Cheat Sheet: 21 Financial Terms You Should Know (2019 Update)
One of the most important lessons I’ve learned in life is not to be afraid to ask questions. I grew up in a household where talking about the finances was pretty hush hush. Besides my dad teaching me how to sign and endorse a cheque, I really knew nothing about finance until my mid-twenties. I had enough street smarts, and general know-how to do the simple things. I could open a bank account (my first was with my mom at age 11 when she found I had saved over $1000 from my allowance because I never spent any of it), apply for my first credit card (in college, with the help of a very nice bank employee), and get a mortgage (yes, it took years off my life), and that was about it.
I took me a long time to fully understand exactly what all those financial terms meant. Finally, I got sick of not truly understanding all the financial terms that seemed necessary for life. They felt like a secret code only people in the finance industry understood and I started to ask questions. I didn’t care that it took me about 10 times of asking different people to really understand the meaning of APR or the difference between that and cents on the dollar.
I’m so thankful for my relatively newfound knowledge, and I wish someone would have just given me a cheat sheet of all the financial terms I would need to know as a birthday present at 17. (If we all lived in ArieleLand a financial fundamentals class would be mandatory for all high schoolers.)
Here are 21 of the most important financial terms you should know if you’re thinking about getting financing for your business.
- AIR: Annual Interest Rate is the yearly interest percentage you pay based on your average loan balance. This rate excludes any fees.
- APR: Annual Percentage Rate is the annualized interest rate plus any fees that are a condition of receiving capital—expressed as a yearly rate.
- Assets: Within the context of a small business loan an asset is something of value, owned by the borrower, which can be used as collateral by a lender.
- Business Credit Profile: A collection of information based on your business’ history of credit used to predict the likelihood of your business to be able to pay back borrowed funds.
- Cash Flow: The total amount of money being transferred into and out of a business that is used to pay for day-to-day expenses.
- Cents on the Dollar: Cents on the Dollar is the total amount of interest paid per dollar borrowed. This amount excludes any fees.
- Collateral: An asset, or assets, a borrower offers to a lender to secure a loan. The lender can take possession of these assets if the borrower defaults on the loan.
- Default: Failure to make the agreed upon periodic payments on a loan.
- Fixed Asset: A “tangible asset,” like property or equipment that can be used as collateral.
- Gross Profit: What is left over when the total cost of goods is subtracted from the total revenue.
- Interest-Only Payments: Making only the interest payments on a loan without paying anything on the principle. At the end of the term, the borrower will either need to refinance or pay back the principle in a lump sum.
- Liabilities: A business’ debts or obligations, which can be resolved in the form of payments or the transfer of goods or services.
- Line of Credit: Where the borrower receives access to a revolving set amount of funds to be utilized at the borrowers discretion and to be paid back based on the borrowed amount over a set period of time.
- Net Income: The total revenue for a given period of time minus all costs and expenses.
- Personal Credit Score: A number determined by a collection of information based on your personal history of credit, used to predict the likelihood of your personal ability to pay back borrowed funds.
- Principal: The amount of money being borrowed excluding interest payments and fees.
- Revenue: The total income generated for a given period of time before deducting any costs or expenses.
- Secured Loan: A loan where the borrower puts forth collateral in the event they should default.
- Stacking: Loan stacking is where a loan or cash advance is approved on top of a loan or advance that is already in place with similar characteristics and payback terms.
- Term Loan: A loan where the borrower receives a lump sum to be paid back in a predetermined dollar amount per period (day, week, month, etc.), for a set length of time.
- Unsecured Loan: A loan where the borrower is not required to put up collateral to secure the loan.