5 Business Financing Terms You Need To Understand

 

Starting a business can be thrilling, but understanding financial jargon often throws a wrench into the process. Whether you’re looking for funding or simply planning out your finances, getting familiar with key terms will save you time and energy. Take a look at this quick guide to five business financing terms that can help you feel more confident as you shape your company’s future.

Equity Financing

Financing with equity means raising money by selling ownership shares in your business. This could involve handing over a stake in your company to investors, friends, or family members.

While it avoids the need for immediate repayment, it could reduce your control over decision-making as stakeholders may expect a say in how the business operates. For entrepreneurs ready to grow quickly, equity financing can open doors, but it requires careful consideration of who gains influence in your business.

Debt Financing

With debt financing, you borrow money with the agreement to repay it later—usually with interest. This might include taking out loans, lines of credit, or issuing bonds.

Banks and online lenders are common sources for debt financing. It provides quick access to capital without giving up equity, but repayment schedules mean you’ll need steady cash flow to cover monthly installments. If structured wisely, debt can help fuel growth while keeping ownership intact.

ROBS

A ROBS, or Rollover for Business Startups, allows entrepreneurs to use funds from their 401(k) to invest in their business without penalties or taxes. It requires setting up a C Corporation and rolling over the account into a retirement plan for the business.

This term may sound intimidating, but ROBS can be a powerful financing option for those who want to bet on themselves rather than relying on traditional loans or equity sales. It’s best suited for people who feel confident in both their business plan and their retirement goals.

Working Capital

Working capital measures the difference between your current assets, like cash or inventory, and current liabilities, such as bills or short-term loans. It’s a snapshot of your business’s financial health and shows how effectively it can cover day-to-day operational expenses.

Positive working capital means your company can handle obligations with room to spare, while negative working capital signals trouble that could impact growth or survival. This small but mighty metric speaks volumes about how well your business functions right now.

Collateral

Any asset you offer to a lender as security for a loan is called collateral. This might include property, equipment, or accounts receivable. Loans backed by collateral often come with better interest rates because the lender has something to fall back on if the borrower defaults.

For new businesses without an established credit history, offering collateral can make it easier to secure funding. The decision to put up assets, however, deserves careful thought since losing them could deal a substantial blow to your company.

Financial terms might feel overwhelming at first, but learning them doesn’t have to be a grind. These concepts lay a strong foundation for anyone trying to grow or manage a business. With this knowledge in hand, you’re better prepared to have meaningful conversations with lenders, investors, or financial advisors.

Want to take a deeper dive into your financing options? Use Pango Financial’s funding solutions tool to learn more.