
January 21, 2025
Small business owners are usually more financially literate than the general population, but it’s important to understand a wide range of banking terminology and definitions when making important decisions. We’ve created a glossary of payment industry terms to clarify meanings for hardworking decision-makers.
Payment and Banking Terms, Definitions, and Explanations
From credit checks to transaction fees, dive into this commonly used financial terminology with definitions.
A
Amortization
Amortization is the process of gradually reducing the value of an asset over time. However, the term is also used to describe paying off a loan or credit debt gradually in installments. (See repayment). Amortization may apply to non-physical assets like patents, trademarks, or copyrights. The asset’s cost is divided by its estimated lifespan (e.g., the length of the trademark agreement) and marked down on corporate balance sheets over time.
Annual Percentage Rate (APR)
Annual percentage rate, or APR, reflects the cost of borrowing money on an annual basis. APR includes the interest rate and any additional fees associated with serving the loan.
C
Compound Annual Growth Rate (CAGR)
Compound annual growth rate (CAGR) measures annualized growth over a specific period. It is calculated using the CAGR formula (below). CAGR is useful for compounding interest during the selected period and smoothing out the impact of market volatility.
CAGR formula:
CAGR = ((Ending Value / Beginning Value) ^ (1 / Number of Years) – 1)
Credit Limit
A credit limit is the maximum amount of money a lender will allow one to borrow. It applies to credit cards and lines of credit offered by banks and other financial institutions. Credit limits are set based on several variables, including payment history, current account balances, income, account history, and other outstanding debts.
Credit Report
A credit report is a detailed record of a person or business’s credit history and creditworthiness. It details credit accounts, credit limits, payment history, when accounts were opened or closed, and negative events such as bankruptcies or charge-offs. Credit reports are compiled by credit bureaus like Experian, Equifax, and TransUnion.
Credit Score
A credit score represents an individual or business’s creditworthiness. It is a three-digit number ranging from 300 to 850; higher scores indicate superior credit history. Scores are created based on an entity’s credit report.
Credit Utilization Ratio
A credit utilization ratio reflects how much credit a person or business uses. The ratio is calculated using a simple formula (see below) and is a significant factor in determining credit scores. In most cases, a credit utilization ratio above 30% will negatively impact a credit score. Once the ratio returns to below 30%, scores typically go back up.
Credit utilization ratio = Total credit card debt / Total credit limit
D
Disbursement
Disbursement refers to the distribution of funds or a direct payment. It is often used to describe funds from approved loans, dividends from investments, court orders, and payroll.
E
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
EBITDA is a valuation metric used to evaluate a company’s profitability by excluding non-cash expenses (depreciation and amortization) and removing factors that various accounting practices can influence. EBITDA is an important calculation when comparing companies and analyzing performance. It is a favored metric for private equity companies ahead of an acquisition.
It’s important to note that EBITDA does not account for capital expenditures or true cash flow, especially in mark-to-market accounting systems.
Electronic Funds Transfer (EFT)
Electronic funds transfer (EFT) is a generalized term for any transaction executed digitally without paper checks or cash. Some common examples of EFTs are direct deposits, ACH payments, credit and debit payments, and eChecks.
F
Federal Deposit Insurance Corporation (FDIC)
The Federal Deposit Insurance Corporation is a US government-backed corporation that offers deposit insurance to commercial and savings banks. The FDIC also supervises and regulates banks and works with consumer protection agencies. FDIC-insured banks offer their depositors $250,000 insurance in case of insolvency; some banks offer additional insurance for free or at higher deposit amounts.
Financial Institution (FI)
A financial institution is any organization that holds money, offers financial advice, manages financial risk, or processes transactions. In addition to banks, the term includes other entities, including:
- Credit unions
- Insurance companies
- Investment banks
- Brokerages
- Pension funds
- Hedge funds
- Financial technology (fintech) companies
Fixed Expenses
Fixed expenses are recurring expenses (e.g., monthly, annual, quarterly) that are relatively unchanging and cannot be significantly reduced. These are examples of a business’s fixed expenses:
- Business software
- Rent or lease payments
- Utilities
- Loan payments
- Payroll
H
Hard Pull Credit Check
Also known as a hard inquiry, a hard pull credit check occurs during a credit or loan application process. Frequent hard pulls can negatively impact a credit score, although usually by just a few points and generally for a short period of time. (See also soft pull credit checks)
I
Interest Rate
An interest rate is the borrowing cost of taking out a line or utilizing credit. It’s the amount of money a lender (See lender) expects to earn from the money they lend. The rate is a percentage of the loan balance and is paid monthly, quarterly, or annually. There are different types of interest rates, including:
- A simple interest rate is based solely on the initial amount borrowed.
- A compound interest rate is based on the principal amount plus accrued interest.
- A fixed interest rate stays the same throughout the loan term.
- A variable interest rate fluctuates based on a benchmark rate, which means payments vary over time.
L
Lender
The lender is the entity that offers a loan or access to a line of credit. In most cases, the lender is a bank, credit card issuer, or another type of financial institution.
Limited Liability Company (LLC)
A limited liability company is a business entity that combines the characteristics of a corporation and a sole proprietorship. Its core function is to protect individual members (the owners) from being personally liable for the company’s debts or legal risks.
N
Net Operating Income
Net operating income is a financial metric that measures total business income minus total operating expenses. The metric is often used in real estate investing, quantifying the income generated by one or more properties before taxes, mortgage interests, and capital expenditures. NOI is sometimes used to evaluate the financial health of multi-location businesses.
O
Operating Income (EBIT)
Operating income, or earnings before income and taxes (EBIT), is used to measure the profitability of a business’s core operations. EBIT (see also EBITDA) is used to evaluate any kind of business and includes operating expenses like:
- Costs of goods sold
- Marketing
- Selling, General, and Administrative expenses (SG & A)
- Depreciation
- Amortization
Overdraft
Overdraft occurs when an individual or business spends more money than is available. Most banks offer overdraft protection if the customer has a savings account with the institution.
P
Payment Processing Network
A payment processing network is a digital environment where electronic payments are conducted between individuals, businesses, and financial institutions. Visa, Mastercard, and American Express own the largest payment processing networks.
Payment System
A payment system is any system used to settle financial transactions in person (cash, check) or electronically (ACH, credit card payments).
Point of Sale Network
Also known as a POS network, this is the hardware and software that allow a point-of-sale system to process transactions. A POS network includes a POS terminal (a card reader), a network connection, and dedicated software to facilitate communication between the POS and payment processor. (See Payment Processing FAQs)
Prepayment
This refers to the act of making a payment before it is due. The term includes paying early, paying more than is required, or making additional payments.
R
Repayment
Repayment is the payment of the loan principal plus relevant interest or fees. Loan and credit repayment usually require monthly payments via check or ACH.
Reserve Account
A reserve account is a fund earmarked for specific expenses. Examples of reserve accounts include:
- Emergency funds
- Retirement funds (including 401(k) and IRA accounts)
- Repair and maintenance funds
- Contingency reserves
- Self-insurance (in lieu of purchasing insurance coverage for certain risks)
Retail Payments
Retail payments are any transactions between consumers, businesses, and public entities. They are everyday transactions.
S
Secured Loan
A secured loan requires the borrower to pledge an asset or collateral to receive funds. The asset or collateral might be real estate, vehicles, or other valuable items. Secured, collateralized loans often have lower interest rates. They are sometimes required for individuals with low credit scores to obtain financing.
Soft Credit Pull
A soft credit pull, or soft inquiry, will not affect your credit score and allows a company to check your score without it appearing in your credit history. Most consumer financing companies, including BuyFin, offer soft credit pulls.
Staged Funding
Staged funding is a consumer financing method that disburses funds to consumers in installments, usually based on project progress. Staged funding has several benefits for consumers, including reduced upfront costs, better budget, and more project oversight.
T
Tax Credit
A tax credit reduced the tax liability of individuals and businesses. A tax credit is a dollar-for-dollar reduction in the amount of tax owed, which makes it more beneficial than a tax deduction.
Tax Deduction
A tax deduction reduces your taxable income, which indirectly lowers tax liabilities. Tax deductions are not a dollar-for-dollar reduction. For example, a $10,000 tax deduction in a 22% tax bracket results in a tax savings of $2,200, not $10,000.
Transaction
A transaction is the exchange of money for goods or services. Both consumer financing and payment processing entities facilitate electronic transactions between consumers and businesses.
Transaction Fees
Transaction fees are the fees businesses incur for using payment processing services. The fees are usually calculated as a percentage of the sale amount, with a fixed rate, or using a combination of both methods.
V
Value
Value is the agreed-upon worth of money, a service, or a product.
Variable Expenses
Variable expenses are recurring costs that change from month to month, year to year, or bill to bill. They can change a little or a lot based on external factors. Energy price volatility is often a source of variable expenses, causing budgeting problems for small businesses. (See also fixed expenses)
The ABCs of Growing Your Business BuyFin makes business success easier with a simple onboarding process and excellent customer service. Our consumer financing and payment processing services are tailored to the unique needs of home service businesses, and we take pride in leveraging our industry expertise to help our customers thrive. Experience the BuyFin advantage; contact our team today to get started.
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