Common Financial Terms for Beginning Farmers
Amortization: Is the process of paying debt with regular payments made over time. An amortization schedule, or payment plan, shows exactly how much money you need to pay each month and for how many months. Each payment includes two parts: 1) money to pay back what you borrowed, and 2) extra charges, or interest, for borrowing the money.
Asset: Something valuable that you or your business owns. This could be something you can touch, like a car or building, or something you can't touch, like a patent for an invention. You can sometimes use assets to help get a loan.
Business Advisor: Someone who helps business owners make good decisions. They can help you plan your business, figure out your money needs, and give advice on managing your finances. Think of them like a coach for your business.
Collateral: Something valuable you promise to give to a lender if you can't pay back your loan. For example, when you get a loan for a tractor, the tractor itself is often the collateral.
Credit Card: A card from a bank that lets you borrow money up to a certain amount to buy things. You need to pay back what you spend, and the bank decides how much you can borrow based on your history of paying bills. Every month the bank sends you a bill. You can pay all the money you borrowed the previous month or pay back just a part of it. The bank charges interest on the amount you don’t pay back each month. Most credit cards have interest rates higher than personal or business loans.
Compounding Interest: When borrowing money, compounding interest means you pay interest on what you borrowed and on past interest charges. So, the debt grows faster over time. Similarly, when you save money with compounding interest, you earn interest both on your original savings and on your past interest earnings.
Debt: Money that you've borrowed and need to pay back. Usually, you also have to pay extra (called interest) for borrowing the money.
Equity Financing: When a business gets money by selling parts of ownership (called shares) to other people or companies. It's like splitting your business into pieces and selling some of those pieces to raise money.
Grants: Money given to help people or businesses by the government or other organizations. Unlike loans, you usually don't have to pay back grants, but you do need to use the money for specific purposes. Typically, grant funders also require you to send them reports both about how you spent the money and on the project’s activities and achievements.
Gross Revenue: All the money your business makes from selling things or services before you subtract any costs or expenses.
Interest Rate: The extra percentage you pay when borrowing money. For example, if you borrow $100 with a 5% interest rate, you'll need to pay back the $100 plus $5 in interest. Interest rates can also apply to saving money. If you put $100 in a savings account with a 3% interest rate and don’t take any money out, after a year you will have $103.
Liabilities: Money that you owe to others. This includes things like loans, credit card bills, or money you need to pay to suppliers.
Lien: A legal right that lets a lender take your property if you don't pay back your loan. It's like a safety net for the lender.
Line of Credit: A type of loan where you can borrow money up to a certain amount whenever you need it. With a line of credit, you have to pay back what you take out plus interest.
Maturity Date: The final date when you need to pay back all the remaining money you borrowed.
Mortgage: A special type of loan used to buy property or a house. The property serves as collateral, and you usually have many years to pay it back.
Net Revenue: The money left over after you subtract all your expenses from your gross revenue. This is also called profit.
Personal Net Worth: The total value of everything you own minus everything you owe.
Guaranty: A promise that you'll pay back a loan if your business can't. It's like being a backup payer - if the business can't pay, you agree to pay with your own money.
Principal: The original amount of money you borrowed, not counting any interest charges.
Profit & Loss Statement: A document that shows how much money your business made and spent during a certain time period, like a year or a few months.
Projected Cash Flow: Your best guess about how much money will come in and go out of your business in the future. It's like planning your business's budget ahead of time.
Working Capital: Money used to pay for everyday business needs like buying supplies, paying workers, and handling regular bills.
Note: This guide uses simpler terms to explain financial concepts. When dealing with real financial documents or making financial decisions, you might see more complex terms. Always ask questions if you're unsure about what something means.