GUIDED FINANCIALS

An integral part of the loan application process is furnishing information that shows your business is a good credit risk. The standard Financial Statement packet includes four main reports: the income statement, the balance sheet, the statement of cash flow, and the statement of shareholders equity, if you have shareholders.

Lenders and investors want to see that your business is well-balanced with assets and liabilities, has positive cash flow, and will have capital to make expected repayments.

The Balance Sheet is essential information that gives a “snapshot” of the company’s net worth at any given time. The report is a summary of the business assets and liabilities.

It is also called a profit and loss statement, and it addresses the business’s bottom line, reporting how much the business has earned and spent over a given period of time. The result will be either a net gain or a net loss.

Anything that has value—whether tangible or intangible—and is owned by the business is considered an asset. Typical items listed as business assets are cash on hand, accounts receivable, buildings, equipment, inventory, and anything else that can be turned into cash.

An investment that puts cash in your account is an asset.

A tangible, long-term asset used for the business and not expected to be sold or otherwise converted into cash during the current or upcoming fiscal year is called a fixed asset.

A business asset that is non-physical is considered intangible. These assets can be items like patents, goodwill, and intellectual property.

This business finance key term is a legal obligation to repay or otherwise settle a debt. Liabilities are considered either current (payable within one year or less) or long-term (payable after one year) and are listed on a business’s balance sheet. A business’s accounts payable, wages, taxes, and accrued expenses are all considered liabilities.

Anything that you pay for more than one time.

Refers to the overall wealth of a business as demonstrated by its cash accounts, assets, and investments.

Not to be confused with fixed capital, it consists of the financial resources necessary for maintaining the day-to-day operation of the business. Working capital, by definition, is the business’s cash on hand or instruments that you can convert to cash quickly.

Financial technology (better known as fintech) is used to describe new technology that seeks to improve and automate the delivery and use of financial services. ​​​At its core, fintech is utilized to help companies, business owners, and consumers better manage their financial operations, processes, and lives. It is composed of specialized software and algorithms that are used on computers and smartphones. Fintech, the word, is a shortened combination of “financial technology.”

Passive income is money that you earn either automatically or without putting in much effort. Examples of passive income include rental income, interest income, investment income, and affiliate marketing.

Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman.

P2P lending is also known as “social lending” or “crowd lending.” It has only been around since 2005, but the crowd of competitors already includes Prosper, Lending Club, Upstart, and StreetShares.

The industry works in a very simple way. In the marketplace, people and companies in need of best peer to peer (person to person) loans can apply and get it within a short period of time. On the other hand, investors, who are in need of growth can deposit money in these companies and then lend that cash out for interest gains. Peer to peer lending platforms generate their profits by taking a cut of the interest rates paid by the borrowers.

Same as or otherwise known as, an Income Statement.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability to net income. By stripping out the non-cash depreciation and amortization expense as well as taxes and debt costs dependent on the capital structure, EBITDA attempts to represent cash profit generated by the company’s operations.

It is a process that lets you combine multiple loans into a single loan.

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.

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.

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.

A FICO is another type of credit score used by potential lenders for evaluating the wisdom of entering a contract with you and your business. FICO scores comprise a substantial part of the credit report that lenders use to assess credit risk. It was created by the Fair Isaac Corporation, hence the name FICO.

The interest rate on a loan that is established in the beginning and does not change for the lifetime of the loan is said to be fixed. Loans with fixed interest rates are appealing to small business owners because the repayment amounts are consistent and easier to budget for in the future.

In contrast to the business finance term and definition fixed rate, the floating interest rate will change with market fluctuations. Also referred to as variable rates or adjustable rates, these amounts may often start out lower than the fixed rate percentages.

When starting a new small business, lenders might want you to provide a guarantor. This is an individual who guarantees to cover the balance owed on a debt if you or your business cannot meet the repayment obligation.

All loans and other lending instruments are assigned the business finance key term interest rates. This is a percentage of the principal amount charged by the lender for the use of its money. Interest rates represent the current cost of borrowing.

Just like it sounds, this term represents any profits earned that are retained in the business. This can also be referred to as bootstrapping.

Assets – Liabilities = Net Worth

A franchise is a type of license that grants a franchisee access to a franchisor’s proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor’s business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual license fees.

For a small business entrepreneur, entering into a franchise agreement with a larger company can be a way to enter the marketplace. The agreement made between you and the larger company gives you the right to operate as a satellite of the larger company in a certain territory for a given period of time. This lets you, the business owner, take advantage of a brand name that’s already familiar in the marketplace and a process or operation that has already been tested.

In order to be more easily identified by the Internal Revenue Service, every business entity is assigned a unique number called an EIN. When you start your small business, an EIN will be assigned and mailed to the business address. This number never changes, and you will be asked to furnish it for many reasons.

Here is your tool for demonstrating how you want to establish your small business and how you plan to grow it into good financial health. When writing a business plan, it should include financial, operational, and marketing goals as well as how you plan to get there. The more specific you are with your business plan, the better prepared you will be in the long run.

This is legal documentation of the business’s creation, including name, type of business, and type of business structure or incorporation. This paperwork is one of the first tasks you will complete when you officially start your business. Once submitted, your articles of incorporation are kept on file with the appropriate governmental agencies.

Loans that are not backed by collateral are called unsecured loans. These types of loans represent a higher risk for the lender, so you can expect to pay higher interest rates and have shorter repayment time frames. Credit cards are an excellent example of unsecured loans that are a good option for small business funding when combined with other financing options.

These are debt financing tools used to raise needed funds for your small business. Term loans provide the business with a lump sum of cash up front in exchange for a promise to repay the principal and interest at specified intervals over a set period of time. These are typically longer term, one-time loans for start-up expenses or costs for established business expansion.

Many lenders will require some form of security when loaning money. When this happens, this business finance term and definition is a secured loan. The asset being used as collateral for the loan is said to be “securing” the loan. In the event that your small business defaults on the loan, the lender can then claim the collateral and use its fair-market value to offset the unpaid balance.

This business finance term and definition is a funding option is similar to a standard line of credit. However, the agreement is to lend a specific amount of money, and once that sum is repaid, it can be borrowed again.

• A non-accredited investor is any investor who does not meet the income or net worth requirements from the Securities and Exchange Commission (SEC).
• Non-accredited investors are anyone who makes less than $200,000 annually ($300,000 including a spouse) with a total net worth of less than $1 million when their primary residence is excluded.
• The SEC regulates what a non-accredited investor can invest in and what those investments need to provide in terms of documentation and transparency.

An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience.

 

Requirements for Accredited Investors

The regulations for accredited investors vary from one jurisdiction to the other and are often defined by a local market regulator or a competent authority. In the U.S, the definition of an accredited investor is put forth by SEC in Rule 501 of Regulation D.3

To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. The income test cannot be satisfied by showing one year of an individual’s income and the next two years of joint income with a spouse.3

A person is also considered an accredited investor if they have a net worth exceeding $1 million, either individually or jointly with their spouse. This amount cannot include a primary residence. The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities.3

An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.

 However, an organization cannot be formed with the sole purpose of purchasing specific securities.

The U.S. Securities and Exchange Commission (SEC) is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation.

The Financial Industry Regulatory Authority (FINRA) is an independent, nongovernmental organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States.

Its stated mission is “to safeguard the investing public against fraud and bad practices.” It is considered a self-regulatory organization.

“FINRA plays a critical role in ensuring the integrity of America’s financial system—all at no cost to taxpayers.
Working under the supervision of the Securities and Exchange Commission, we:

• Write and enforce rules governing the ethical activities of all registered broker-dealer firms and registered brokers in the U.S.;
• Examine firms for compliance with those rules;
• Foster market transparency; and
• Educate investors.”

A method of accounting that involves the timely recording of all financial transactions for the business.

This represents your small business’s obligations to pay debts owed to lenders, suppliers, and creditors.

The money owed to your small business by others for goods or services rendered.

An accounting method of recording income when it’s actually earned and expenses when they actually occur.

Every business needs cash to operate. The business finance term and definition cash flow refers to the amount of operating cash that “flows” through the business and affects the business’s liquidity. Cash flow reports reflect activity for a specified period of time, usually one accounting period or one month.

Future business decisions will depend on your educated cash flow projections to plan ahead for upcoming expenditures and working capital, you need to depend on previous cash flow patterns.

The value of any asset can be said to depreciate when it loses some of that value in increments over time. Depreciation occurs due to wear and tear.

Gross profit, also sometimes referred to as gross income, is revenue minus cost of goods sold (COGS).

It corresponds to the income the company makes after having deducted all the costs associated with making its products or providing its services.

Gross profit appears on the company’s income statement.

liquidity is an indicator of how quickly an asset can be turned into cash for full market value. The more liquid your assets, the more financial flexibility you have.

One of the important documents required by lenders and investors that shows a summary of the actual collection of revenue and payment of expenses for your business. The statement of cashflow should reflect activity in the areas of operating, investing, and financing and should be an integral part of your financial statement package.

If you have chosen to fund your small business with equity financing and you have established shares and shareholders as part of the controlling interests, you are obligated to provide a financial report that shows changes in the equity section of your balance sheet.

The business finance term and definition APR represents the yearly real cost of a loan including all interest and fees. The total amount of interest to be paid is based on the original amount loaned, or the principal, and is represented in percentage form.

Just like your real estate appraisal when buying a house, an appraisal is a professional opinion of market value. When closing a loan for your small business, you will probably need one or more of the three types of appraisals: real estate, equipment, and business value.

A loan that is structured so that the small business owner makes regular repayments on a predetermined schedule and one much larger payment, or balloon payment, at the end.

This federal law is used as a tool for businesses or individuals who are having severe financial challenges. It provides a plan for reduction and repayment of debts over time or an opportunity to completely eliminate the majority of the outstanding debts.

Using your own money to finance the start-up and growth of your small business.

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.

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.

Provides private credit reports on businesses.

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.

Any loan instrument is made of three parts—the principal, the interest, and the fees. The principal is a business finance key term and is the original amount that is borrowed or the outstanding balance to be repaid less interest. It is used to calculate the total interest and fees charged.

If you’re seeking financing for a very new business and don’t have a high value asset to offer as collateral, you may be asked by the lender to sign a statement of personal guarantee. In effect, this statement affirms that you as an individual will act as guarantor for the business’s debt, making you personally liable for the balance of the loan even in the event that your business fails.

Microloans are loans made through nonprofit, community-based organizations and they are most often for amounts under $50,000.

A merchant may offer a funding method through a loan based on the business’s monthly sales volume. Repayment is made with a percentage of the daily or weekly sales. These tend to be short-term loans and are one of the costliest ways to fund your small business.

Any loan product with a total repayment schedule lasting longer than one year is considered a long-term debt.

The LTV comparison is a ratio of the fair-market value of an asset compared to the amount of the loan that will fund it. This is another important number for lenders who need to know if the value of the asset will cover the loan repayment if your business defaults and fails to pay.

Line of Credit is considered a short-term funding option, with a maximum amount available. This pre-approved pool of money is appealing because it gives you quick access to the cash.

This business finance term and definition is a creditor’s legal claim to the collateral pledged as security for a loan is called a lien.

If your business has a significant amount of open invoices outstanding, you may contact a factoring company and have them purchase the invoices at a discount. By raising capital this way, there is no debt, and the factoring company assumes the financial responsibility for collecting the invoice debts.

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.

If your business fails to pay taxes owed to the designated government entity, namely the IRS, you may find your assets seized by the claim of a tax lien. The government can not only seize your assets for liquidation to resolve the tax debt, but they can also charge you penalties on the amount you owe.

A breach of contract is a violation of any of the agreed-upon terms and conditions of a binding contract. The breach could be anything from a late payment to a more serious violation, such as the failure to deliver a promised asset.

A contract is binding and will hold weight if taken to court. If it can be proved that a contract was breached, the remedy would generally be to give the victim what they were initially promised. A breach of contract is not considered a crime or even a tort, and punitive damages are rarely awarded for failing to perform promised obligations.

Income – Expenses = Cash Flow

I = p x r x t

 

I = Interest

p = principal amount

R = rate of interest charged per year (as a decimal number)

T = How long the money is borrowed or invested for (in years)

A = P (1 + r/n) nt

A = The amount earned after interest

P = The principal amount

r = The annual interest rate (as a decimal)

n = The number of times the interest is compounded (per year)

t = How long the money is borrowed or invested for (in years)

An investment that puts cash in your account is an asset.

Price to Earnings Ratio = Price per share / Earnings per share

This can tell you if stocks are over- or undervalued.

Basic liquidity ratio = Monetary assets (in dollars) / Monthly expenses (in dollars)

Basic liquidity ratio = Monetary assets (in dollars) / Monthly expenses (in dollars)

Net income = Revenue – Expenses

Purchase price variation = (Current price – purchase price) / purchase price

Years needed to double your investment = 72 / compound interest rate (per year)

The rule of 72 is a useful trick that tells you how many years your investment will need to double in value at a specific annual return rate.

• Debt payments / Income = Leverage Ratio

 

• Total Debt / Total Equity = Leverage Ratio

 

• Debt to EBITDA ratio: Total Debt ÷ EBITDA. This ratio shows how many years it would take for a business to pay off its debt using its earnings before interest, taxes, depreciation, and amortization.

 

• Debt to equity ratio: (Preference share capital + debentures + Long term loan) / (Equity share capital + Reserve and surplus). This ratio shows how much debt a business has compared to its shareholders’ equity.

 

• Operating leverage ratio: % change in EBIT / % change in sales. This ratio shows how sensitive a business’ income is to changes in sales.

 

• Financial leverage ratio: Total Assets / Equity. This ratio shows how much of a business’ assets are financed by debt.