accrual-basis accounting method records revenue and expenses as soon as they are earned or incurred. Even if your company hasn’t received or paid the cash yet, the transaction appears on your books to match income with the costs used to generate it during that same period.
Cash-Basis Accounting Method: Also referred to as cash accounting, the cash-basis accounting method only records transactions when money physically enters or leaves your bank account. Many business owners choose this system for its simplicity and the way it mirrors the actual cash available for daily operations.
Modified Cash Basis: As a hybrid accounting method, the modified cash basis approach tracks most daily income and expenses on a cash basis while applying accrual rules to specific items like inventory or large assets. Your company can use this method to monitor physical goods without adopting a full accrual system.
Percentage-of-Completion Method: Long-term project accounting often relies on this accrual variation to recognize revenue as work progresses. Using the percentage-of-completion method ensures your books reflect ongoing work and income throughout the life of a project rather than waiting for a single final invoice.
Completed-Contract Method: Revenue and expense recognition stays on hold under the completed-contract method until a project is entirely finished. Business owners often choose this variation for projects where the final costs or timelines are difficult to predict accurately.

Accounts Payable (AP)

Often referred to as trade payables or simply payables, accounts payable represent the money your company owes to vendors and suppliers for goods or services purchased on credit. These balances are recorded as liabilities on your balance sheet because they represent a short-term debt that your business must settle to maintain good standing with your creditors.

Days Payable Outstanding (DPO): Also known as days payable, days payable outstanding tracks the average number of days your company takes to pay its bills. A higher DPO means your company is holding onto cash longer, while a lower DPO suggests you’re paying creditors quickly, perhaps to take advantage of early payment discounts.
Accounts Payable Turnover Ratio: Your accounts payable turnover ratio is a financial ratio that measures how many times your company pays off its accounts payable during a specific period. It helps you understand the speed at which your business settles its debts and serves as a key indicator of your short-term liquidity and creditworthiness.

Accounts Receivable (AR)

Often referred to as trade receivables or simply receivables, accounts receivable represent the money customers owe your company for goods or services they have already received but not yet paid for. These balances are recorded as assets on your balance sheet because they represent a legal claim to cash that your business expects to collect in the short term.

Days Sales Outstanding (DSO): Also known as the average collection period or days receivable, days sales outstanding is a financial metric that tracks the average number of days it takes your company to collect payment after a sale has been made. A low DSO indicates that your company is collecting payments quickly, while a high DSO may suggest that your credit terms are too lenient or that customers are struggling to pay.
Accounts Receivable Turnover Ratio: Sometimes shortened to AR turnover ratio, your accounts receivable turnover ratio measures how many times your company collects its average accounts receivable balance during a specific period. This financial ratio helps you evaluate the effectiveness of your credit and collection processes and indicates how efficiently your business is turning receivables into cash.
Allowance for Doubtful Accounts: Sometimes called a bad debt reserve, your allowance for doubtful accounts is an estimate of the portion of your accounts receivable that you don’t expect to collect. For comparison, around five percent of B2B invoices are typically written off as bad debt, per Atradius. By setting aside this amount, your company provides a more realistic view of your total asset value and prepares for the reality that some customers may not pay their invoices. As an alternative, solutions like non-recourse factoring can protect your business from certain unpaid invoices without requiring you to build a reserve or allowance.
Net Receivables: Your net receivables is the total amount of accounts receivable minus the allowance for doubtful accounts. It represents the actual cash value your company realistically expects to receive from its outstanding invoices.

Amortization

Amortization is the accounting process of gradually writing off the cost of an asset over its useful life or spreading out the costs over time. Rather than taking a massive expense hit the year you acquire an item, your company recognizes a smaller portion of the cost each year to more accurately reflect how that investment contributes to your revenue over time.

Amortization Expense: Amortization expense refers to the specific amount your company writes off each year on your income statement. It is a non-cash expense, meaning it reduces your reported profit for tax purposes without requiring an actual cash payment every time it is recorded.
Accumulated Amortization: Also referred to as total amortization, accumulated amortization is the running tally of all amortization expenses taken against an asset since you acquired it. It helps you track how much of the asset’s original cost has already been used up on your books.
Useful Life: Sometimes called the economic life, the useful life is the period over which your company expects an asset to remain productive or relevant. The length of the useful life determines how much you must amortize each year.
Straight-Line Amortization: This is the most common method for calculating the expense. With straight-line amortization, your company writes off an equal amount of the asset’s cost every year until the balance reaches zero.

Assets

Your assets are resources with economic value that can be converted into cash. More simply, they can be thought of as anything your business owns. Your business uses assets to generate revenue, whether through the sale of inventory, the use of equipment, or the collection of payments owed by customers.

Current Assets: Also known as short-term assets, current assets are resources your company expects to convert into cash or consume within one year. This category typically includes cash, accounts receivable, and inventory, serving as a primary measure of your business’s immediate liquidity.
Liquid Assets: Your liquid assets are the specific items on your balance sheet that are already in a spendable form or can be converted to cash almost instantly with little to no loss in value. Cash and government bonds are primary examples.
Fixed Assets: Frequently called long-term assets or capital assets, fixed assets are physical properties like machinery, vehicles, and real estate that your company uses for more than a year. Because they aren’t intended for immediate sale, their value is often written down over time through depreciation.
Intangible Assets: Your intangible assets are non-physical resources that provide long-term value to your business, such as patents, trademarks, brand reputation, or proprietary software. While you can’t touch them, they are essential for your company’s competitive advantage and are often accounted for through amortization.
Tangible Assets: Often referred to as physical assets, tangible assets include any resource with a physical form, ranging from the furniture in your office to the raw materials in your warehouse.

Cash Flow

Often described as the movement of money in and out of your business, cash flow tracks the liquid funds available to cover your immediate financial obligations. It represents the actual timing of cash entering and exiting your bank accounts during a specific reporting period.

Cash Inflows: Also known as receipts or simply inflows, cash inflows are the funds entering your company from sales, asset sales, or financing. Monitoring your inflows helps you understand the timing of when your customers actually pay you versus when you send the initial invoice.
Cash Outflows: Often referred to as disbursements or as outflows, cash outflows are the funds leaving your bank account to cover expenses like rent, inventory, and payroll. Tracking outflows is essential for ensuring your company doesn’t spend money faster than it collects it.
Operating Cash Flow: Frequently called working cash flow, operating cash flow tracks the money generated specifically from your core business activities, like selling products or services. It’s a primary indicator of whether your company can sustain itself without needing outside loans.
Investing Cash Flow: This category covers the money spent on or earned from long-term investments. Examples of investing cash flow include your company buying new equipment, selling a piece of real estate, or purchasing securities to grow your reserves.
Financing Cash Flow: Often called external cash flow, your financing cash flow shows the movement of money between your company and its owners or creditors. This includes cash coming in from a new business loan or cash going out to pay down debt or distribute owner draws.
Positive Cash Flow: When the amount of money flowing into your company exceeds the amount flowing out, it’s referred to as having positive cash flow. Maintaining a positive flow ensures your business has the liquid money to handle unexpected expenses or take advantage of new growth opportunities.
Negative Cash Flow: Sometimes referred to as a cash burn, negative cash flow happens when your company spends more cash than it brings in during a specific period. While common during a growth phase, prolonged negative cash flow can lead to insolvency if not managed through factoring, a line of credit, or other financing.
Cash Runway: Often shortened to runway, cash runway refers to the amount of time your business can continue to operate before it runs out of money, typically calculated by dividing your current cash balance by your burn rate.
Burn Rate: This is the rate at which your company is spending its available cash. Business owners track burn rate to know how long they can operate before needing more revenue or funding.

Cash Position

Often referred to as your cash balance, this is the total amount of liquid money your company has available at a specific point in time. While cash flow tracks the movement of money over a month or year, your cash position is a snapshot that tells you exactly how much cash is in your accounts right now to cover immediate needs.

Net Cash Position: Also known as your liquidity cushion, net cash position is the amount of cash you have left after subtracting your current short-term liabilities. This number gives you a realistic view of your “spendable” cash after your immediate bills are accounted for.
Restricted Cash: Your restricted cash is money that is held in your bank account but can’t be used for general operations. Your company might have cash in this category for security deposits, funds held in escrow, or specific loan requirements.
Cash Equivalent: Often grouped with your cash position on a balance sheet, a cash equivalent is a low-risk asset that can be converted into cash almost instantly, such as money market funds or short-term treasury bills.

Cost of Goods Sold (COGS)

Often referred to as cost of sales, cost of goods sold represents the direct costs your company incurs to produce the goods or services you sell. This figure includes the price of raw materials and the direct labor used to create a product, but it excludes indirect expenses like office rent, marketing, or administrative salaries.

Direct Materials: Also known as raw materials, direct materials are the physical components used to manufacture a product. For a business that buys and resells finished goods, this would be the wholesale cost of the inventory itself.
Direct Labor: Often called production wages, direct labor includes the compensation paid to employees who are directly involved in manufacturing a product or providing a specific service.
Inventory Valuation: Often called your inventory accounting method, your inventory valuation is how you put a dollar value on the products you haven’t sold yet. Because material prices fluctuate, the method you choose, such as first in, first out or last in, first out, directly changes your total COGS and your taxable profit at the end of the year.

Depreciation

Often described as the aging of your assets, depreciation is the accounting process used to allocate the cost of a physical asset over its useful life. Rather than deducting the entire purchase price of a piece of equipment in a single year, your company spreads the expense out to reflect the wear and tear the asset experiences as you use it to generate income.

Accumulated Depreciation: Frequently called the total depreciation, this is the running tally of all depreciation expenses taken against an asset since you bought it. On your balance sheet, this amount is subtracted from the asset’s original cost to show its current book value.
Straight-Line Depreciation: The straight-line depreciation method is the simplest and most common way to calculate depreciation, as it provides a steady, predictable expense for your annual budget. With it, your company deducts an equal amount of the asset’s value every year until it reaches its salvage value.
Accelerated Depreciation: Often used for tax advantages, the accelerated depreciation method allows your company to take larger depreciation deductions in the first few years of an asset’s life and smaller ones later. This is common for assets like vehicles or technology that lose value quickly.
Salvage Value: Sometimes referred to as scrap value or residual value, salvage value is the estimated amount your company expects to receive if you sell the asset at the end of its useful life. Depreciation stops once the asset’s book value hits this predetermined number.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

Short for earnings before interest, taxes, depreciation, and amortization, EBITDA is a measure of core operational profitability. By stripping out non-operating expenses and accounting entries, this metric allows business owners and lenders to see how much cash your company is generating from its actual day-to-day business activities.

EBITDA Margin: Frequently called the profitability ratio, EBITDA margin is calculated by dividing EBITDA by your total revenue. It tells you what percentage of your income remains as profit before those four major expenses are taken out, serving as a key indicator of your company’s efficiency.
Adjusted EBITDA: Often referred to as normalized earnings, this version of the metric adds back one-time or unusual expenses, such as a legal settlement or a relocation cost. Lenders use this to see what your company’s true earning power looks like in a typical year.
Valuation Multiple: This is a common way to determine the sale price of a business, where a company is valued at a certain multiple of its EBITDA, such as 5 x EBITDA. It’s a standard benchmark used by investors to decide if a company is a good acquisition or lending candidate.

Equity

Often described as ownership interest, equity represents the value of your company that remains after all liabilities are subtracted from total assets. If your company sold everything it owned and paid off every debt, the equity is the amount of money that would be left over for the owners or shareholders.

Owner’s Equity: Often referred to as net worth or capital, owner’s equity is the portion of the business that belongs directly to you as the owner. It increases when you invest your own money into the company or when the business generates a profit, and it decreases when you take out owner draws or the business suffers a loss.
Retained Earnings: Sometimes called accumulated earnings, retained earnings are the profits your company has kept and reinvested over time rather than distributing them to owners. High retained earnings suggest a healthy, self-sustaining business that can fund its own growth.
Paid-in Capital: Frequently known as contributed capital, paid-in capital is the total amount of money or assets that owners or investors have put into the company in exchange for ownership. It tracks the external funding provided to the business at its start or during expansion rounds.
Shareholder Equity: In companies with multiple owners or investors, shareholder equity describes the collective ownership interest of everyone who holds stock or a stake in the business. It is the bottom line of the balance sheet and serves as a primary measure of the company’s overall financial health.

Expenses

Often described as the cost of doing business, expenses are the payments your company makes to generate revenue. While some expenses go toward the products you sell, others are necessary just to keep the doors open and the lights on.

Fixed Expenses: Also known as overhead or static costs, fixed expenses stay the same every month regardless of how much you sell. Examples include office rent, insurance premiums, and salaries for administrative staff.
Variable Expenses: Frequently called fluctuating costs, your variable expenses go up or down based on your business volume. If you sell more products or take on more clients, costs such as shipping fees, raw materials, and sales commissions will increase.
Operating Expenses: Often referred to as OPEX, operating expenses are the daily costs required to run your business that aren’t directly tied to manufacturing a product. This includes everything from marketing and utilities to travel and office supplies.
Extraordinary Items: Sometimes called non-recurring expenses, extraordinary items are one-time costs from events that are unusual and infrequent. This could be a major repair after a natural disaster or a legal settlement. Accountants separate these, so they don’t skew your view of how the business normally performs.

Financial Reports

Often referred to as financial statements, your financial reports are the formal records that summarize your company’s financial activities. They provide the data needed to track your performance, manage your tax obligations, and prove your creditworthiness to lenders.

Aged Payables: Also known as an AP aging report, aged payables categorizes your unpaid bills by how long they have been outstanding so you can prioritize vendor payments.
Aged Receivables: Frequently called an AR aging report, your aged receivables list shows which customers owe you money and how long their invoices have been overdue to help with collection efforts.
Balance Sheet: Your balance sheet is a snapshot-style report that shows your company’s financial position at a specific moment by listing assets, liabilities, and equity.
Cash Flow Statement: Sometimes called a statement of cash flows, your cash flow statement tracks the actual movement of money in and out of your business over a set period.
Comparative Analysis: Often called a horizontal analysis, a comparative analysis compares your current financial data against a previous period to help you spot growth patterns.
Expense Report: Your expense report is a detailed record of the specific costs your company has incurred, typically used to track internal spending for tax documentation.
Income Statement: Frequently referred to as a profit and loss statement or P&L, your income statement summarizes your revenue and expenses to show your profit or loss over a specific timeframe.
Trend Analysis: Also known as time-series analysis, a trend analysis looks at your financial data over a long stretch of time to identify the big picture trajectory of your business.

Income/Profit

Often described as the bottom line, income and profit are terms that represent the financial gain your company realizes when revenue exceeds expenses. While income typically refers to the specific dollar amount you earned, profit is often used to describe your overall success and efficiency.

Gross Income (Gross Profit): Your gross income is the money remaining after subtracting the COGS from your total revenue. It shows the basic profitability of your products or services before overhead is considered.
Gross Profit Margin: Often described as a percentage of efficiency, gross profit margin is your gross profit divided by your total revenue. It tells you what portion of every dollar earned is available to cover your fixed expenses.
Net Income (Net Profit): Also known as the final bottom line, your net income is the amount left after subtracting every expense, tax, and interest payment from your total revenue. This is the ultimate measure of your company’s success.
Net Profit Margin: Often referred to as the bottom-line margin, your net profit margin is your net profit divided by your total revenue. It shows how much of your total sales actually turns into spendable earnings.
Normal Gross Margin: Frequently called the industry standard margin, your normal gross margin is the typical percentage that companies in your specific field expect to earn. Business owners use this to benchmark their performance against competitors.

Liabilities

Your liabilities are what your business owes; the legal, financial obligations, or debts your business must pay to other parties. On a balance sheet, liabilities are the opposite of assets. They represent the claims that creditors and lenders have against your company’s resources.

Current Liabilities: Also known as short-term liabilities, current liabilities are debts or obligations your company must pay within one year. This typically includes accounts payable to your vendors, short-term business loans, and accrued expenses such as upcoming payroll or taxes.
Long-Term Liabilities: Frequently called non-current liabilities, long-term liabilities are debts that are not due for at least twelve months. Common examples include multi-year equipment loans, mortgages on business property, or long-term notes payable.
Short-Term Liabilities: Obligations with very near-term due dates are called short-term liabilities. Examples include a 90-day line of credit or a credit card balance. Tracking these closely is essential for managing your weekly cash flow.

Liquidity and Net Working Capital

These terms measure your company’s financial flexibility. Liquidity is your ability to convert assets into cash quickly to pay bills, while net working capital, often shortened to working capital, is the actual dollar cushion you have to fund your daily operations.

Current Ratio: Also known as the working capital ratio, your current ratio compares your total current assets to your total current liabilities to see if you can cover your debts for the next 12 months.
Quick Ratio: Frequently called the acid-test ratio, quick ratio is a stricter measure of liquidity that only counts assets you can turn into cash immediately, such as bank balances and accounts receivable.

Projection

Frequently referred to as a financial forecast, a projection is an estimate of future financial outcomes based on your current data, historical trends, and expected market conditions.

Revenue

Often called the top line, revenue refers to the total amount of money your business generates from selling goods or services before any expenses are subtracted.

Annualized Revenue: Often called run rate, annualized revenue is a method of predicting your future financial performance by taking a short-term measurement (like one month’s revenue) and extending it over a longer period (usually a year).

Spotlight: Profit vs. Revenue vs. Cash Flow

Profit, revenue, and cash flow are often confused, but they represent three entirely different lenses through which you must view your financial health. You can have record-breaking revenue and still be unprofitable. Similarly, you can be profitable on paper and still run out of money.

Revenue (The Top Line): This is your engine. It tells you if there is a market for your product and how well your sales team is performing. However, revenue can be a vanity metric if it isn’t managed well, as high volume doesn’t matter if your expenses are higher.
Profit (The Bottom Line): This is your efficiency. It tells you if your business model is actually viable. Profit is what remains after every expense is paid. It is the primary indicator of long-term sustainability, but it doesn’t account for the timing of money.
Cash Flow (The Lifeline): This is your reality. Cash flow tracks the actual movement of currency in and out of your bank accounts. While profit is an accounting calculation, cash flow determines whether you can actually make payroll on Friday or pay a vendor today.

Profit vs. Revenue vs. Cash Flow at a Glance

Term	Focus	Key Question
Revenue	Sales Volume	How much did we sell?
Profit	Efficiency	How much did we keep?
Cash Flow	Timing	Can we pay our bills right now?

(If including this as a table in the article is problematic, delete it. Maybe turn it into a graphic? It might also be better to give this H2/H3 a shaded background to break things up more. It was added for SEO so it doesn’t really fit with the rest of the sections, but it deserves a highlight as well.)

Funding and Financing Terms Explained

Once you’ve mastered the terms in the easy finance guide for entrepreneurs, familiarize yourself with terms tied to business financing and funding.

Angel Investor

An angel investor is a private individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

Asset Allocation

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.

Asset-Based Lending

A business loan or line of credit secured by collateral, such as inventory, accounts receivable, or other balance sheet assets, is referred to as asset-based lending.

Bootstrapping

If you rely on personal finances or operating revenue to fund growth rather than seeking outside investment, this is called bootstrapping.

Bridge Financing

Often used to cover immediate cash flow needs until permanent funding is secured, bridge financing acts as a short-term financial gap-filler.

Capital Market

Broadly speaking, a capital market is the financial arena where long-term debt or equity-backed securities are bought and sold.

Cash Available to Service Additional Debt (CASAD)

Lenders use the CASAD metric to determine how much extra cash a business has available to make payments on a new loan after all existing obligations are met.

Cents on the Dollar

If a debt is settled or purchased for significantly less than the total amount owed, it is commonly described as paying cents on the dollar.

Collateral

To secure a loan, a borrower may offer collateral, which is an asset the lender can seize to recoup losses in the event of a default. This is the premise for asset-based lending.

Commercial Credit Cards

Unlike individual accounts, commercial credit cards are issued to businesses to help track company expenses and establish a dedicated business credit history. They’re often used to fill short-term cash gaps. However, using credit cards can be a dangerous practice, as many businesses get trapped in a cycle of making interest-only payments.

Credit Profile

A lender assesses a credit profile to review a business’s or individual’s financial responsibility and determine the risk of extending new credit.

Business Credit Score: A business credit score provides a numerical rank of a company’s creditworthiness based on its specific payment history with vendors and suppliers. A top business credit score is usually 100.
Personal Credit Score: Lenders frequently assess a personal credit score to review a business owner’s individual credit files, which often serves as a benchmark for small business funding. A top score is usually 850.
FICO Score: While primarily a measure of personal credit, the FICO score is a critical tool in small business lending because many lenders use the owner’s personal financial history to predict the company’s reliability.
PAYDEX Score: Issued by Dun & Bradstreet, the PAYDEX score is a business credit rating ranging from 1 to 100 that specifically measures how promptly a company pays its trade credits and invoices.

Financing

The overarching process of providing funds for business operations, equipment purchases, or investments is known as financing.

Debt Financing: When a firm raises capital by selling debt instruments that must be repaid with interest, it is utilizing debt financing.
Cost of Debt Formula: To find the effective rate a company pays on borrowed funds, the cost of debt formula adjusts for the tax-shielding effects of interest deductions.
Equity Financing: Raising capital through the sale of shares or ownership stakes in an enterprise is referred to as equity financing.
Short-Term Financing: Intended to be repaid within a single year or sometimes two, short-term financing is typically used to manage immediate working capital needs.

Fuel Advances

In the trucking industry, fuel advances provide a way for carriers to receive a portion of their payment early to cover diesel costs before a load is delivered. They’re often paired with fuel cards.

Interest

Expressed as a percentage of the principal, interest represents the fundamental cost of borrowing money.

Annual Interest Rate: Rather than a monthly fee, the annual interest rate reflects the total interest charged over a full year for a loan or mortgage.
Annual Percentage Rate (APR): To understand the total yearly cost of a loan, the APR includes interest, fees, and other transaction costs expressed as a single percentage.
Compound Interest: By calculating interest on both the initial principal and accumulated interest from previous periods, compound interest allows debt to grow exponentially. This structure is most commonly found in credit card accounts, lines of credit, and traditional bank loans where unpaid interest is added to the principal balance.
Interest-Only Payments: Some repayment structures allow for interest-only payments, where the borrower pays only the cost of the loan for a set period without reducing the principal balance.

Invoice Factoring

By selling accounts receivable to a third party (called a factor or factoring company) at a discount, you can use invoice factoring to turn unpaid business-to-business (B2B) invoices into immediate working capital. It’s sometimes referred to as accounts receivable factoring, AR factoring, receivables factoring, or simply factoring. It’s often easier to get started factoring than it is to qualify for a loan because approval typically hinges on the creditworthiness of your clients.

Advance Rate: Usually ranging from 80 to 95 percent, the advance rate is the specific percentage of the invoice value that the factor pays the business upfront.
Factoring Rate: Also known as a discount rate or factor rate, this is the fee charged by the factoring company for providing the service and assuming the risk of collection.
Recourse Factoring: If an invoice goes unpaid by the customer, recourse factoring requires the business to buy that invoice back from the factor.
Non-Recourse Factoring: Under a non-recourse factoring agreement, the factor assumes the credit risk if the customer is unable to pay due to financial insolvency.
Reverse Factoring: Often initiated by a buyer rather than a supplier, reverse factoring allows vendors to receive early payments based on the buyer’s credit.

Invoice Financing

Rather than selling the assets outright, invoice financing involves using outstanding accounts receivable as collateral to secure a revolving line of credit or a short-term loan. This arrangement allows the business to remain responsible for collecting payments from its customers, while the lender provides an advance that’s typically up to 85 percent of the invoice value. The balance is then repaid once the customers settle their balances.

Line of Credit

A line of credit allows you to draw funds up to a set limit and pay interest only on the amount you actually use.

Loan

A loan provides a sum of borrowed money that must be repaid over a specified period, typically with interest.

Loan Stacking: Taking out multiple business loans or advances from different lenders at the same time is a risky practice known as loan stacking.
Equipment Loan: Because the purchased machinery serves as its own collateral, an equipment loan offers a specialized way to fund business hardware.
Term Loan: Provided for a specific amount with a set repayment schedule, a term loan can carry either a fixed or floating interest rate.
Secured Loan: Debt that is backed by specific collateral, such as real estate or inventory, is classified as a secured loan.
Unsecured Loan: Supported only by your creditworthiness and a promise to pay, an unsecured loan requires no physical collateral.

Merchant Cash Advance (MCA)

A merchant cash advance provides a lump sum of capital in exchange for a fixed percentage of your future daily credit card or debit card sales. MCAs have recently come under legal scrutiny throughout the country because their APRs can reach into the thousands.

Advance: The advance is the initial lump sum of cash provided to your business upfront, which you can typically use for any operational need or growth opportunity.
Holdback: Instead of a fixed monthly payment, the lender takes a specific percentage of your daily sales, known as the holdback, directly from your card processor until the total agreed-upon amount is repaid.

Mezzanine Financing

Acting as a hybrid of debt and equity, mezzanine financing gives a lender the right to convert debt into an ownership stake if the loan isn’t repaid on time and in full.

Quick Pay

Often used in industries like construction, quick pay is a funding solution established by a payor that accelerates payment for those supporting their work. For instance, subcontractors may use quick pay when a general contractor makes it available to them, typically by partnering with a top factoring company.

Return on Investment (ROI)

To evaluate the efficiency of a specific spend or project, calculate the return on investment by dividing the net profit by the original cost.

Stock Market

As a key pillar of the capital market, the stock market serves as the platform where investors trade shares of ownership in publicly listed companies.

Venture Capital

Startups with high growth potential often seek venture capital, which is a form of private equity provided by investors in exchange for an ownership stake.

Financial Contract Terms Explained

Before you sign a financial contract, double-check any terms you’re unfamiliar with.

Chargeback

If a customer disputes a transaction with their bank, it can result in a chargeback, where the funds are forcibly reversed from your merchant account and returned to the consumer.

Default/Acceleration Clause

Contracts often include a default or acceleration clause, which gives the lender the right to demand immediate repayment of the entire remaining balance if you breach specific terms of the agreement.

Drag-Along Rights

Used primarily during a company sale, drag-along rights enable a majority shareholder to force minority shareholders to join in the sale of the business under the same terms and conditions.

Lien

To secure their interest in your assets, a lender may place a lien on your property, giving them a legal right to seize that property if you fail to meet your debt obligations. Some businesses may also have an IRS lien if taxes go unpaid.

Liquidation Preference

In the event that your company is sold or dissolved, a liquidation preference determines the order and amount of payout, often ensuring that investors receive their initial capital back before other shareholders are paid.

Loan Authorization and Agreement (LA&A)

Most commonly associated with government-backed funding, the LA&A is the formal document that outlines the specific terms, conditions, and requirements you must meet to receive and maintain the loan.

Maturity Date

The maturity date marks the specific point in time when the final payment on a loan or financial instrument is due, ending the term of the agreement.

Position

The position describes the priority of a lender’s claim on your assets. For example, a first-position lender is the first in line to be repaid if your business is liquidated. Many lenders will not take a second position for this reason.

Principal

Regardless of the interest or fees accrued, the principal is the original amount of money you borrowed or invested, which serves as the basis for all interest calculations.

Pro-Rata Rights

Investors often negotiate pro-rata rights, which grant them the opportunity to maintain their percentage of ownership by participating in future funding rounds.

Repayment Penalty

Also known as a prepayment penalty, a repayment penalty is a fee charged by some lenders if you pay off your debt significantly earlier than the scheduled maturity date.

Repayment Schedule

To ensure consistency, a repayment schedule provides you with a clear timeline of all required payments, including the specific dates and amounts due over the life of the loan.

Simple Agreement for Future Equity (SAFE)

Designed as a faster alternative to convertible notes, a SAFE is an agreement where you receive immediate capital from an investor in exchange for the right to ownership shares during a future funding round. Because it is not a loan, a SAFE does not accrue interest or have a specific maturity date, though it often includes a Valuation Cap to protect the investor’s future stake.

Valuation Cap: In a convertible note or SAFE agreement, a valuation cap protects your investors by setting a maximum price at which their debt can convert into equity, regardless of how high the company’s valuation climbs.

Schedule of Liabilities

As part of a financial disclosure or loan application, you provide a schedule of liabilities that lists every outstanding debt and financial obligation your company currently owes.

Stock Options

Often used as an incentive for employees or partners, stock options give the holder the right to purchase shares of your company at a set price within a specific timeframe.

Term Sheet

Before a formal contract is drafted, you will likely receive a term sheet, which is a non-binding document that outlines the preliminary price, conditions, and structure of a proposed investment or loan.

Termination Clause/Exit Clause

Every well-structured contract includes a termination or exit clause, which defines the specific circumstances and procedures under which either party can legally end the agreement before it reaches its natural conclusion.

Vesting

To encourage long-term commitment, vesting is the process where ownership of stock options or employer-contributed funds is earned over time rather than being granted all at once.

Term

The term refers to the total duration of a financial agreement, such as the length of a vesting period or the overall lifespan of a loan.

Growth and Sale Financial Jargon for Entrepreneurs

To round things out, a simple financial glossary for startups is provided below. These terms will come into play if your business is growth-minded or your goal is to sell.

Buyout

When an investment firm or another company purchases a controlling interest in your business, the transaction is referred to as a buyout, effectively transferring ownership and control to the new entity. There are also partner buyouts, in which one of the company’s partners departs, and the remaining partner or partners buy out the departing party’s share.

Capital Gain

If you sell an asset, such as shares in your company or real estate, for more than the original purchase price, the resulting profit is classified as a capital gain.

Customer Acquisition Cost (CAC)

To determine the efficiency of your marketing efforts, you calculate the customer acquisition cost by dividing the total spend on sales and marketing by the number of new customers acquired during a specific period.

Dilution

As you issue new shares to investors or employees, your individual ownership percentage decreases; this process, known as dilution, reduces your relative control and claim on future profits.

Dividend

A dividend is a portion of your company’s earnings distributed to shareholders, typically as a reward for their investment when the business is profitable.

Due Diligence

Before a merger, acquisition, or major investment is finalized, the interested party will conduct due diligence. It’s a rigorous investigation into your financial records, legal standing, and operations to verify that your business is a sound investment.

Ending Market Value

At the close of a specific period or upon the completion of a project, the ending market value represents the total dollar amount an asset or your entire company is worth on the open market.

Exit Strategy

Every founder needs an exit strategy, which is a strategic plan for how you will eventually transition out of the business, whether through a sale, a merger, or an IPO.

Initial Public Offering (IPO)

An IPO marks the first time you offer shares of your private company to the general public on a stock exchange, transforming the business into a publicly traded entity.

Investment

Whether it comes from your own pocket or an outside source, an investment is the act of putting money or assets into your business with the expectation of generating a future profit or achieving a specific return.

Key Performance Indicators (KPIs)

To track progress toward your strategic goals, you monitor KPIs. These are specific, measurable metrics like revenue growth or customer retention that indicate how effectively your business is operating.

Mergers and Acquisitions (M&A)

The overarching term M&A describes the consolidation of companies or assets through various types of financial transactions, including one company buying another or two companies joining to form a new entity.

Series Funding

As your company matures, you may go through different rounds of series funding to raise capital from venture capitalists and private equity firms.

Series A: Series A is typically your first significant round of venture capital, used to optimize your product and scale your marketing and sales efforts.
Series B: Once you have a proven track record and a growing user base, you raise a Series B round to expand your market reach and grow your team.
Series C: Companies that are already successful use Series C funding to develop new products, expand into international markets, or even acquire other businesses.

Valuation

To determine the total economic worth of your company, an analyst or investor will perform a valuation, which serves as the basis for how much equity you must give up in exchange for funding.

Master Small Business Finance Basics with Invoice Factoring

Understanding business financial terms is key to running a healthy and profitable business, but as this glossary shows, profit isn’t everything. Cash flow is what keeps the lights on and business operations moving. If your business seems to be performing well but money is tight or not available at key moments, like when payroll is due, invoice factoring can unlock the cash trapped in your B2B invoices so you can move forward with confidence.

Skip the financial jargon for entrepreneurs and get clarity. Request a complimentary rate quote.

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Greg DiDonna

President and Partner at Viva Capital

Greg DiDonna, President & Partner at Viva Capital, leads strategy, growth, and service. A three-time Southwestern Banker of the Year award winner.