Financing Terms, Explained

The total amount of funding a business requires, including use-of-funds (equipment, inventory, buildout), working capital, and contingency.

An itemized breakdown of how borrowed or invested capital will be spent, typically listing equipment, inventory, working capital, and other categories.

Short-term funds needed to cover day-to-day operations, calculated as current assets minus current liabilities, or as monthly operating expenses multiplied by a coverage period.

An additional amount (typically 5-15% of the subtotal) added to the capital request to cover unexpected costs or cost overruns.

Borrowing money that must be repaid with interest, such as bank loans, SBA loans, lines of credit, or equipment financing. The lender does not gain ownership in the business.

Selling a portion of ownership in the business to an investor in exchange for capital. The investor shares in profits and losses but repayment is not required.

The reduction in an existing owner's percentage of ownership that occurs when new equity shares are issued to investors.

A loan repaid in regular installments over a set period (term), typically 1-10 years. Each payment covers principal and interest.

A loan partially guaranteed by the U.S. Small Business Administration, offering favorable terms and lower rates than conventional loans. Common programs include 7(a) and 504.

A flexible borrowing arrangement allowing a business to draw funds up to a set limit as needed. Interest is charged only on the amount drawn.

A loan or lease used to purchase business equipment, where the equipment itself serves as collateral for the loan.

The cost of borrowing, expressed as a percentage of the principal per year. May be fixed (unchanging) or variable (tied to a benchmark rate).

The process of paying off a loan through regular payments that cover both principal and interest over the loan term.

An asset pledged to a lender as security for a loan. If the borrower defaults, the lender can seize and sell the collateral to recover the debt.

A promise by a business owner to personally repay a business loan if the business cannot. Commonly required for small business loans.

A condition in a loan agreement that the borrower must maintain, such as minimum DSCR, maximum debt-to-equity ratio, or restrictions on additional borrowing.

A measure of cash flow available to pay debt obligations, calculated as monthly cash flow divided by monthly debt payment. Many lenders look for 1.20x–1.25x or higher; requirements vary by lender and loan type.

A financial statement showing revenues, expenses, and net income over a period. Also called an income statement.

A financial statement showing assets, liabilities, and owner's equity at a point in time. It must balance: Assets = Liabilities + Equity.

A financial statement showing cash inflows and outflows from operating, investing, and financing activities over a period.

Money owed to a business by customers for goods or services delivered but not yet paid for. Listed as a current asset on the balance sheet.

Money a business owes to suppliers for goods or services received but not yet paid for. Listed as a current liability on the balance sheet.

Revenue minus all expenses, taxes, and costs. Also called profit or net earnings. Positive net income means the business is profitable.

Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of operating profitability that excludes financing and accounting decisions.

The net amount of cash moving in and out of a business. Positive cash flow means more cash is coming in than going out.

Cash generated by a business's core operations, before financing or investing activities. A key indicator of business health.

Operating cash flow minus capital expenditures. Represents cash available for debt repayment, dividends, or expansion.

The number of months a business can continue operating with its current cash balance, assuming current burn rate.

The rate at which a business spends cash, typically expressed as a monthly amount. Used to calculate cash runway.

A document submitted to a lender or investor requesting capital. Includes the amount, purpose, repayment plan, and supporting financial information.

A one-to-two-page overview of a business plan or funding proposal, summarizing the key points for quick review by lenders or investors.

The investigation a lender or investor conducts before providing capital, including review of financial statements, legal documents, and business operations.

A non-binding document outlining the key terms of a proposed investment or loan, including amount, interest rate, equity stake, and conditions.

A presentation used to pitch a business to investors, typically 10-15 slides covering the problem, solution, market, business model, and financials.

The estimated worth of a business, used to determine the price per share for equity investments. Common methods include revenue multiples, EBITDA multiples, and discounted cash flow.

The value of a business before a new investment is added. Post-money valuation = pre-money valuation + investment amount.