If you own a business and are considering financing, it’s important to be thoroughly prepared before you begin contacting potential lenders. There are countless funding options available today and a variety of lenders to serve your needs at every stage of your company’s growth. However, finding a program that is the right match for your business is no easy task.
Small business owners need to invest the time and effort to understand the financing process in order to avoid making costly mistakes. For starters, it’s essential to have a basic understanding of the terminology lenders commonly use. Mastering these 10 need-to-know terms will allow you to move forward with confidence and help you make an informed decision about financing for your business:
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. The APR offer you receive will vary from lender to lender, based on the loan product you’re seeking and your history as a borrower. 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: This is the maximum amount of credit 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: 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 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 understands that securing the funding you need to grow is critical. Our working capital loans for small to medium-sized businesses involve using your accounts receivable and other assets as collateral. We create custom financing solutions with reasonable rates that provide the working capital you need – when you need it most.