• Twitter
  • LinkedIn
  • Facebook
  • Instagram
  • Youtube
Login  | Call now: (800) 780-7133
Kapitus
  • Problems We Solve
  • Products We Offer
  • Partner With Us
  • Blog
  • APPLY NOW
  • Search
  • Menu Menu
Small Business Financing - A Glossary to Get You...

Small Business Financing – A Glossary to Get You Started

March 1, 2017/in Featured Stories, Financing /by Wil Rivera

Sometimes it takes money to make money, as the saying goes.

But when you don’t have the money and need to borrow, and you don’t have the bandwidth to study up on finance and accounting terms and conditions, the fat stack of documents you’re about to sign can prove daunting.

In this series, we will examine several topics that affect small businesses seeking financing using the example of two fictional local competitors: Buddy’s Bakery and Callie’s Cupcakes. While the respective (imaginary) businesses are doing well, the owners have a lot to learn when it comes to their finances.

In order to get Buddy and Callie started, we’ve defined a few financial terms that often come up in business; terms any business owner should familiarize themselves with in order to feel comfortable and confident when it comes to finances. While it’s impossible to know everything, you don’t have to have an accounting degree to understand the basics.

Want to learn more? Look no further.

What is Accounting Rate of Return (ARR)?

For starters, accounting rate of return, also known as “simple rate of return,” is used by a small business to decide the assets or projects it would like to invest. Calculating the ARR is useful if you are looking to determine the expected profit, or return, on the investments you make in your business. It is also often used to compare and contrast multiple projects.

In its simplest form, the ARR of a project is the following calculation: divide the annual accounting profit by the initial investment in the project. For a real-time application, let’s consider this scenario:

  • Buddy’s Bakery invests $250,000 in equipment.
  • The total profit it has made over the past five years is $50,000.
  • If we divide $50,000 by 5, we come up with an average annual profit of $10,000.
  • From there, we divide the investment of $250,000 by 5, making the annual average investment $50,000 per year.
  • To come up with the ARR, we simply divide the average annual profit of ($10,000) by the annual average investment ($50,000). This makes the ARR for the bakery investment 20%.

What is Annual Percentage Rate (APR)?

On the other hand, annual percentage rate, or APR, is a more common term. Anyone with a mortgage or credit card is probably somewhat familiar with the term and how it works. A loan’s APR provides a borrower with the bigger picture of their payout because it showcases the total price and accounts for the interest rate on an annual basis. In addition to interest, APR includes fees such as closing, origination and documentation fees.

Speaking of interest, it is something to look at on a deeper level when examining APR. For example, interest is affected by the life of the loan and its repayment schedule. And in some instances, loans are offered with provisions that decrease the interest rate as the balance is paid off.

What is Internal Rate of Return (IRR)?

IRR is a percentage that determines the investment return on capital expenditures or investments and ignores external factors. Also, IRR is an interest rate that equalizes cash spent on an investment with cash that comes in because of the investment. IRR can also occur when net cash related to an investment equals zero.

Its real-world application determines if the cost of a project, investment or expense was worth it; or, it is calculated to see if a business made money on a project or not. In the case of our competing bakeries, if Buddy’s cost of capital is 6%, any opportunity with an IRR of 6% or higher is a viable option he can consider. So, when his accountant presents him with an investment opportunity with a yield of 4%, Buddy knows this is not worth consideration because it falls below his 6% cost of capital. However, a few weeks later, when his accountant shows him an option with a 7% yield, Buddy knows this is worth a second look and possibly pursuing because it is above the cost of capital.

What is Annual Percentage Yield (APY)?

First things first. Written up as a formula, APY = (1 + r/n )n – 1

r = quoted annual interest rate; and n = the number of times interest compounds per year.

APY is the rate of return on an investment that accounts for compounding interest. This is assuming funds will remain in an investment vehicle such as stocks, bonds or CDs for 365 days. In one case, it can evaluate the true return on an investment. For example, if Callie invests $1,000 in a CD with a 12% interest rate, over the following 12 months, we can assume that with the bank compounding 12% interest every month for a year, it will grow to an APY of $1,126.83, or 12.683%.

On the flip side, APY also determines the true interest rate paid on a loan; and/or help a business owner to standardize a varying interest rate into an annualized percentage. In Callie’s case, she is considering bank loan and would like to know what the loan’s APY will be. If she uses the above formula for a 12 month $1,000 loan at 2.12% interest, at the end, she would end up paying $1,021.41, an APY of 2.14%.

What is Factor Rate?

If a business finds itself in need of short-term financing, one important component is its factor rate. One can determine this by dividing financing cost by a loan amount. Factor rates are typically in a decimal amount and vary from 1.1 to 1.5. Factor rates also rely on variables such as the average monthly sales, industry, and length of time in business.

In the instance of Callie’s Cupcakes, if she takes out short-term financing for $100,000 at a factor rate of 1.18 over a 12 month term, Callie will be repaying a total of $118,000.

With a basic grasp on these terms, Buddy and Callie can face their finances from a more realistic standpoint. It can empower them to find out what funds are going where. That will hopefully be an easier and smoother ride. But what do they know about the impact of cash flow on their respective businesses? Stay tuned to learn more.

Share this entry
  • Share on Facebook
  • Share on Twitter
  • Share on WhatsApp
  • Share on Pinterest
  • Share on LinkedIn
  • Share on Tumblr
  • Share on Vk
  • Share on Reddit
  • Share by Mail
https://kapitus.com/wp-content/uploads/2018/11/small-business-financing-a-glossary-to-get-you.jpg 1414 2121 Wil Rivera https://kapitus.com/wp-content/uploads/Kapitus_Logo_white-2-300x81-1-e1615929624763.png Wil Rivera2017-03-01 00:00:002017-03-01 00:00:00Small Business Financing – A Glossary to Get You Started

LATEST FROM KAPITUS

  • How to Strengthen Your Small Business’ Company Culture
  • Tips to Prevent a Toxic Work Environment
  • Where and How to Find Employees Who Value More than Pay
  • Dos and Don’ts of Online Job Listings for Small Business Owners
  • Over 200 Small Businesses Told Us How They’re Attracting Workers, and Gave Some Surprising Answers

Subscribe To Our Blog For More Tips On How To Grow Your Business

Categories

  • Accounting & Taxes
  • Business Expansion
  • Business Loans
  • Business Productivity
  • Business Productivity
  • Cash Flow Management
  • Claim Your Corner of the Internet
  • Company News
  • Featured Stories
  • Financing
  • Human Resources
  • Industry Center
  • Leadership
  • Legal
  • Living Your Best SBO Life
  • Making Her Mark – Influential Women Business Owners
  • Monthly Must Reads
  • News
  • Operations
  • Raising Capital
  • Recruitment
  • Risk Management
  • Sales and Marketing
  • Tax Center
  • Tax Legislation
  • Technology
  • Technology Center
  • Uncategorized

About Us

  • Media Center
  • Team
  • Careers
  • Events
  • Success Stories
  • The Kapitus Difference
  • Developer Documentation
  • Blog

Products

  • Revenue Based Financing
  • Helix® Healthcare Financing
  • Business Loans
  • SBA Loans
  • Line of Credit
  • Invoice Factoring
  • Equipment Financing
  • Purchase Order Financing
  • Concierge Services

Contact Us

  • (800) 780-7133
  • Email Us

Signup For Our Newsletter

[email protected] Kapitus, LLC or its affiliates. All rights reserved. Kapitus, LLC, Kapitus.com, and the Kapitus logo are registered trademarks of Kapitus, Inc. or its affiliates. | Loans made in California are issued by Strategic Funding Source, Inc. dba Kapitus, pursuant to California Finance Lenders License No. 603-G807.
Sitemap | Terms & Conditions | Privacy Policy
  • Twitter
  • LinkedIn
  • Facebook
  • Instagram
  • Youtube
What NYC’s New Freelance Law Could Mean for Every Small Businesses 7 For 2017: 7 Small Business Contests You Don’t Want to Miss
Scroll to top
  • Whether you want to learn more about our financing options, are interested in becoming a partner or just have a general question, we’re here to help! Simply fill out the form below and we’ll get it directly into the inbox of the right person.

Step 1 of 4 - Tell us about you

25%
  • Sign up for the Kapitus Partner Program!

  • Sign up for the Kapitus Partner Program!

  • Sign up for the Kapitus Partner Program!

  • Sign up for the Kapitus Partner Program!

Step 1 of 10 - TELL US ABOUT YOUR PRIMARY FINANCING NEED

10%
  • Find the right financing product for you.

    Answer a few questions and we’ll match you with the best product based on your needs and current situations.

  • 1. Answer a few questions. You let us know some basic information about your financing needs, so we can find a match.
    2. See your financing matches. You'll get matched with up to four financing options based on your answers.
    3. Apply for financing. You can apply for all of your financing options by completing one simple application and providing a few documents.
    4. Get an Advisor: You have the option to be assigned a financing specialist to help guide you through the application process.
    If you are looking to determine the best financing option for you, our matching tool streamlines the process and arms you with information that you can use before you apply. To match you with your best options, we ask you to answer a series of basic questions about your existing and future needs, current financial health, and your financing preferences – including amount to be financed, ideal terms and financing urgency. Our system then finds you up to four financing options to fit your needs. Once you’re matched, you can expect to be contacted by one of our financing specialists to help you navigate the application and selection processes.
  • Find your financing match


  • Each financing product has its own minimum and maximum requirements around the amount of money that can be acquired through that option.
  • Find your financing match



    • Business Accountants
    • Marketing & PR Agencies
    • Commercial Cleaning Companies
    • Printers
    • Human Resource & Payroll Firms
    • Office Supplies Organizations
    • Salons/Spas
    • Gyms & Other Workout Studios
    • Pet Services Companies
    • Personal Accountants
    • Home Cleaning Companies
    • Residential Landscaping
  • There are financing options created to meet the specific needs of particular industries.
  • Find your financing match

  • Thank you for reaching out to Kapitus. Unfortunately, our financing products are only available for existing businesses and we will not be able to help you at this time.


  • The amount of time your business has been in operation is a deciding factor in the type of financing options available to you.
  • Find your financing match


  • Each financing product has its own minimum requirement for the amount of revenue being brought into a business on either a monthly or an annual basis. In addition, your monthly and/or annual revenue can dictate the length and term on your financing option.
  • Find your financing match


  • Each financing product offers different payback lengths and terms.
  • Find your financing match


  • Each financing product has different paperwork and underwriting processes. As a result, the amount of time it takes to get approved for one type of financing over another can vary significantly.
  • Find your financing match

  • Find your financing match


  • There are financing options for every credit type, however your personal credit score will determine your eligibility for each financing type.
  • We’re finding your match