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Financial glossary for entrepreneurs

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Accelerated payment

When the borrower makes a request to reduce his or her loan amortization period by increasing the amount or frequency of payments, allowing the loan to be paid off earlier.

Accounts payable

Money owed by a company to its suppliers or other parties for services or goods.

Accounts receivable

Money owed to a company by its customers for services or goods that have been delivered.

Amortization period

Total length of time that it takes to pay a debt in full.

Angel investor

A wealthy investor who typically invests in a company in its early stages of development, often a tech start-up company.

Asset

Something a company owns. Tangible assets are physical; they include cash, inventory, vehicles, equipment, buildings and investments. Intangible assets do not exist in physical form and include things like accounts receivable, prepaid expenses, and patents and goodwill.

Average days payable

A financial indicator that measures the average number of days it takes for a company to pay its suppliers.

Average collection period

A financial indicator that measures the average number of days it takes for a company to receive payments from its customers.

Balance sheet

A document that summarizes a company's assets, liabilities and shareholders’ equity at a specific point in time (as indicated at the top of the statement). It is one of the fundamental documents that make up a company’s financial statements.

Balloon loan

A type of loan that doesn’t fully amortize over its life and requires a balloon payment at the end in order to be fully paid.

Balloon payment

A large payment due at the end of the term of a loan. The name comes from the fact that the debt becomes inflated like a balloon because the loan amount hasn’t been fully amortized over the life of the loan.

Blended payment

A loan repayment method where the loan is repaid in equal instalments, which include both principal and interest.

Breakeven point

When a company’s revenues will equal all the costs associated with those revenues.

Bridge capital

Also called bridge funding or bridge financing.

It is temporary funding that helps a business cover its costs until it can get permanent capital from equity investors or debt lenders.

Business accelerators

Programs that support and accelerate the growth of early-stage or established companies through mentorship, access to investors, logistical and technical resources as well as shared office space. Accelerators usually last for three to four months. They generally focus on the high-tech sector.

Business incubators

Programs that support the growth of start-up companies through mentorship, access to investors, logistical and technical resources as well as shared office space. They generally focus on the high-tech sector. Companies can spend from several months to a year or two in a business incubator.

Business plan

A document that typically identifies a company’s target customers and describes the products and services the company will offer. It also includes a detailed description of the market potential and competitors, as well as financial projections and marketing, production and human resources strategies.

Cash flow

Measures how much cash a company takes in versus how much it expends. More cash coming in than going out means the cash flow is positive. If the opposite is true, the cash flow is negative.

Cash flow statement

A document showing the company’s cash flow over a period of time (months or years).

Cash ratio

Also called quick ratio or acid test ratio.

A financial ratio indicating a company’s ability to pay immediate creditor demands, using its most liquid assets (cash or assets that are easily converted into cash), also called quick assets. It’s similar to the working capital ratio, except that it does not include inventory and prepaid items for which cash cannot be obtained immediately.

Collateral

The different kinds of assets that borrowers pledge as security for a loan.

Costs of goods sold

Costs that are a direct result of producing the product or providing a service, such as materials, direct labour and utilities.

Current assets

Assets that can be converted into cash within the next 12 months or operating cycle, such as inventory and accounts receivable.

Current liabilities

A company’s financial obligations that are due over the next 12 months or operating cycle, such as short-term debt and accounts payable.

Debt service coverage ratio

A financial ratio measuring a business’s capacity to generate adequate earning to repay its debt. It’s typically calculated by dividing the business’s operating profit before interest and depreciation by the annual principal and interest payments on its debt.

Debt-to-asset ratio

A financial ratio showing the percentage of a company’s assets financed by creditors. A high ratio indicates a substantial dependence on debt and could be a sign of financial weakness.

Debt-to-equity ratio

A financial ratio measuring how much debt a business is carrying as compared to the amount invested by its owners. This indicator is closely watched by bankers as a measure of a business’s capacity to repay its debts.

Default

Failure to repay a loan when term is due or failure to respect other conditions in the Loan Agreement that are defined as “incidents of default.”

Depreciation

A decrease in the value of an asset. For accounting purposes, depreciation indicates how much of a tangible asset’s value has been used up. Amortization and depreciation are often used interchangeably, but this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.

Dividends

A portion of the net profit that is distributed by a company to its shareholders.

EBITDA

Acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. It’s a fairly standard indicator of a company’s general financial performance.

Equity financing

When a company sells shares to investors to raise money to finance a company’s activities.

Financial statements

A set of documents showing a company’s current financial status. They generally include the income statement, balance sheet, statements of retained earnings and cash flow.

Fixed assets

An accounting term to describe tangible assets such as land, buildings, and equipment that the company owns or uses during the normal course of business.

Fixed costs

Overhead costs that generally do not change, such as office expenses and rent.

Fixed-rate loan

A loan for which the interest rate is fixed for a specified period of time.

Government remittance

Entrepreneurs collect sales taxes on behalf of federal and provincial governments. Most businesses collect the goods and services tax (GST) and/or the harmonized sales tax (HST). However, in British Columbia, Saskatchewan, Manitoba or Quebec, you may be required to register with the provincial government to collect the provincial sales tax—called the Québec sales tax in Quebec and the Retail Sales Tax in Manitoba.

Gross profit

Also called gross margin and gross profit margin.

The difference between a company’s revenues and the cost of goods sold (costs that are a direct result of producing the product or providing a service, such as materials, direct labour and utilities). It does NOT include fixed costs (overhead costs that generally do not change, such as office expenses and rent), taxes and interest payments.

Illiquid assets

Assets that cannot be easily converted into cash.

Income statement

A document that shows the profitability of a business over a specific period of time, including the company’s net profit or loss. It also summarizes revenues and expenses from operating and non-operating activities. It’s one of the fundamental documents that make up a company’s financial reporting.

Intangible assets

Assets that do not exist in physical form, such as accounts receivable, prepaid expenses, and patents and goodwill. They cannot be used for payments of debts but may produce income and can be sold, which is why they are listed under assets.

Inventory turnover

A ratio indicating how often a company has sold and replaced its inventory over an accounting period. It is a common operational efficiency ratio.

Letter of credit

Also called letter of guarantee.

A document issued by a financial institution guaranteeing payment to a seller if certain conditions are met. The letter of credit serves as a payment guarantee for the seller regardless of whether the buyer ultimately pays.

Liabilities

A company’s debt or other financial obligations, such as loans, accounts payable and mortgages.

Liquidity

A company’s ability to raise cash when it needs it, converting assets to cash to pay its current liabilities.

Loan acceptance

When a company has agreed to the authorized financing terms and conditions offered by the financial institution. Loan acceptance follows loan authorization.

Loan authorization

When the financial institution has completed its due diligence and approved the financing request. Authorization precedes loan acceptance.

Loan maturity date

The date on which the loan ends and the last payment is due.

Long-term assets

Assets that are not intended to be turned into cash or be consumed within the next 12 months or operating cycle, such as property and equipment.

Long-term liabilities

Debts or obligations that are not due within the next 12 months or operating cycle.

Love money

Money loaned by family or friends. Bankers consider this “patient capital”—that is, money that will be repaid as the company’s profits increase.

Net profit

Also called bottom line, net income or net earnings.

A company’s total income minus all the expenses, including taxes, interest, depreciation and amortization, or operating expenses for a determined period of time.

Net operating profit

Also called net operating income or Earnings Before Interest and Taxes (EBIT).

A company’s operating profit minus the operating expenses, but before income taxes and interest are deducted.

Operating expenses

Also called selling, general and administrative expenses (SG&A). The costs of running a business. They include rent and utility costs, marketing expenditures, computer equipment and employee benefits. They are categorized as indirect expenses on an income statement because they do not directly contribute to the making of a product or delivery of a service.

Operating loan

Also called line of credit.

A short-term, flexible loan that a company uses as required—borrowing as much as it needs up to a determined amount. It is usually secured by inventory and accounts receivable, and the bank can require full repayment at any time.

Operating profit

Also called Earnings Before Taxes (EBT).

The difference between gross profit and operating expenses.

Pari-passu

A way of structuring loan security (the assets that would be taken over by creditors if the borrower defaulted on the loan) where creditors are said to be equal in terms of who gets paid first. This means that in the event of a loan default, distribution of the assets will occur proportionate to the amount owed to each creditor with no other preference. This allows for the risk exposure of each institution to be reduced.

Personal loan

Also called line of credit.

Money loaned to a person, not to a business, and secured by the borrower’s personal assets. Many banks offer this type of loan to start-up businesses or to those with few fixed assets (land, building or equipment).

Quick assets

Highly liquid assets that can be rapidly turned into cash. They include the available cash in the business and accounts receivable. Inventory and prepaid items for which cash cannot be obtained immediately are excluded.

Retained earnings

The portion of a company’s net income that is reinvested in the business instead of distributed to shareholders as dividends.

Seasonal payment

A loan payment schedule that is adapted to the company’s cash flow availability. For example, a business in the tourism industry will have lower payments during its off-season months and higher payments during high-season period.

Secured loan

Financing where assets such as machinery or property are pledged as collateral in the event the borrower defaults on the loan; if this were to happen, the financial institution takes possession of the assets used as collateral.

Seed capital

The initial capital used to start a business. The money often is provided by angel investors (wealthy investors who usually expect to take an ownership position), friends and family members.

Senior debt

Debt that gives its holder a priority right over other debts.

Shareholders’ equity

Also called business net worth.

The difference between what a company owns (assets) and what it owes (liabilities) at a certain point in time.

Sole proprietorship

A business that is owned and operated by one individual. The owner of the sole proprietorship is responsible for all business liabilities, and his or her personal assets can be used to pay for these liabilities.

Stepped payment

A type of payment in which lower payments are allowed for the first few years, followed by increased or “stepped up” payments later in the life of the loan.

Straight-line payment

Also called regular payment.

The simplest type of amortization, whereby the principal payments are spread out equally over the life of the loan.

Subordinate financing

A blend of debt and equity financing used to finance the growth of existing companies. It is financing that is subordinate in priority of payment to secured debt, and senior to common stock or equity.

Tangible assets

Assets that have a physical form, such as real estate, equipment, vehicles, furniture and inventory. Tangible assets are usually required as collateral by conventional lenders when considering a loan request.

Term loan

A loan that is intended to be fully disbursed and then repaid in regular instalments (usually monthly) over a set period of time. Term loans are most often used to finance fixed assets, such as equipment and buildings.

Unsecured loan

A loan for which the lender does not have any tangible assets (equipment, real estate, cash) as collateral. The lender relies solely on the financial capacity and creditworthiness of the borrower to repay the loan.

Variable-rate loan

Also called floating interest loan.

A loan where the interest fluctuates depending on market interest rate changes.

Working capital loan

Financing to cover everyday operations in a company, such as marketing, developing or launching new products.

Working capital ratio

Also called current ratio.

The difference between current assets and current liabilities. This financial ratio indicates whether a business has sufficient cash flow to meet short-term obligations, take advantage of opportunities and attract favourable credit terms.

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