When it comes to financing, it’s important to make smart choices for your small business. There are many funding options available and a variety of lenders to serve your needs at every stage of your company’s development. Before you seek funding, it’s essential to have a basic understanding of how financing works. This will help you approach lenders with confidence and determine what will best serve your current needs.

Here are 10 essential financing terms every small business owner needs to know:

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Accounts Payable (A/P): Money a business owes to vendors for goods or services purchased on credit. Accounts payable appears as a current liability on the company balance sheet.

Accounts Receivable (A/R): Money owed to a business for products or services sold on credit. Once a company sends a customer an invoice for a specific sale, the sale becomes an account receivable and is typically recorded as a current asset on the company balance sheet.

Annual Percentage Rate (APR): If you want to know your true borrowing cost, look at the APR. It reflects not just the interest rate on a loan, but also the cost of fees and other charges you’ll have to pay. When deciding between different loan offers, small business owners can use APR to compare how much each loan will actually cost.

Asset-Based Lending (ABL): A business loan or line of credit that is secured by a company’s assets, which then forms the basis for determining how much credit the borrower can access. The collateral for an ABL is generally a financial asset, such as accounts receivable, rather than a physical asset. However, other collateral, such as inventory and equipment can also be used. Companies that need working capital to operate or grow often rely on ABL loans.

Cost of Capital: This is the true cost of securing the funds that a business uses to pay for its asset base. Some funds are from debt financing, which is less risky to creditors and has a lower cost of capital to the firm; some funds come from equity, which has a higher risk and a higher cost of capital.

Credit Facility: The maximum amount of assets that your company can borrow against. In other words, this is the credit limit that a lender is willing to provide to you based on the amount of collateral you have. If a lender offers you a million dollar loan but you only have $100,000 in collateral, this is the maximum amount of credit you will receive.

Invoice Factoring: Simply put, invoice factoring is a financing option that provides short-term working capital using a company’s outstanding invoices, or accounts receivable, as collateral. The factor advances you a percentage of the invoice’s value. Once the invoice is paid, the factor pays you the remaining percentage minus their fees.

Lien: A lien is the legal interest of a creditor to the collateral, or assets, of a debtor. A tax lien is a public document that asserts the government’s right to seize and sell your business property in order to satisfy your debts. The type and amount of business property that can be seized is far ranging and includes equipment, buildings, and intellectual property.

Underwriting: The process of determining the risk for a debt, based on the history of the borrower. At Summit Financial Resources, underwriting is our due diligence: the process of gathering information and analyzing your financials to make sure we determine the best way to lend you the most money possible while minimizing or offsetting risk. We focus on the value of the assets or collateral when structuring the loan’s terms and conditions, whereas bank underwriting guidelines generally involve a much closer scrutiny of credit worthiness, debt-to-equity ratios, working capital, and other criteria.

Working Capital: Also called current capital, working capital is the cash available to a business for its day-to-day operations. Your working capital is what is left over once you subtract your current liabilities from your current assets, and it can be a positive or negative amount. It is a common measure of a company’s efficiency, liquidity, and overall health.

Summit Financial Resources’ invoice factoring and ABL programs benefit small businesses by enabling them to borrow against their assets, including accounts receivables, inventory, equipment, and machinery. We partner with our clients to help them secure the operating capital they need to manage and grow their businesses.

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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.