Financial jargon. Everyone hates it, right? Seemingly impenetrable and often downright confusing, jargon tends to keep people out of the financial conversation more than it makes them a part of it. But for any entrepreneur or small business owner, understanding financial jargon is crucial to success. Once you’ve learned the basics, you’ll find yourself asking your accountant the right questions and talking to investors about your financial future with confidence.
Here are 15 key financial terms every small business owner needs to know.
Alternative business finance
What does it mean?
Acquiring funding for your business without a traditional high street bank. Think crowdfunding (using websites like Kickstarter to gain investment from members of the public) or asset leasing (renting out your equipment, land or vehicles to raise money for your business), or alternative digital lenders, like OakNorth.
Why you need to know
Economic uncertainty has made it harder than ever for small business owners to access traditional loans. Alternative business funding allows you to cut out the banks and secure funding on your own terms.
Cash flow
What does it mean?
The flow of money in and out of a business’ account. Money comes in from revenue and funding and goes out through expenses, taxes and staff salaries.
Why you need to know
Understanding cash flow is essential to the overall health of a business. Many enterprises fail due to poor cashflow management. Business owners must build effective forecasts in order to avoid a financial shortfall.
Cloud accounting
What does it mean?
An accounting system that is accessed via the internet. Examples of cloud accounting software include Xero and Intuit Quickbooks.
Why you need to know
Cloud accounting makes it easier for business owners to keep track of their finances. Real-time reports and automated invoice reminders take the hard work out of cashflow management.
Debtor days
What does it mean?
The number of days it takes for a business to collect payment from its customers.
Why you need to know
Debtor days are a crucial part of understanding cash flow. Business owners must account for debtor days when calculating how much money they need to cover upcoming bills.
Invoice discounting
What does it mean?
When a finance company lends to a business against their accounts receivable (money owed to them in unpaid invoices). The finance company will charge interest and a monthly fee for this service.
Why you need to know
Invoice discounting allows you to collect money as soon as you issue an invoice, ensuring a steady flow of cash into your business and avoiding the stress of late payments.
Invoice factoring
What does it mean?
Similar to invoice discounting, but the finance company takes full responsibility for monitoring their client’s sales ledger and chasing late payments.
Why you need to know
Invoice factoring takes the hard graft of credit control out of business owners’ hands. Without the stress of chasing invoices, you can concentrate on other areas of your business.
Letter of credit
What does it mean?
A letter issued by a buyer’s bank, promising to pay a seller if the buyer fails to do so. This is on the condition that the seller fulfills their obligation to deliver the goods.
Why you need to know
By acquiring a letter of credit, business owners avoid paying for goods upfront. This is particularly useful when trading internationally, where shipping risks may make a buyer more cautious.
Long-term asset
What does it mean?
A business asset that is not converted into cash within a year, but will benefit a business for several years. Examples of long term assets include property, equipment and patents.
Why you need to know
Investment in long-term assets is a good sign of a business’s health and future growth potential. However, the expense of long term assets can drive businesses into debt.
P2P business funding
What does it mean?
Peer-to-peer (P2P) business funding is where a business secures a loan from a collection of private investors without the involvement of a bank, usually via an online platform.
Why you need to know
P2P business funding provides a fast and accessible alternative to traditional loans. P2P funding is unsecured, so loans can be acquired quickly. However, interest rates can be higher than bank loans.
Personal guarantee
What does it mean?
A legal document signed by a company executive, in which they agree to personally repay a loan if the company is unable to do so. Find out more about personal guarantees in our complete guide.
Why you need to know
Personal guarantees allow new business owners to secure funding before your company has acquired assets. This type of agreement suits entrepreneurs who are prepared to risk their own capital.
Secured business funding
What does it mean?
A loan that is secured against either personal or company assets. If the loan isn’t repaid in the agreed time, the lender will reclaim these assets.
Why you need to know
This is a traditional form of business lending. Because it is a secured business loan, lenders tend to view the loan as less risky, giving borrowers a better interest rate and more flexible payment terms.
Short-term asset
What does it mean?
A business asset that is converted into cash within one year. Examples of short-term assets include outstanding customer invoices and raw materials.
Why you need to know
Business owners can use short-term assets to calculate how much revenue they expect to make within a year. They can also borrow against short term assets.
The FCA
What does it mean?
The Financial Conduct Authority (FCA) is an independent body which regulates financial companies in the UK.
Why you need to know
There are many financial services available to businesses, but some are more reliable than others. Business owners can avoid scams by working with FCA-approved companies, like OakNorth.
Trade finance
What does it mean?
A blanket term for the financial services that enable international trade between businesses. These include letters of credit, shipping insurance and invoice factoring.
Why you need to know
International trade can be risky. When trading abroad, it’s important to use the financial services available to protect yourself against potential issues, such as non-payment and shipping delays.
Unsecured business funding
What does it mean?
A loan that is not guaranteed against personal or company assets. These loans work as an alternative to bank loans, which are generally secured against collateral such as property or equipment.
Why you need to know
Unsecured business loans suit businesses that need fast access to cash but don’t yet have the assets required to secure a traditional loan.
If you’re a business owner looking to scale, we can help. No matter the sector you operate in, we can offer smart, tailored financing to power the future of your business. Check out our business loans page to find out more.
