If you’re thinking of starting a business, financing is something you’ll have to consider early on. You’ll likely be confronted with many financial terms you’ll be expected to understand. We get it, this process can seem daunting. That’s why we’ve created this glossary of financial terms, explained in a simple and approachable way. By familiarizing yourself with this new terminology, you’ll be better equipped to navigate the financial landscape and set your business up for success.
Don’t forget to check out our resources for Starting a Business as well as our Free Introductory Business Advisory to get helpful tips and advice for getting started.
Accounts Payable
Accounts payable refers to the money a company owes to suppliers or vendors for goods and services that have been received, and for which the supplier has submitted an invoice.
Accounts Receivable
Accounts receivable refers to the money customers owe to your business for products or services that have been invoiced. This amount is considered a current asset because it usually converts into cash within one year.
Angel Investor
An angel investor is an individual who invests their own money into a company, usually a start-up, in exchange for ownership equity (a piece of the business).
Amortization Period
An amortization period is the length of time it takes a company to pay off a loan. Terms usually last over months or years.
Annual Percentage Rate
The Annual Percentage Rate (APR) of a loan is the yearly cost of borrowing money, including fees, expressed as a percentage. It allows you to calculate the total cost of the loan over its term.
Applicant/Co-Applicant
A loan applicant is an individual requesting a business loan. Sometimes, a financial institution will require a co-applicant to sponsor the application. The co-applicant participates in the loan underwriting and approval process alongside the primary applicant.
Appraisal
A loan appraisal is the process of assessing a loan applicant’s creditworthiness before approving a loan. The assessment typically examines areas like income sources, age, experience, number of dependents, repayment capacity, and other outstanding debts.
Articles of Incorporation
Articles of Incorporation are legal documents submitted to the Provincial, Territorial, or Federal governments that are necessary to establish your business as a legal entity. They generally include the purpose of the corporation, the type and number of shares, and the process of electing a board of directors.
To learn more, check out the BC Business Legal Library.
Assets
An asset is anything a business owns or controls that has current or future economic value. Examples include machinery, property, vehicles, patents, and investments.
Balance Sheet
A balance sheet provides a snapshot of a company’s assets, liabilities, and shareholder’s equity at a specific moment in time. It helps keep owners and other stakeholders informed of the business’ financial position.
Bankruptcy
Bankruptcy is a legal process that businesses can undergo to eliminate debt, liquidate assets, and ensure creditors (those owed money by the business) receive a fair distribution of what they’re owed. A company may choose to file for bankruptcy when it’s unable to meet its financial obligations.
Bootstrapping
Bootstrapping is the process of starting a business using only personal savings, funds borrowed or invested by family or friends, and revenue generated from initial sales. This approach is seen as a common sense and straightforward way to start a business, encouraging slow and organic growth.
Break-Even Analysis
A break-even analysis is a formula used to compare the startup costs of a new business with the unit selling price, determining the point at which you’ll break even. It allows entrepreneurs to understand the trajectory of their business and offers strategies to lower the break-even point and even increase profits.
Cash Flow Test
A cash flow test assesses a company’s ability to settle its debts promptly, either by generating sufficient cash or liquidating assets quickly enough.
Collateral
Collateral is an asset, such as a car or home, that a borrower uses to qualify for a business loan. Providing collateral reassures lenders by protecting their financial interest in case the borrower fails to repay the loan in full.
Competitor Analysis
Competitor analysis, also called competitive analysis, is the process of identifying competitors in your industry and analyzing their marketing strategies. You can use this information as a point of comparison to identify your business’ strengths and weaknesses relative to competitors.
Current Assets
A current asset is a business asset that can be used to fund day-to-day operations and ongoing business expenses. Current assets typically include cash, accounts receivable, stock inventory, and other liquid assets.
Current Liabilities
Current liabilities encompass all of a company’s short-term financial obligations that are due within one year or the business’ normal operating cycle. Examples include accounts payable, payroll, payroll taxes, income taxes, rental fees, and other short-term debts.
Debt Consolidation
Debt consolidation allows businesses to combine several loans or liabilities by taking out a new loan to pay off outstanding debts. This will usually result in a lower interest rate for the borrower.
Debt Service Coverage Ratio
The debt service coverage ratio measures a company’s cash flow against its current debt obligations. It demonstrates a company’s ability to repay loans, take on new financing, and make dividend payments.
Depreciation
Depreciation represents the estimated value reduction of a fixed business asset within a fiscal year. It allows companies to deduct the cost of a business asset over a long period of time, rather than the year it was purchased.
Equity Financing
Equity financing is the process of selling shares of a company to investors in order to raise capital.
Fixed Asset
A fixed asset is a long-term tangible asset owned by a business that’s used to produce income and isn’t expected to be sold within the fiscal year. Fixed assets include items like property, computer equipment, furniture, machinery, and vehicles.
Fixed Interest Rate
A fixed interest rate is an unchanging rate of interest charged on a liability such as a loan or mortgage. The rate might be fixed for the entire term of the loan or just part of the term.
Guarantor
A guarantor is a person who guarantees or agrees to be responsible for, the repayment of a loan if the borrower breaks the agreement to repay the money.
Gross Profit
Gross profit is the company’s total sales minus the total cost associated with making and selling the goods.
Income Statement
An income statement is an important financial document that details a company’s revenue, expenses, and profitability over a set period. It’s also sometimes referred to as a profit and loss (P&L) statement.
Liabilities
A liability refers to the legal obligations or debts a company owes to external creditors. It encompasses both current and future debts.
Limited Partnership
A limited partnership is one of the three main business structures in Canada, alongside sole proprietorship and incorporation. In a limited partnership, one partner typically takes on greater risk and contribution but often receives a larger share of the profits. The other ‘limited’ partners contribute capital but can’t be involved in the company’s management.
Read our article, Find the Right Business Structure for Your Small Business, to learn more about different business structure options.
Line of Credit
A line of credit is a prearranged, flexible loan from a financial institution that a borrower can tap into at any time until the limit is reached.
Loan-to-Value Ratio
A loan-to-value ratio determines the maximum amount of a secured loan based on the market value of the asset pledged by the borrower as collateral. It helps lenders assess the level of risk associated with the loan.
Micro Loan
Micro loans are small business loans, often with short repayment terms. The amount available for this type of loan usually doesn’t surpass $50,000.
Net Income
Net income is a company’s profits after all expenses have been deducted from its revenue.
Operating Lease
An operating lease is a contract that allows a business to use an asset for a set period of time without conveying ownership of that asset.
Opportunity Cost
When a business faces multiple choices on how to move forward, it must evaluate the costs of each option to make an informed decision. Opportunity cost represents the value of what you don’t pick when choosing between two or more options.
Overhead
Overhead costs refer to expenses associated with running a business, not linked to creating a product or service. Typical overhead costs include accounting fees, taxes, utilities, rent, repairs, and travel expenses.
Profit and Loss Statement (P&L)
A profit and loss statement summarizes the revenues, costs, and expenses incurred during a specific period.
Principal
The principal on a loan is the money borrowed that was originally agreed to be repaid. It doesn’t include interest or other costs incurred in receiving the loan.
Qualitative Analysis
Qualitative analyses are ways for businesses to measure their overall value based on non-quantifiable metrics like management expertise, industry cycles, labor relations, and more.
Quantitative Analysis
A quantitative analysis allows businesses to use financial information and statistics to determine their future financial outlook.
Secured Loan
A secured loan is one where the lender has a legal claim against a borrower’s assets. It allows borrowers to access larger amounts of capital, often at lower interest rates than with unsecured loans.
Sole Proprietor
A sole proprietor is an unincorporated business, owned by one individual. It’s the simplest business structure in Canada, with one individual responsible for all liabilities, and receiving all the profits.
Unsecured Loan
An unsecured loan is one that doesn’t involve collateral and is given based on the character of the borrower.
Variable Interest Rate
A variable interest rate on a loan fluctuates over time based on an underlying benchmark interest rate set by Canada’s central bank.
Working Capital
Working capital is the amount of cash and other assets a business has at hand after all current liabilities have been met.
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