Finance jargon can feel overwhelming. Whether you're managing your personal finances or navigating business loans with a trusted Minnesota bank, understanding the terminology is critical. To empower you, we’ve compiled a simple dictionary of financial terms, so you can make informed decisions with confidence.
The Automated Clearing House Network (ACH) powers electronic financial transactions. It handles direct deposit paychecks, online bill payments, and even Venmo transfers. By bypassing mailed checks, ACH makes transactions faster and more secure.
Why It Matters: ACH simplifies money transfers, saving time and minimizing errors. Minnesota businesses often rely on ACH to streamline their operations.
APR is the yearly interest rate charged on loans or earned on investments. It includes fees, broker costs, and other charges, offering a true picture of loan costs.
Pro Tip: Use APR to compare loan options and choose the best financial institution for your needs. Whether you’re financing real estate or securing a business loan, understanding APR is essential.
APY measures how much you earn on a deposit account in one year, including compound interest. It’s a crucial metric when evaluating savings accounts or CDs at your local Minnesota bank.
Remember: APR reflects costs, while APY shows earnings.
Amortization has two meanings:
For intangible assets: Writing off expenses like goodwill or trademarks to reduce taxable income.
For loans: Gradually paying off a loan in scheduled installments. Early payments primarily cover interest, while later payments reduce the principal.
Plan Ahead: Use an amortization schedule to stay on top of payments. This is particularly helpful when planning small business lending repayments.
A balance sheet shows a business’s financial position, listing assets, liabilities, and shareholder equity. It’s a snapshot of financial health.
Why It Matters: It’s a vital tool for investors assessing a company’s performance. Small business owners in Minnesota can use balance sheets to attract investors or secure loans.
Buying a bond means lending money to a corporation or government in exchange for regular interest payments and the return of the principal at maturity.
Key Insight: Rising interest rates lower bond prices. Timing is crucial. Bonds are a popular choice for Minnesota investors seeking steady returns.
Cash flow measures the money moving in and out of a business or personal budget. Positive cash flow means you’re earning more than you’re spending.
Why It Matters: Strong cash flow supports growth and ensures financial stability. Managing cash flow is vital for small businesses in Minnesota’s competitive market.
Collateral is an asset pledged to secure a loan. If you default, the lender can seize the collateral to recover their funds.
Examples: Homes are often used as collateral for mortgages, while businesses may use equipment or inventory. Many Minnesota banks, including Security Bank & Trust Co., offer flexible collateral options.
Compound interest is the “interest on interest” you earn or owe. It’s a key driver of wealth in investments but can also amplify debt costs.
"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it" Albert Einstein
Tip: Start investing early to maximize compounding benefits. Minnesota savers can take advantage of high-yield accounts to build their wealth.
Equity is the value of ownership in an asset after deducting liabilities. For homeowners, it’s the difference between your property’s market value and your mortgage balance. For businesses, it represents shareholder ownership.
Why It Matters: Equity can be a powerful source of financing for real estate lending or business growth.
Your FICO score reflects your creditworthiness, based on factors like payment history and debt levels. It’s a critical metric lenders use to evaluate loan eligibility.
Why It’s Vital: A good FICO score unlocks better interest rates and financial opportunities. This is especially important for securing business loans in Minnesota.
A fiduciary is someone legally obligated to act in your best interest, whether managing assets or providing financial advice.
Pro Tip: Always confirm if your advisor has fiduciary responsibility.
A line of credit is a flexible loan that lets you borrow up to a set limit as needed. Interest applies only to the amount borrowed.
When It’s Useful: Ideal for managing short-term business expenses in industries across Minnesota.
Liquidity measures how quickly an asset can be converted to cash without losing value. Cash is highly liquid, while real estate is less so.
Why It Matters: Liquidity ensures you can meet short-term financial needs. Real estate investors in Minnesota often balance liquidity with long-term investments.
Passive income comes from investments requiring no active role in the business to generate a return. A good example is an investment in dividend-paying stocks or real estate investment trusts.
Tip: Minnesotans looking to diversify their income streams often explore passive income in real estate and other investments.
The principal is the original amount borrowed in a loan or invested, excluding interest. Paying off the principal faster reduces overall interest costs.
Refinancing adjusts the terms of an existing loan, often to lower interest rates or monthly payments.
When to Consider It: Refinancing can save money when market rates drop. Many Minnesota homeowners and businesses benefit from refinancing to optimize their finances.
ROI measures the profitability of an investment, expressed as a percentage. It helps evaluate whether an investment is worth pursuing.
Why It’s Important: Higher ROI means better profitability. Small business owners in Minnesota often use ROI to gauge the success of their ventures.
A term loan is repaid over a fixed period with regular payments of principal and interest.
Who It’s For: Small businesses often use term loans to fund growth or buy equipment. Security Bank & Trust Co. offers tailored lending options for Minnesota businesses.
Working capital is the difference between current assets and current liabilities. It indicates a business’s ability to cover short-term obligations.
Why It’s Essential: Positive working capital ensures operational stability. Minnesota small businesses rely on strong working capital to remain competitive.
Understanding financial terms is the first step toward smarter money management. Whether you’re optimizing cash flow for your business or planning for personal financial goals, Security Bank & Trust Co. is here to help.
Contact one of our experienced lenders today to get started.