10 Financing Concepts Every Small Business Owner Must Understand

If you’re looking to source for finance whether now or in the future there are a few finance terms you ought to familiarize yourself with.

Learning what these terms mean would serve in building a solid foundation on the basics of small business financing, especially if you’re coming from a non-finance background. Here are 10 terms in small business finance you should know:

  1. Grants – A grant is money that is given by the government or an organization that is not required to be paid back. One popular example of a grant is the Tony Elumelu Entrepreneurship Grant.
  2. Loans – A loan is the money that a lender offers to a business with an agreement to pay it back within a certain period of time and with interest. A good example of a loan is a bank loan.
  3. Bootstrap – To bootstrap means to start a business without any outside funding. Basically, funding that your business gets comes from you. Bootstrapping is a process whereby an entrepreneur starts a self-sustaining business, markets it, and grows the business by using limited resources or money. Some popular examples of bootstrapped businesses include eBay, GitHub, Coca Cola etc.
  4. Crowdfunding – Crowdfunding is the sourcing of finance for a business from different people through platforms like Kickstarter or GoFundMe that allow people to fund your business via the internet without any expectation of paying them back. It is an increasingly popular source of financing especially for entrepreneurs who may not be able to get funding through traditional means.
  5. Interest Rate – This is the extra amount that a business owner has agreed to pay his/her lender for the capital it received to fund his/her business. It is a portion of the loan received that the business owner is required to pay with the amount collected in loan.
  6. Principal – This is the original sum of money borrowed in a loan. It is the total amount of money a business or individual receives as loan from a lender.
  7. Collateral – Collateral is an item of value offered to the lender as leverage in the event that the business owner is unable to pay back the loan. It could be any thing of value that a lender can sell to get back the amount the debtor owes.
  8. Equity – Equity although can mean different things, in business financing, it often communicates ownership. It can describe individual shares of stock, overall balance sheet value of a company, or ownership in a private enterprise.
  9. Budget – A budget is an estimation of a business’ revenue and expenses over a specific period of time. It is an instrument used to monitor the spending and revenue of a business.
  10. Capital – Capital is used to describe financial assets, like funds held in deposit accounts and funds for a business. There a four major types of capital; equity, debt, working and trading capital.