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The Credit Process: A Guide
For Small Business Owners

... Continued From Previous Page


Accounts payable: Amount owing to creditors for goods and services on an open account.

Accounts receivable: Amount due from customers for merchandise or services purchased on an open account.

Asset: Anything owned by a business or individual that has commercial or exchange value.

Balance sheet: Financial statement that presents a "snapshot" of what the business owns, what it owes, and what equity it has on a given date.

Capital: See Equity.

Capital expenditures: Purchases of long-term assets, such as equipment, used in manufacturing a product.

Cash flow: Incoming cash to the business less the outgoing cash during a given period. Also used to refer to the figure derived from net income plus noncash items charged off in the accrual accounting process.

Collateral: Assets pledged to secure a loan.

Collection period ratio: Indicates how quickly your customers pay you. Average accounts receivable divided by net sales, multiplied by 365.

Community Reinvestment Act (CRA): Under provisions of the Community Reinvestment Act of 1977, banks and thrift institutions seek opportunities to help meet the credit needs of their local communities, including low—and moderate—income neighborhoods, consistent with safe and sound operation of the institutions.

Compensating balance: Money a bank requires a company to leave in a deposit account as part of a loan agreement.

Corporation: Form of business ownership that is a legal entity on its own and puts stockholders and the board of directors in control. Owners have limited liability for the corporation's actions. A corporation has unlimited life and in most cases is taxed as an entity on its own.

Cost of goods sold: Figure representing the cost of buying raw materials and producing finished goods.

Current assets: Cash or other assets you expect to use in the operation of the firm within one year.

Current liabilities: Debts you expect to pay within one year.

Current ratio: Shows the firm's ability to pay its current obligations from current assets. Current assets divided by current liabilities.

Days purchases in accounts payable ratio: Indicates how quickly you pay your suppliers for inventory purchases. Average accounts payable divided by the cost of goods sold plus change in inventory, multiplied by 365.

Days to sell inventory ratio: Indicates the firm's efficiency at matching purchases to expected sales. Average inventory divided by the cost of goods sold, multiplied by 365.

Debt ratio: Indicates the firm's debt level, or leverage. Total liabilities divided by total liabilities plus capital.

Depreciation: Amortization of the cost of a fixed asset, such as plant and equipment, over several years, or the "depreciable life."

Dividend: Distribution of earnings to shareholders. Equal Credit Opportunity Act (Federal Reserve Regulation B): Prohibits lenders from denying your application on the basis of race, color, religion, national origin, sex, marital status, or age, or from discouraging you from applying, or giving you less favorable terms than any other applicant, on such a basis. Regulation B also contains specific rules governing credit transactions.

Equity: The ownership interest in a business remaining after its liabilities are deducted. Also known as common stock plus retained earnings, or capital.

Extraordinary items: Unusual or nonrecurring event that must be explained to shareholders or investors, such as a manufacturer's sale of a building.

Finance company: Competitors of commercial banks in providing credit to households and firms. Unlike banks, they do not accept deposits.

Financial projections: Estimates of the future financial performance of a firm.

Financial statements: Written record of the financial status of an individual or organization. Commonly include profit and loss, or income, statement; the balance sheet, which includes a statement of the company's retained earnings; and the cash flow statement.

Fixed assets: Long-term assets such as buildings, equipment, or property that are not expected to be converted to cash in the near term.

Gross profit: Indicates the revenues of the firm before consideration of its operating expenses. Net sales less cost of goods sold.

Gross profit margin: Measures a firm's profitability. Gross profits divided by net sales.

Gross income: Net sales less cost of goods sold. Installment loan: Loan type that is paid in periodic payments, such as an automobile loan.

Inventory: Value of a firm's raw materials, work in process, supplies used in operations, and finished goods.

Investor: An individual who takes an ownership position in a company, thus assuming risk of loss in exchange for anticipated returns.

Leverage: Measures the firm's use of borrowed funds versus those funds provided by the shareholders or owners (equity).

Line of credit: Although not a contract, a bank's promise to lend to a specific borrower up to a pre-agreed amount during a specific time frame. Usually reviewed annually and subject to cancellation without notice.

Liquid assets: Those assets that can be readily turned into cash.

Liquidity: Gauges firm's ability to quickly turn assets into cash.

Marketable securities: Securities that are easily sold.

Net income: The sum remaining after all expenses have been met or deducted. Also called profit.

Net sales: Gross sales minus returns and allowances.

Net worth: Excess of assets over debt.

Niche: Particular speciality in which a firm has gained a large market share.

Operating expenses: Those costs associated with the day-to-day activities of the business.

Operating profit (loss): Income or loss before taxes and extraordinary items resulting from transactions other than those in the normal course of business.

Operating profit margin: Measures a firm's profitability by examining the pre-tax profit generated from primary operations (versus extraordinary items) in relation to net sales. Operating profit divided by net sales.

Partnership: Can be general or limited, but in either case the general partners are in control. The tax burden is shared by all the partners at their personal rate, and the general partners have unlimited liability. Limited partners have limited liability.

Principal: The currently unpaid balance of a loan, not including interest owed. Also can refer to a primary owner or investor.

Profit: Compensation an entrepreneur receives for the assumption of risk in a business venture. Also called net income.

Profit and loss statement: Summary of the revenues, costs, and expenses for a business over a period of time. Also called the income statement.

Pro forma financial statements: Financial statements for a business where certain amounts shown are hypothetical, or estimated, for the period depicted.

Quick ratio: Liquidity ratio that focuses on the firm's most liquid assets by excluding inventory. Also known as the acid test ratio. Cash, marketable securities, and accounts receivable divided by current liabilities.

Retained earnings: Net profits kept to accumulate in a business after dividends are paid.

Seasonal loan: A loan made for the purpose of meeting predictable and periodic funding needs, such as funding of camping gear inventory before summer purchases.

Small Business Administration (SBA): Federal agency created in 1953 to provide management and financial assistance to small businesses. Mainly, the SBA guarantees loans through financial institutions. The loans may be used for working capital, machinery and equipment acquisition of real estate, and expansion.

Sole proprietorship: A type of business where the owner has full control and unlimited liability. A sole proprietorship is taxed at the personal income tax rate.

Information Guide

The following is a partial list of the organizations in the Second Federal Reserve District that offer technical assistance programs and/or loans. Please contact your local Federal Reserve Bank for similar information.

New Jersey

Economic Development Corporation of Essex County (EDC)
Burton Sebold, Executive Director
50 South Clinton St.
East Orange, NJ 07018
(973) 395-8426

Somerset Alliance for the Future (SAF)/
District Management Corp. of the Borough of Somerville (DMC)
William Lawton, Design Coordinator
166 W. Main St.
Somerville, NJ 08876
(908) 704-1010

Downstate New York

Terri Ludwig, Director, or Alex Stein, Operations Manager
235 Havemeyer St.
Brooklyn, NY 11211
(718) 599-5170

Bedford Stuyvesant Restoration Corp.
Bernice McRae, Project Coordinator
1368 Fulton St.
Brooklyn, NY 11216
(718) 636-6924

Brooklyn Economic Development Corp. (BEDC)
Joan Bartolomeo, President
175 Remson St. Suite 350
Brooklyn, NY 11201
(212) 522-4600

Greater Jamaica Local Development Co., Inc.
Lamont Bailey
Assistant Secretary
90-04 161st St.
Jamaica NY 11432
(718) 291-0282

Harlem Restoration Project.
Dorothy Vaughn
461 W. 125th St.
New York, NY 10027
(212) 662-8186

Long Island Development Corp.
Roslyn D. Goldmacher, Executive Director
Executive Drive
Planview, NY 11803
(516) 349-7800

Manhattan Borough Development Corp.
Patricia Swan, Executive Director
55 John St. Suite 1701
New York, NY 10038
(212) 791-3600

New York City Comptroller’s Office
Stuart Baron, Project Manager
1 Centre St. Room 736
New York, NY 100017
(212) 699-7318

New York City Economic Development Corp.
110 William St.
Anne Doyle, Vice-President
Financing Initiatives Division
New York, NY 10038
(212) 312-3600

New York State Small Business Development Center
Judith M. McEvoy, Director
Harriman Hall
State University of New York at Stony Brook
Stony Brook, NY 11794-3 775
(631) 632-9070

Port Jervis Development Corp.
John Clune, Executive Director
P.O. Box 3105
19 East Main St.
Port Jervis, NY 12771
(914) 858-8358

Upstate New York

Adirondack Economic Development Corp.
Cristie MacConnell, Economic Specialist
Trudeau Rd., Box 747
Saranac Lake, NY 12983
(518) 891-5523

Alternatives Federal Credit Union
Carol Chernikoff, Director of Lending
301 West State St.
Ithaca, NY 14850
(607) 273-4666

Erie County Industrial Development Agency
Paul Leone, Business Development Director
275 Oaks
Buffalo, NY 14203
(716) 856-6525

Ibero-America Investors Corp.
Domingo Garcia, President & CEO
George Dickinson, Chief Lending Officer
104 Sico St.
Rochester, NY 14604
(716) 262-3440

Monroe County Industrial Development Corp.
Judith Seil, Economic Development Specialist
One West Main St. Suite 600
Rochester, NY 14614
(716) 428-5060

New York Business Development Corp.
Robert W. Lazar, President & CEO
41 State St.
P.O. Box 738
Albany, NY 12201
(518) 463-2268

Rochester Economic Development Corp.
David Balestiere, Secretary
30 Church St.
Rochester, NY 14604
(716) 428-6808

Rural Opportunities, Inc.
Joan Dallis, Deputy for Economic Development
400 East Ave.
Rochester, NY 14607
(716) 546-7180

NY State Government Programs

Empire Development Corp.
Jerry Trifari, Vice President
633 3rd Avenue
New York, NY 10017
(212) 803-3100

Federal Government Programs
Farmers Service Agency
Keith Kelly, Chief, Community and Business Programs
1400 Independence Avenue, S.W., Stop 0501
Washington, DC 20250-0501
(202) 720-3467

U.S. Department of Commerce,
Minority Business Development Agency
Heyward Davenport, Regional Director
Jacob K. Javitis Federal Building
Room 3720
New York, NY 10278
(212) 264-3262

Small Business Administration
Joseph Guarino, Chief of Finance
26 Federal Plaza
New York, NY 10278
(212) 264-1480

Al Gensch, Chief of Finance
2 Gateway Center
Newark, NJ 07012
(973) 645-2434

Regulatory Agencies
Federal Reserve Bank of NY
Elizabeth Ann Rodriguez
Assistant Vice President and Community Affairs Officer
33 Liberty St.
New York, NY 10045
(212) 720-5921

Office of the Comptroller of the Currency
Pamela Lea Mount, Compliance Manager
114 Avenue of the Americas
Suite 3900
New York, NY 10036
(212) 819-9860

Office of Thrift Supervision
Francis Baffour
Community Affairs Liaison
10 Exchange Place Center
Jersey City, NJ 07302
(201) 413-1000

Federal Deposit Insurance Corp.
Valerie Williams
Community Affairs Officer
20 Exchange Place
New York, NY 10005
(917) 320-2500

New York State Banking Department
Edward Kramer, Assistant Deputy Superintendent
Consumer Services Division
2 Rector St.
New York, NY 10006
(212) 618-6408

New Jersey State Banking Department
William Waits
Administrative Analyst
West State St.
Trenton, NJ 08625
(609) 292-7272

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