Running a business means being on a constant learning spree. Whether you are just starting out on your entrepreneurial journey or you are a seasoned small business owner looking to expand, the need for continuous learning is universal. No matter what stage you are at, there will be new tools to explore, problems to solve and vocabulary to understand.
The good part is that you don’t have to be a financial whiz to understand the world of business finance. Here are some key business finance terms and definitions, that you will find useful as a business owner.
1. Goods & Service Taxpayer Identification Number (GSTIN)
Taxpayer Identification Number (TIN) is a unique 11-digit number assigned to any business for it to be easily identified by the commercial tax department of the state. TIN registration was mandatory for all manufacturers, traders, exporters, and dealers. After the implementation of GST on July 1, 2017, TIN is now replaced with a 15-digit GSTIN (Goods and Services Tax Identification Number).
Any asset that is pledged as security while taking a loan is called collateral. Lenders often require it to be sure that they won’t lose their money in case the business defaults on the loan. If a business fails to meet the requirements of the loan, the pledged asset can be seized by the lender. The collateral can be a fixed asset (property), moveable (vehicle) or general charge (stocks & receivables). Based on the value of the loan, banks may ask for multiple types of collaterals (general charge + fixed assets). In the case of multiple lenders, banks or financial institutions may ask for Pari Pasu, that is, equitable charge over the same asset, or exclusive/first charge over a certain asset.
3. Unsecured Loans
Loans that are not backed by any asset/collateral are called unsecured loans. Since these loans present a greater risk for the lender in comparison to secured loans, there’s a higher interest rate involved. These loans are usually of lower ticket size or lower amount.
Banks, at times, provide larger loans without any security to large enterprises based on their repayment capacity and established cash flows.
Of late, partially secured loans have started making an impact in the market. Herein, the financial institutions ask for collateral of a value lower than the loan value. Such loans also need to be supported by the repayment capacity and established cash flows.
4. CIBIL Score/Bureau Score
A summary of an individual’s credit history derived using the Credit Information Report (repayment history of loans over a period) is called the CIBIL score.
CIBIL Score is a 3-digit number ranging from 300–900; a higher score signifies a stronger credit profile. This score is the primary screening filter used by financial institutions while reviewing a loan application. A lower score is usually a sign of delay or non-payment of obligations towards the lending institutions. A delay in credit card payment, non-payment of housing loan EMI for more than 90 days, default on loan by a borrower where you were a guarantor can also affect the CIBIL score adversely.
This score is enabled by RBI norms where all the financial institutions are mandated to share the credit history of all their customers with all the bureaus. While CIBIL is the oldest bureau in India, there are other bureaus as well, namely, Experian, CRIF, and Equifax.
5. Invoice Financing
A way for a business to borrow based on the transaction. Under this, the bank disburses the borrowing amount equal to the value of the invoice. In some cases, banks pay the invoice amount directly to the seller. The repayment period/tenure of this is usually linked to the working capital cycle of the business. This product works as a limit, wherein the limit gets reinstated to full with every repayment.