Small Business Finance Terminology Guide

In the world of small business, there are a lot of terms floating around that pertain to the money side of the endeavor. You might as well face it; most of us pretend that we know what a certain term refers to without a real concrete understanding.

That's just human nature, and this guide will provide you with a list of some of the most commonly used terms in small business finance for quick reference.

* Angel Investors. Private and wealthy individuals who loan money for business start ups, with the expectation of an ownership portion or a share of profits (or a high interest rate on a loan).

* Assets. Anything that your company owns outright or can claim without penalty, including office furniture and cash in the bank.

* Audit. A process undergone in order to verify the accuracy of accounting procedures within a business. May be done by an accounting firm or by governmental tax agencies.

* Bootstrapping. You might have started a small business, but you lack the funds to grow on your own. Bootstrapping refers to the practice of using funds that are not exactly your own, but which do not come from outside investors who may want some input into business in return. Credit cards and lines of credit are examples of bootstrap financing.

* Liabilities. Obligations of one company to another (a loan from a bank, a lease on a car, etc.).

* Lien. Property owned by one party but held by another in order to ensure payment. The party holding the lien has the legal right to sell it and apply it to debt.

* Line of credit. A certain amount of credit extended to an individual or business by a bank or other financial institution, used when cash on hand is limited.

* Ownership equity. The remaining amount of money in a business in terms of assets, after all liabilities are accounted for. It can be negative, if all the liabilities are not covered by all the assets.

* Overhead. Costs necessary to running a business, but which do not generate profit (rent, insurance, etc). These costs are usually recurring.

* Pre-money valuation. The evaluation of an individual or company, undertaken before an investor sinks money into the proposed endeavor.

* Proprietorship. Determines the ownership of a business. Sole, limited liability and corporations.

* Sole Proprietorship. The individual and the business are indistinguishable, thus debts apply both to the owner and the business.

* Sweep Account. A place where excess funds (those not needed to run the business or to finance an individual) are put in order to gain interest. They may be operated on a daily basis, in order to generate some interest regularly and have the funds available on the next business day.