Alaska Small Business Development Center

Business Glossary

Acceleration Clause: A loan contract clause stating that if you are in default, your creditor can demand payment of the entire balance of your loan at once, before its scheduled maturity.
Accounts Payable: The amount of money that you owe for goods or services that you bought.
Accounts Receivable: The amount of money that people or companies owe you.
Adjustable Rate Mortgage (ARM): A contractual loan may have provision for adjustable rates. In the case of a home mortgage loan, the interest rate changes over time with movements in an index.
Adjustment Period: The length of time between interest rate changes on an ARM.
AHFC Loan: A loan purchased by the Alaska Housing Finance Corporation from any mortgage lending institution qualified to make such loans.
Amortization: Repayment of a loan in installments of principal and interest, rather than interest-only payments.
Annual Percentage Rate (APR): Cost of credit expressed as a yearly rate .
Appraisal: A report made by a qualified person giving an opinion or estimate of value.
Appreciation: An increase in the value of an item, for instance a home, due to changes in market conditions or other causes.
Assets: All property to include equipment, materials, vehicles, vessels, cash, investments, and other items you or your business owns.
Assumption of Mortgage: A buyer’s agreement to assume the liability under an existing note that is secured by a mortgage or deed of trust. Ordinarily, assumptions require a lender’s written consent and the original buyer may not be released from the liability.

Balance Sheet: A total list of all assets and liabilities in the business. The difference between them is owner equity.
Balloon Payment: A lump-sum principal payment due during the term of or at the end of a loan. It is substantially larger than the other payments.
Break Even: The status of a business when you have made enough money to cover all costs, but not making any profit. The total sales in dollars equal the total costs.

Capital: Another word for “money”.
Capitalization: How you are going to raise money for your business.
Cash Flow: The movement of money into and out of a business as it sells products and services and pays expenses.
Cash Flow Projection: An estimate into the future of how cash will move through the business during a period of time.
Closing a Settlement Statement: When referring to a real estate mortgage loan, the financial disclosure statement that accounts for funds received to date and expected at the closing, including deposits for taxes, hazard insurance and mortgage insurance.
Collateral: Assets that can be sold to repay a loan in the event of failure of the business.
Consolidation Loan: The process of paying off several smaller obligations with the proceeds of a new loan, usually with lower interest monthly payments than the combined total of the obligations being paid off.
Contribution: The difference between the selling price of a product and the cost to make that product. The amount of money that remains to pay fixed costs. After you break even, contribution is the amount of money from each sale of your product or service that now is counted as profit.
Contribution Margin: The percentage of the selling price that can be used to pay fixed costs. If a product is sold for $1.00 and it costs 70 cents to make the product, 30 cents is the contribution that can be used to pay fixed costs and 30 % or .3 is the contribution margin. 70 cents pays for the variable costs.
Credit Rating: An evaluation of your qualifications to receive credit, based largely on your past credit history.
Credit Report: A report given by a credit-reporting agency about your credit worthiness based on your present financial condition, experience and past credit history.
Current Assets: Cash or other assets you expect to use in the operation of the firm within one year.
Current Liabilities: Debts payable within one year, including current portions of any long-term debt.

Debt Financing: A method of financing by borrowing money; a loan that must be repaid, such as a bank loan.
Declining Balance: The decreasing amount you owe on a debt as you make installment payments.
Default: Failure to pay a debt when due, or otherwise failing to comply with an essential term of a loan payment.
Delinquent: A credit account which is past due.

Equity: The difference between the market value of a property and the outstanding mortgage balance.
Escrow: An account established to monitor the repayment of an owner-financed type of contract while holding the transfer document – sometimes known as a contract-collections loan. These accounts can be bought, sold or used as collateral for bank-held loans.

FHA Loan: A loan insured by the Federal Housing Administration, which may be made by any mortgage lending institution qualified to make such loans.
Finance Charge: According to federal regulations, the total cost in dollar terms a borrower must pay, directly or indirectly, to obtain credit. The lender must disclose it.
Fixed Costs: Expenses that do not change during the normal operation of the business. These expenses remain constant regardless of the changes in sales.
Fixed Interest Rate Loan: A loan on which the interest rate is set or constant for the term of the loan.

Graduated Payment Mortgage: A residential mortgage with monthly payments that start at a low level and increase according to a predetermined schedule.

Homeowner’s Insurance: An insurance policy that combines liability coverage and hazard insurance.

Income Statement: An accounting form that reports business revenues, expenses and the resulting profit or loss for a particular period of time. Also called profit-and-loss statement or statement of income and expenses.
Installment: One of a series of payments to pay off a loan.
Interest: Money paid for the use of money, usually expressed as an annual percentage.

Leverage: Debt in relation to equity in a firm’s capital structure. Measured by the debt-to-equity ratio. The more debt, the greater the leverage.
Liabilities: Loans and other debts that you or the business must pay.
Lien: A legal claim or hold on property as security for repayment of a debt.
Line of Credit: A predetermined amount of credit immediately accessible to use as you need, and pay for only as you use.
Loan-to-Value Ratio: The relationship between the amount of the mortgage and the appraised value of the property, expressed as a percentage of the appraised value.
Loan Terms: Details and conditions of a loan contract, including finance charges, payment schedule, due date, annual percentage rate, etc.

Micro-Loan: Can be defined in terms of the size of the business loan amount requested; usually micro-loans are considered loans in the range of $1,000-$5,000.
Mortgage: A written pledge of real property to assure payment of a debt, allowing for sale of the real property to satisfy the debt, in event of default. Also known as “deed of trust.”

Note: A written, signed promise to pay that lists the details of the repayment agreement.

Origination Fee: A charge for taking and processing a loan. This charge is also called a “bank fee.”
Outstanding Indebtedness: The still unpaid part of a loan.
Owner Equity: The difference, if any between total assets and total liabilities on a balance sheet. If assets are more than liabilities, the owner has that amount of equity it the business.

Payment Obligation: An amount of money one is legally bound to pay.
Prepayment: Repaying part or all of a loan in advance of the due date, with or without penalty. Penalties for prepayment in full are often prohibited on consumer loans.
Price: The amount of money that a business charges for its product or service. The price must be enough to cover all costs and give the owner a desired return on his or her investment in the business.
Prime Rate: An interest rate formally announced by a bank, the lowest available at a particular time to its most creditworthy customers. The U.S. Small Business Administration uses the prime rate published in The Wall Street Journal.
Principal: The amount of money you borrow, or the amount of credit you receive exclusive of interest.
Profit: The amount of money that remains after all expenses (total costs) are paid.

Refinance: Revision of a loan by making a new loan with new terms.
Return On Investment: An amount of money that is included in the price of a product or service. It can be considered an expense since the business is expected to make enough money to pay this amount to the original investors. Return on investment is normally shown as a percent. For example, let’s say you put up $1,000 to start up a small business and you wanted a 10 percent return after one year for that investment. You are expecting the business to be able to pay all expenses, still have your original $1,000 plus an additional 10 % or $100 for a total of $1,100. A 10% return on an investment of $1,000 is $100.
Revolving Credit: A credit source such as a credit card agreement, which may be used to make additional purchases before repaying the existing debt in full. It is a type of line of credit in that interest is only charged on the monthly-unpaid balance, and only a portion of the unpaid balance need be repaid each month.

Sales, Volume Sales, Revenue: Terms that are used to represent the amount of money that is produced when a business sells products or services.

Term: The prescribed time you have in which to make payments under a loan contract.

Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.
Unpaid Balance: The difference between the amount of money borrowed, including charges, and the amount of money paid to date.
Unsecured Loan: A loan extended solely on the borrower’s ability and promise to repay.

VA Loan: A mortgage loan guaranteed by the Department of Veterans Affairs and made by a private lender.
Variable Costs: Expenses that increase or decrease as sales increase or decrease. The expenses that are necessary to make the products or provide the services that you sell are variable costs. The more you sell, the more variable costs you must pay.
Variable Rate Loan: A loan that allows the lender to adjust the interest up or down with the market within the terms of the note. Your banker determines rates.

Working Capital: The money you use to keep your business running. In accounting, working capital is the difference between current assets and current liabilities.

The SBDC is funded in part through a Cooperative Agreement with the U.S. Small Business Administration.

Accredited member of the Association of Small Business Development Centers (ASBDC).