Business Finance Terms Definition List

13 min read

Executive Summary

You don't need a crazy degree to be a super successful business owner — but you might need to know a few of these terms. Here are some key financial terms that you need to know as an entrepreneur when managing and running your business.  

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Looking to dust off your business finance terminology? We've got your back. Here's a glossary featuring many of the most common business finance terms you may need or want to know.

Accounts receivable (AR)

Accounts receivable refers to money owed to a business by third parties like customers or clients. For example, if you provide a service and allow your client 60 days to pay, the amount they owe you will be recorded under your accounts receivables until it’s paid.

Accounts payable

Accounts payable refers to money owed by a business to third parties such as suppliers and creditors. For example, if your company receives $3,000 worth of inventory on January 1st and has agreed to net-60 payment terms, the $3,000 debt would be filed under accounts payable until you pay it off.

Accrual basis accounting

Accrual basis accounting is an accounting method where a business's revenue and expenses are recorded at the time that a transaction occurs—not necessarily when money is exchanged. This method is required for large companies who have revenues of more than $25 million over the previous three years.

Annual percentage rate (APR)

An annual percentage rate (APR) shows borrowers the percentage of a total loan amount that they will have to pay each year to borrow a sum of money. For example, if a $10,000 loan comes with an APR of 10%, your cost of borrowing would be $1,000 per year until the balance is paid off.

Annual percentage yield (APY)

An annual percentage yield (APY) shows investors the percentage of a total investment amount that will be paid to them each year. For example, if you invest $5,000 into an account with a 5% APY, you'd earn $250 per year.

Balance sheet

A balance sheet is a statement that summarizes the financial balances of a business including its assets, liabilities, and capital.

Business assets

A business asset is anything with economic value that is owned or under the control of a business.

Business to business (B2B)

Business-to-business (B2B) refers to a business that sells products or services to another business.

Business to consumer (B2C)

Business-to-consumer (B2C) refers to a business that sells products or services directly to consumers.

Calendar year

A calendar year refers to a year that starts on January 1st and ends on December 31st. Businesses may define their tax years by calendar years or fiscal years (defined below).

Cash basis accounting

Cash basis accounting is an accounting method that records revenue and expenses when they are paid for, instead of when transactions occur.

Cash flow statement

A cash flow statement is a financial statement that shows a detailed account of how much cash has entered and left a business within a specified period of time.


Collateral refers to an asset that acts as a security for a loan. If the borrower defaults, the asset can be seized and sold by the lender to cover the outstanding debt.

Cost of goods sold (COGS)

The cost of goods sold is the total amount of money that a business spends in order to sell products during a specified period of time. It can include costs for raw materials, factory labor, storage, freight-in costs, and more.

Credit limit

A credit limit is the amount of money a borrower is allowed to borrow through a specific credit line. For example, if your business gets approved for a $5,000 credit card, your credit limit would be $5,000. Once you hit that limit, you'll need to pay down the balance before you can use the card again.

Credit score

A credit score is a number that indicates the likelihood of a person or business to fulfill its financial obligations. Credit reporting agencies typically base the scores on factors such as payment history, credit utilization, debt to income ratio, credit mix, and the length of credit accounts.

Credit utilization ratio

A credit utilization ratio refers to the percentage of an available credit line that a borrower has used. You can find it by dividing your balance by your credit limit. For example, if you have a credit line of $1,000 and your outstanding balance is $600, your credit utilization ratio would be 60%. Credit utilization is a factor commonly considered by credit reporting agencies to determine the credit scores of businesses and individuals. A good credit utilization ratio is 30% or less.

Current assets

Current assets are liquid business assets that are expected to be used or sold within a current financial or fiscal year. Examples include inventory, cash, and short-term investments.

Debt financing

Debt financing refers to borrowing money and agreeing to pay it back, plus interest, by a set date. Examples include loan types such as SBA loans, equipment loans, car loans, and mortgages.


A deliverable is a product or service that is delivered as part of a project. For example, if your business provides graphic design services, a design ordered by a client would be a deliverable.


Depreciation refers to a reduction in the value of an asset over time as the result of normal wear and tear. Businesses can deduct the depreciation of their assets on their tax returns.


Equity refers to a company's worth and is found by subtracting the company's total liabilities from its total assets.

Equity financing

Equity financing refers to financing in which a business sells shares of its company to investors in exchange for an injection of capital.

Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a tax identification number assigned by the Internal Revenue Service (IRS) to businesses. It's necessary to give business entities their own identity for tax filing, hiring employees, establishing credit, and more.


Business expenses include any money that's spent to operate a business. Common business expenses include wages, salaries, rent, utility bills, insurance, and inventory.

Factor rates

Factor rates show the cost of funding expressed as a decimal number, often between 1.1 and 1.5. You multiply the loan amount by the factor amount to get the total cost of borrowing. These are often used in short-term business loan products like merchant cash advances.

Fiscal year

A fiscal year is a 12-month accounting period that ends on the last day of any month but December (which is a calendar year). Fiscal years are used by governments and businesses for accounting and budgeting purposes.

(Here from “Calendar year?” Jump back up)

Fixed assets

Fixed assets are tangible assets used in a business's operation which are kept for long periods and typically somewhat difficult to turn into cash. Examples include buildings, equipment, land, and machinery.

Fixed Costs

Fixed costs are costs that aren’t dependent on a business’s production of goods and services. For example, rent, salaries, loan repayments, and utility bills would be considered fixed costs.

Gross profit and loss

Gross profit is the amount a business earns in total, before deducting expenses. For example, if your business earns $120,000 per year and spends $60,000 on labor, marketing, insurance, and supplies—your gross profit would be $120,000. Gross loss refers to the total amount of money a business spends in a year, without factoring in revenue. Continuing with the example above, your business's gross loss would be $60,000.

Income statement

An income statement is a core financial statement that businesses use to show their earnings, expenditures, profits, and losses during a specified period.

Intangible assets

An intangible asset is a business asset that lacks physical substance and a finite monetary value. For example, goodwill, intellectual property, and brand recognition are intangible assets. Conversely, tangible assets like equipment, inventory, and buildings are physical and have a monetary value that is easier to define.

Interest rates

An interest rate is a number expressed as a percentage that shows how much a financial product costs or pays per year. In the case of a loan, the interest rate shows the percentage of the total loan amount that the borrower will owe per year. In the case of an investment vehicle, the interest rate shows the percentage of the total loan amount that the investor can expect to earn per year.

For example, if you want to borrow $10,000 and a lender offers you a 5% interest rate per year, that means you would have to pay $500 per year until the amount is paid off. Interest rates may be fixed or variable. If fixed, they'll stay the same over a set term. If variable, they can fluctuate over time with the market.

Invoice factoring

Invoice factoring involves a business selling its outstanding invoices to a factoring company to get paid sooner. The factoring company buys the invoice for an amount lower than the amount due and receives the full amount when the invoice is paid by the customer or client.

Interest payments

Interest payments are payments made by a borrower to a lender. They are based on the assigned interest rate on a loan or line of credit and are charged in addition to the repayments of the principal loan amount. Interest payments may also be made to investors from financial institutions that offer investment products.

Intellectual property

Intellectual property refers to intangible creations of human intellect such as a new process or idea that you create. You can legally protect it with the use of patents, trademarks, and copyrights.


A lien is a legal claim against a piece of property. It's often used as collateral to secure a debt. For example, if your business takes out an auto loan to buy a truck, the lender would place a lien on the vehicle. If you don't make your payments as agreed, the lender can take the vehicle and sell it to repay the debt.


A liability is a debt owed or a legally-binding financial obligation. In business, common liabilities include wages, taxes, and accounts payable.

Loan-to-value (LTV)

Loan-to-value (LTV) refers to the percentage of an asset’s value that can be borrowed to purchase it. For example, if your business wants to buy a commercial building and your lender allows up to 80% LTV, you'd only be able to borrow up to 80% of the building's value. As a result, you'd have to make a down payment to cover the other 20%.

Line of credit

A line of credit is a type of financial product in which a borrower is given a specific credit line. The borrower can use up to the amount available on an as-needed basis. Meanwhile, a small minimum payment is often required each month—not the full amount. However, if the borrower doesn't pay off the full amount each month, interest will accrue on the outstanding balance. As the credit line is paid down, it often becomes available for use again. Businesses may obtain lines of credit through business credit lines or credit cards.


Liquidity refers to the ability to exchange an asset for cash. The easier it is to do so, the more liquid it is.

Market value

Market value refers to the amount an asset would be sold for in a competitive auction setting. You may also hear the terms open market valuation (OVM), fair value, or fair market value used interchangeably.

Merchant cash advance

A merchant cash advance (MCA) provides business owners with a cash advance that's repaid through a percentage of their future credit card sales. For example, a business may take out a $5,000 MCA and repay it by having 15% of each credit card payment it receives automatically deducted.

Net income

Net income is the amount of money a business earns in a specific period after deducting taxes, expenses, the costs of goods sold, and any other liabilities.

Net profit and loss statement

A net profit and loss statement refers to a financial statement that outlines a company's revenues, expenses, and profits or losses during a specified period.

Net payment terms

Net payment terms refer to a payment agreement where the payee gives the payor extra time to pay after an invoice is issued. For example, with net 30 terms, the payee has 30 days from the invoice date to make the payment. With net 60 terms, the payee gets 60 days.

Personal guarantee

A personal guarantee involves an individual pledging that they will be responsible for a debt. Many business loans require personal guarantees from one of the owners. If the business can't make the payments as agreed, the person who provided a personal guarantee must take them over or will be held responsible.


Profit refers to a financial gain; the difference between an amount earned and an amount spent.

Profit margin

A profit margin shows the amount by which a business's profits exceed its costs. It's calculated by subtracting a business's costs from its revenue for a set period, dividing the difference by the revenue, and multiplying the quotient by 100. For example, if you make $100,000 and had $50,000 in expenses, your profit margin would be 50%. If you made $40,000 and had $2,000 in expenses, your profit margin would be 95%

Real estate

Real estate refers to something you own that is attached to a piece of land, such as a home or commercial building.

Return on investment (ROI)

Return on investment, or rate of return, is a figure expressed as a percentage that shows how well an investment performed. It's calculated by dividing an investment's net profit or loss by the initial investment and multiplying it by 100. For example, if you spend $10 to set up a lemonade stand and you make $30 in total sales, your ROI would be 200% ($20 in net profit/$10 initial investment) * 100 = 200%.


Revenue refers to the amount of money generated from the sales of products and services during a company's normal business operations.

Secured loan

A secured loan is a loan that’s backed with a lien against an asset. If the borrower defaults, the lender can seize the asset and sell it to repay the debt. Examples include equipment loans, mortgages, and auto loans.

Term loan

A term loan is a loan that provides a borrower with a lump sum upfront. The loan is then repaid, plus interest, over a set term. Common examples of term loans include mortgages, SBA loans, and auto loans.

Unsecured loan

An unsecured loan is a loan that doesn't require the borrower to provide any collateral. Approval is instead based on the creditworthiness of a business and/or individual. If the borrower defaults, the lender won't have any direct recourse. However, they can send a debt to collections and can sue the borrower to recover their losses.

Variable costs

Variable costs are costs that vary based on the demand for a business’s goods or services. For example, raw materials, commissions, packaging supplies, and credit card fees would all be variable costs.

Working capital

Working capital refers to the amount of money available to a company to be used for day-to-day operations. You can calculate it by adding up your current assets and subtracting your liabilities. Many lenders offer working capital loans that make capital available to businesses for a fee.

Want to learn more about business financing? Check out these articles:

About the author

Jessica Walrack

Written by Jessica Walrack

Jessica Walrack is a personal and business finance writer who has written hundreds of articles over the past eight years about loans, insurance, banking, mortgages, credit cards, budgeting, and all things credit. Her work has appeared on Bankrate, The Simple Dollar, The Balance, MSN Money, and Supermoney, among other publications. Her love of a good number breakdown and passion for making complex concepts easy to understand makes writing about finance a natural fit.

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