You’ve launched your company, entering a sea of business finance terms. Learn the jargon.

Here’s a list of 50 business finance 101 terms and definitions, ranging from the most basic to more complex. They should prove useful when comes to reporting financial results or applying for small business loans.

Small Business Finance: A Definition

Small business finance, by definition, encompasses all of the various ways businesses obtain and spend their money.

It covers strategies, practices and other processes relating to the generation and expenditures of earnings.

Business Finance 101: Terms and Definitions

Let’s build a business finance vocabulary, starting with the basics:


Assets are all of the economic resources your business owns and are categorized into a few different types.

  • Current/Liquid Assets: These assets include any resource that can be quickly turned into money: stock holdings, business checking and savings bank account balances and inventory.
  • Fixed Assets: These assets — namely real estate and equipment — aren’t as easy to turn into cash. They take time to sell.
  • Intangible Assets: These are assets you can’t physically touch, including brands, patents and intellectual property. Despite their nature, intangible assets still have the ability to make you money.


While assets can add cash resources to your business, liabilities may drain them.

Liabilities are anything that your business is legally responsible for paying. They include loans, credit-card debts and invoices payable to vendors.

  • Current Liabilities: These types of liabilities must be paid in the short-term. They include things such as vendor invoices payable to inventory suppliers.
  • Noncurrent Liabilities: Long-term liabilities, those that won’t be repaid within a year, are considered noncurrent. Noncurrent liabilities include business loans, mortgages and other long-term debts.


Expenses are any type of cost associated with your business. They can be fixed or variable.

  • Fixed Expenses: Expenses that do not fluctuate month-to-month- or year-to-year are fixed. These include costs like rent, equipment leases and insurance.
  • Variable Expenses: These expenses aren’t always the same. Common examples are wages, shipping costs and inventory purchases.

Accounts Receivable

Accounts Receivable (sometimes known as A/R) is the money your business is owed for its goods or services.

Accounts Payable

These liabilities represent the money you owe vendors and suppliers for goods or work performed.

Gross Profit

Gross profit is calculated by subtracting the total expenses from all sales related to a certain venture. The formula looks like this:

Revenue (Sales) – Cost of Goods Sold = Gross Profit


It is used to calculate gross profit margin, a crucial metric of profitability.

Net Income

Often referred to as the bottom line, net income is the total amount of profit or loss your business sees over a specified accounting period.

Working Capital

Working capital is a business finance word you hear often when speaking about small business loans.

It refers to the amount of money you have on hand, including assets that can be quickly converted into cash.

Cash Flow

Cash flow is the movement of money to and from your business. Tracking all of your transactions allows you to see trends in your cash flow.


When assets lose value due to wear and tear or other causes, they have depreciated. It’s important to track how your assets depreciate as you calculate the value of what you have on hand.


Your earnings before interest, tax, depreciation and amortization (EBITDA) are a good indicator of your company’s performance.

Why is this adjusted earnings figure important? It spells out how much cash a business generates from operations.

You can use either of these formulas to calculate EBITDA:

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization

EBITDA = Operating Income + Depreciation + Amortization

Employer Identification Number

Your employer identification number (EIN) is given to you by the IRS. It’s used like a personal social security number and is necessary for payroll and business tax purposes.

Automated Clearing House

If you’ve been in business for longer than one billing cycle, you may be familiar with automated clearing house (ACH) payments. These are taken directly to and from bank accounts electronically and are used for everything from making accounts receivable payments to paying off your monthly bills.

Business finance definitions for accounting.

Business Accounting Terms and Definitions

There are many reports you should create to track your financial performance as you run your small business. Understanding them can help you get ahead of the game.

Balance Sheet

A balance sheet gives you a broad look at your assets and liabilities. It can be used to find your company’s equity or its net worth.

Here is the formula:

Assets – Liabilities = Equity

Profit and Loss Statement

A profit and loss statement (sometimes referred to as a P&L) shows you how much your company has made and spent in a given period.

Use the following simple formula:

Revenue – Expenses = Profit (or Loss)

Cash Flow Statement

Your cash flow statement shows a record of the money coming in and going out for a specified period.

Include accounts receivable and other revenue, then subtract your day-to-day expenses along with any other operating, investing and financing costs.

Debt Service Coverage Ratio

Your debt service coverage ratio (DSCR) shows lenders and creditors how much money you have to pay off existing or future debts.

Use the following formula:

Net Operating Income / Debt Payments = DSCR


A DSCR exceeding 1 means your income is higher than your debt payments. This is important for lenders to know before allowing a business to assume more debt.

Accrual Basis Accounting

This common accounting practice records incomes and expenses as they happen. Some accruals that are reported include wages and payroll taxes.

Business Credit Terms and Definitions

Many terms used in business finance are related to credit. Add them to your business and finance vocabulary.

Small business tip: When applying for small business loans, lenders will usually ask to see one or more of these financial reports.

Before you apply, make sure you have these documents together to give them an accurate picture of your business’s financial health.

Business Credit Report

This is similar to how a mortgage lender would check your personal credit history before approving home loan. Creditors need somewhere to find that information about your business.

The report includes your full credit history including payments, loan balances and open lines of credit. It’s used to judge your business’s risk profile.

Business Credit Score

Your business is issued a credit score by each of the four major credit-rating firms: Dun & Bradstreet, Equifax, Experian and FICO.

While the ranges and factors vary by firm, the scores can provide a quick overview of your company’s fundability when lenders consider your application for financing.

Small business tip: Still unsure of how your business credit report and scores affect your ability to find small business loans? Learn more about the ranges, factors and everything else that goes into your business credit profile.

Credit Limit

When securing a business credit card or line of credit, your credit limit is the maximum amount of money you’re able to take out.


Filing for bankruptcy protection is an option for small business owners facing severe financial challenges.

It should only be considered if you’ve exhausted other options, as it will put a derogatory mark on your credit report that may impact your ability to secure future funding.

Loan and business financing terms and definitions

Loans and Business Financing Terms and Definitions

At some point, you may seek a small business loan or another type of financing to fund your next project. Knowing each business financing term and definition can help you understand your options and find affordable loans.

Debt Financing

Debt financing involves taking on debt that must be repaid in scheduled increments. It includes loans and lines of credit that allow you to keep full control of your business.

Equity Financing

Equity financing requires you to give up a portion of your equity in the business to obtain funding.

A common example is a business owner who gives up a percentage stake in their business to an investor in exchange for a sum of cash.

Annual Percentage Rate

The annual percentage rate (APR) of a loan or line of credit is the total amount of interest and fees you’ll be charged over the course of a year. It’s important to know the APR before signing a loan agreement because it gives you the full cost of borrowing.

Small business tip: Considering a small business loan but aren’t sure what costs are associated with them? Use our commercial loan calculators to get an estimate of what it will cost you to fund your business.

Fixed Interest Rate

A fixed interest rate stays the same over the life of your loan, regardless of changes in the economy.

Floating (Variable) Interest Rate

Floating, or variable, interest rates will fluctuate depending on changes in the market. The rates will go up or down at intervals specified in your loan contract.

Factor Rate

Factor rates are used to calculate the cost of borrowing in certain business financing products, including merchant cash advances.

Instead of using unpaid balance to accrue interest month to month, factor rates calculate a total amount of interest at signing that must be repaid, no matter what.

Loan Principal

The total amount you borrow, or the current balance of your loan, is the principal. This is used to calculate interest.


Loans that are amortized are repaid on a set schedule. Fixed interest rates are used with the loan principal to calculate a set monthly payment to be paid back over a specified term.

Loan Default

A loan goes into default when a business fails to make loan payments. Lenders will notify credit bureaus when a loan is placed in default, which will have a sharply negative effect on a business credit score.


Many small business financing options require a company to offer up collateral. These can be any asset a lender can seize if a loan goes into default.

Personal Guarantee

If you’re operating a new business or don’t have assets to offer as collateral, a lender may require you to sign a personal guarantee. This legally binds you to act as guarantor of the loan, becoming liable in case of default.


A lien is placed on one or more assets when taking out money with a creditor.

This mark is visible on your credit report and acts as a legal claim to recoup losses in case you’re unable to repay your debts.

Secured Loan

A secured loan is any type of financing that requires collateral or a personal guarantee to secure it. Common examples are mortgage and equipment loans, which use the property you’re purchasing as collateral.

Unsecured Loan

Unsecured loans, on the other hand, don’t have this guarantee to lenders and are considered riskier as a result.

Debt Consolidation

Businesses with more than one loan payment every month might consider debt consolidation. This practice refinances your current debts into one loan, often with a lower total monthly payment.

Loan-to-Value Ratio

Common in commercial real estate loans, the loan-to-value (LTV) ratio determines the percentage of a loan that a lender is willing to give you.

For example, a bank may give you 80% LTV on a $500,000 commercial mortgage. That means you’ll need to come up with a 20% ($100,000) down payment to reach the purchase price.

After-Repair Value Ratio

The after-repair value (ARV) of a commercial real-estate loan is the perceived value of the property after upgrades and renovations are made.

The ARV ratio determines how much of that value the lender is willing to loan you. An ARV of 60% on a $500,000 mortgage would mean you would need to come up with 40% ($200,000) of the purchase price on your own.

Term Loan

Debt financing that you take out and repay over a typically long period is considered a term loan.

Invoice Financing

Invoice financing uses your outstanding accounts receivable invoices to borrow money. This lending option is a great choice if your business has long turnaround times for receiving customer payment.

Merchant Cash Advance

A merchant cash advance (MCA) is a funding product that gives you an advance of cash, repaid by your business’s future sales. These can be repaid through a percentage of your credit card sales or, more commonly, ACH payments withdrawn from your business checking account.

Applying Business Finance Terms and Definitions

Having a grasp on business finance terms and definitions helps you run your company better.

They’ll come in handy when applying for business financing. You’ll know all of the terms and definitions you need to find the best option at the right price.

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