Even seasoned entrepreneurs can get lost in financial jargon—let alone new business owners. To simplify things, we’ve compiled a clear, comprehensive glossary of small business financing terms. This guide is designed to help you navigate funding options, communicate confidently with financing providers, and make smarter financial decisions. We’ll continue to add new terms to the glossary, so be sure to check it regularly for updates.
Why Understanding Small Business Funding Terms Matters
Knowing these terms helps you create better financial plans and avoid mistakes that can increase costs or cause you to miss funding opportunities. This guide will also help you:
- Make informed decisions to enhance business growth and stability.
- Improve communication with lenders and investors.
- Demonstrate professionalism and preparedness, increasing trust and credibility.
Learning the lingo will help:
- Access to better funding opportunities
- Improved financial planning
- Enhanced negotiation skills
With the right terms, you can identify which financing options suit your needs. This insight is crucial as small businesses often face unpredictable financial scenarios. It’s all about empowering yourself with knowledge.
How to Use This Small Business Funding Glossary
This glossary is a handy reference tool for small business owners. Use it to clarify unfamiliar funding terms and concepts. Whenever you encounter a term, check this list for straightforward definitions.
To make the most of this glossary:
- Consult it regularly to build your finance vocabulary
- Use it to decipher complex funding documents
- Share it with team members to enhance their financial literacy
If you don’t see a word, reach out — we’ll add it to our list.
A-Z Small Business Funding Glossary
A
Accounts Payable (AP) Financing
Money a business owes to its suppliers or vendors for goods and services it has received but not yet paid for. Accounts payable represents short-term liabilities and is an important part of managing a company’s cash flow and obligations.
Accounts Receivable (AR) / Accounts Receivable Financing
A type of funding where a business uses unpaid invoices as collateral to access immediate cash. Invoice factoring is a common form of AR financing, in which a company sells its receivables to a factoring company in exchange for upfront funds, helping to improve cash flow without taking on traditional debt.
Accrued Interest
Interest that accumulates on a loan. It has not yet been paid but is accumulating over time.
Alternative Financing
A method of raising capital or funding for a business outside of traditional bank loans or equity investments. It encompasses a wide range of non-traditional funding sources, including:
- Merchant cash advances (MCAs)
- Invoice factoring or accounts receivable financing
- Revenue-based financing (RBF)
Amortization
The process of reducing debt gradually. Payments are made over time, covering both interest and principal.
Amortizing Loan
A loan repaid over time through regular, scheduled payments of principal and interest, with each payment gradually reducing the outstanding balance until fully paid. Amortizing loans are often structured as term loans.
Asset-Based Lending (ABL)
Using business assets as collateral. This can include inventory, equipment, or accounts receivable.
B
Bridge Loan
Provides short-term funding for immediate needs. It’s often used before securing longer-term financing.
Business Credit Score
Evaluates a company’s creditworthiness. It’s crucial for obtaining loans and favorable terms.
C
Cash Flow
The inflow and outflow of cash. It’s vital for assessing a business’s financial health.
Convertible Note
A short-term debt that converts into equity under certain conditions, often used in startup financing.
Credit Facility
A flexible loan agreement between a lender and a borrower that allows the borrower to access a specific amount of money over a period without having to reapply for each withdrawal. This arrangement provides ongoing access to funds for various purposes, such as managing cash flow or funding short-term needs. Read a real-world example in “VOX Secures Credit Facility From Raven Capital.”
Creditworthiness
Assessed by evaluating a borrower’s credit score. It determines the likelihood of repaying debt and is often a factor in underwriting.
D
Debt Financing
Borrowing money to fund business operations. The borrower must repay with interest over time.
Debt-to-Equity Ratio
A financial ratio that compares total liabilities to shareholder equity. It helps in assessing financial leverage.
Dilutive Capital
A form of financing that reduces (or dilutes) the ownership percentage (equity stake) of existing shareholders in a company. This usually happens when a company issues new shares of stock or equity-linked instruments such as convertible notes or option.
Private equity investment is a form of dilutive capital.
E
Equity Financing
Involves selling company shares for capital. Unlike debt, it doesn’t involve interest obligations.
Equipment Financing
A loan or lease that helps a business buy or lease essential equipment, letting the company pay over time while preserving cash flow
F
Factoring
Also known as “invoice factoring,” factoring is a financial transaction where a business sells its receivables to improve cash flow. It’s a form of revenue-based financing.
Factor Rate
A fixed multiplier used in merchant cash advances (MCAs) or other alternative financing to determine the total repayment amount. Unlike an interest rate, which is a percentage applied over time, a factor rate determines the total repayment upfront.
Financial Statements
Provide insights into a company’s performance. They include balance sheets, income statements, and cash flow statements.
Franchise Financing
Helps fund the purchase of a franchise. Specialized lenders cater to the needs of franchise buyers.
Fixed Asset
A long-term tangible piece of property used to generate income.
Forecasting
A prediction of future financial outcomes, businesses use for planning and strategy development.
G
Grants
Funds provided by an institution, often government. Businesses receive them to support specific projects without repayment.
Gross Profit
Revenue minus the cost of goods sold. It indicates the efficiency of production in generating profit.
Growth Capital
Funding provided to an established business to expand operations, enter new markets, or develop new products. It is used alongside working capital to fund growth while keeping operations running smoothly.
Guarantor
Someone who promises to pay a borrower’s debt. This occurs if the borrower defaults on a loan.
H
Hedge Fund
An investment fund using pooled resources. It employs diverse strategies to earn returns for investors.
I
Interest Rate
The proportion of a loan charged as interest. It represents the cost of borrowing.
Invoice Factoring
Also called invoice purchasing, invoice factoring is a financing arrangement where a business sells its unpaid invoices to a third-party company (called a factor or purchaser) at a discount. In exchange, the business receives immediate cash instead of waiting for customers to pay, which helps improve cash flow without taking on debt. It is a type of revenue-based financing (RBF).
Invoice Financing
Provides immediate cash using accounts receivable. It helps businesses manage cash flow efficiently.
J
Joint Venture
A business arrangement between two parties. They partner for a specific task or project sharing risks and rewards.
K
KPI (Key Performance Indicator)
A measurable value. It evaluates the success of a business in achieving objectives.
L
Line of Credit (LOC)
An arrangement with a lender that sets a maximum loan balance that the borrower can access. Unlike a loan with a fixed principal, an LOC is “revolving” meaning you only pay interest on what’s used.
Liquidity
Refers to how easily assets convert into cash. High liquidity assets are preferable for managing day-to-day operations. When businesses
Lien
A legal right over an asset. It exists to secure the payment of a debt or performance of some other obligation. A UCC filing is a type of lien.
M
Merchant Cash Advance (MCA)
A form of alternative financing in which businesses receive a lump sum in exchange for a portion of future revenue, often made from credit card sales.
Microloan
A small loan designed for startups and small businesses. It helps those with limited access to traditional loans.
Mezzanine Financing
A hybrid of debt and equity financing. It’s generally used for expansion or growth.
N
Non-Dilutive Capital
Funding in which a business owner does not require giving up equity or ownership. Unlike equity financing, the lender or investor does not take a stake in the company. This type of financing can come in the form of grants, certain types of loans, or revenue-based financing.
Businesses can use non-dilutive capital for growth, operations, or short-term projects without affecting their ownership structure, and repayment is typically structured over set repayment periods or based on revenue performance.
O
Operating Income
Profit realized from regular business operations. It excludes extraordinary items and unrelated income.
P
Peer-to-Peer Lending
Lending to businesses via online services matching lenders and borrowers.
Profit Margin
Net income divided by revenue. It reflects the percentage of each dollar of revenue remaining as profit.
Private Equity
Investments in private companies. Investors inject capital for growth or business turnaround. This is a type of dilutive financing, in which investors receive a percentage of ownership in the business.
Purchase Order Financing
A short-term funding solution that provides capital to a business to pay suppliers and fulfill customer purchase orders before the business receives payment. A financing company advances funds based on a confirmed purchase order, allowing the business to produce, source, or deliver goods without tying up its own cash.
Q
Quick Ratio
A liquidity measure. It evaluates a company’s ability to meet short-term liabilities with quick assets.
R
Reconciliation
The process of reviewing a merchant’s actual earnings or accounts receivable, comparing them to expected remittances, and adjusting repayment amounts or schedules to reflect the merchant’s current cash flow. This typically applies to revenue-based financing products (e.g., Merchant Cash Advances, Invoice Factoring) and not to traditional loans with fixed terms.
Revenue-Based Financing (RBF)
A type of alternative funding where a business receives capital from a lender or investor in exchange for a percentage of its future revenue until a predetermined amount (usually a multiple of the original investment) is repaid.
Invoice factoring and MCAs are two popular types of RBF.
S
Small Business Administration (SBA) Loans
Small business loans guaranteed by the Small Business Administration loan programs. Known as “SBA loans,” they offer favorable terms for small businesses.
Secured Loan
Requires collateral. It is often easier to obtain because the lender’s risk is mitigated.
Supply Chain Financing
A set of funding solutions that helps businesses pay suppliers and manage cash flow across the supply chain by allowing early payment of invoices through a third-party. The supplier gets paid sooner, the buyer preserves working capital, and the financing is repaid according to agreed terms. Simply put, it improves cash flow for both buyers and suppliers by smoothing the timing of payments throughout the entire supply chain.
T
Term Loan
A loan typically from a bank for a specific amount. It’s repaid in regular installments over time.
U
Underwriting
The process of evaluating risk before issuing a policy. Lenders assess the potential risk of borrowers. Credit history may be a factor considered.
W
Working Capital
Current assets minus current liabilities; shows if a business can meet its short-term obligations. Working capital solutions helps fill cashflow gaps and ensures a business runs smoothly.
Revenue-based financing, including merchant cash advance and invoice factoring, can help fill gaps in working capital.
Key Takeaways for Small Business Owners
Fluency in these terms should empower you to make informed financial decisions and secure better funding options.
When you are ready to scale your business, check out VOX Funding’s programs (we can also teach you new lingo).