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Finding financing: terms and definitions

Provided by Business Partners Ltd, South Africa's leading investor in SMEs

StackMoney.jpgWhen you approach a potential financier to provide a loan for starting or expanding your business, it's best to be aware of some of the terminology that may be used and what they mean.

Accounts Receivable Financing - A loan gained by borrowing against receivables (debtors). Loans are paid as receivables are collected.

Angel investor - an individual who invests his or her own money in an entrepreneurial company.

Annual Fee - The amount charged by the lender each year to cover the administrative costs of the loan.

Bridge Financing - A limited amount of equity or short-term debt financing used to "bridge" a company to the next round of financing.

Business Credit Card - An amount of money that a business can borrow against, when it needs capital, using a card accesses the money.

Commercial Property Loans - Similar to a bond on your house, but the security used is business property. Interest rates are usually fixed, the length of the loan can vary and payments are due monthly.

Commercial Term Loans - Loans made to businesses that can be either secured or unsecured. These are usually made to mid-size and large businesses.

Credit Rating - A predictor of your ability to pay back a loan. The credit rating is a result of credit scoring (see below).

Credit Report - Financial history supplied by a credit information company, which contains credit information on a business or an individual, including payment history of bank cards, accounts, mortgages, student loans, etc.

Credit Scoring - The evaluation system used by lending institutions to determine the credit risk of a business or consumer. When evaluating businesses, it generally considers factors such as credit payment history, new credit sought by owner of business, and financial strength and longevity of business.

Debt Financing - A loan with pre-agreed terms, including a repayment schedule and interest rate.

Due Diligence - the process of in-depth analysis of a business's processes, where an investor conducts research before it makes a final decision about going forward.

Equipment Leases - Leases allowing companies to purchase new equipment.

Fixed Interest Rate - An interest rate that is the same throughout the life of a loan.

Interest Rate - The amount charged by a lender for the money borrowed. It can be fixed or variable.

Inventory Financing - Money borrowed on the basis of finished inventory. The loan is paid as inventory is sold.

Loan Term - The length of time the borrower has to repay debt.

Long Term Debt - Financing used to purchase or improve assets such as plant, facilities, large equipment and real estate.

Maturity - A loan's maturity is the life of the loan; that is, how long you have to repay the loan. It usually applies to term loans and not lines of credit.

Multi-Lender Environment - Numerous lending institution sharing the same site and information to provide instant financing to small businesses.

NDA (Non-disclosure agreement) - an agreement issued by entrepreneurs to potential investors to protect the confidentiality of their ideas when disclosing those ideas to third parties.

Overdraft - An amount of money, which a business can borrow against when it needs capital. Often accessed by check, ATM or business card.

Personal Guarantee -A guarantee that the primary owner will assume personal responsibility for repaying the loan, should the company not repay the loan.

Prime Rate - The rate a lender charges its best customers. The rate is calculated differently by each lender.

Revolving Credit - It is the same thing as a line of credit: an amount of money, which a business can borrow against at times it needs capital; often accessed by check, ATM or business card.

Secured Loan - A loan secured by specific security. The creditor may foreclose and seize the specific property that is used as security to satisfy an unpaid secure loan.

Short Term Debt - Financing used to secure cash for accounts payable and stock.

Term Loan - A loan for a specific amount of money. It has either a fixed or variable interest rate, matures in a prescribed number years and has a set repayment schedule.

Unsecured Loan - A loan granted upon the good credit of the borrower, with no security given.

Variable Interest Rate - An interest rate that changes during the life of a loan.

Venture Capital Financing - an investment in a start-up business that is perceived to have excellent growth prospects, but does not have access to external capital.

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