# AI terms explained: a plain-English glossary for small business owners What the words mean, where you'll run into them, and which ones you can skip. By Toby Egbuna ยท Updated Oct 7, 2026 Source: https://www.skillsforsmallbusiness.com/resources/ai-term-glossary/ ## Key takeaways - Most small business owners only need six AI terms to get started: prompt, project, skill, connector, agent, and hallucination. - A prompt is a one-time request to an AI tool, and a skill is a saved set of instructions the AI reuses to do the same task the same way every time. - AI tools can state false things confidently, which is called a hallucination, so check any number, name, date, or legal claim before it reaches a customer. - On consumer plans, ChatGPT and Claude both let you choose whether your chats are used to train their models, and the setting is worth checking before you paste in business details. ## What are the basic AI terms? The basic AI terms below come up in almost every conversation about AI. You can use AI tools well without knowing how any of them work under the hood. ### Artificial intelligence (AI) Artificial intelligence is software that does tasks that usually take human judgment, like writing, summarizing, sorting information, or answering questions. When small business owners say "AI" today, they usually mean a chat tool like ChatGPT or Claude. ### Generative AI Generative AI is AI that creates something new from a request: text, images, audio, or code. Drafting a job post, a customer email, or a product description are all generative AI tasks. ### Large language model (LLM) A large language model is the type of AI behind ChatGPT, Claude, and Gemini. It learned from a huge amount of written text and produces writing by predicting what should come next, which is how it can draft, summarize, and answer questions in plain language. ### Model A model is one specific version of an AI system. AI companies usually offer several at once, often a faster, cheaper model and a slower, more capable one. For everyday business writing the default model is usually fine, and the more capable model is worth trying for harder work like analyzing a spreadsheet or planning a project. ### Chatbot A chatbot is any tool you talk to in a conversation, by typing or speaking. The word covers both general AI assistants like ChatGPT and the simpler bots on websites that answer common customer questions. ### AI assistant An AI assistant is a general-purpose chat app you can ask to help with almost any task. The best-known are ChatGPT from OpenAI, Claude from Anthropic, Gemini from Google, and Copilot from Microsoft. Each has a free version and paid plans with more features and higher limits. ### Training data Training data is the material an AI model learned from before you ever used it. Training data is why a model knows general facts about the world but knows nothing about your prices, customers, or policies until you tell it. ## What do the terms for talking to AI mean? The terms for talking to AI describe what happens between typing a request and getting an answer. Knowing them explains most of the odd results people get from AI tools. ### Prompt A prompt is the request you type into an AI tool. A prompt can be one line ("Write a reminder for a late invoice") or a full page of background, and prompts with more detail about your situation usually get better answers. ### Instructions (system prompt) Instructions are standing directions an AI follows in every message, such as "Write in a friendly, plain tone and keep emails under 100 words." Most AI assistants have a settings area for standing instructions, and projects can carry their own instructions too. Developers call these a system prompt. ### Context Context is everything the AI can see when it answers: your current message, earlier messages in the same chat, files you uploaded, and any standing instructions. An AI tool only knows about your business what is in its context. ### Context window The context window is the limit on how much text an AI can take into account at once. Very long chats or large files can push earlier details out of view, which is why starting a fresh chat for a new task often gets better results than continuing an old one. ### Token A token is the unit AI tools use to measure text, usually a whole short word or a piece of a longer one. Tokens set the limits on how much you can send at once and how API use is billed. In chat apps you rarely see them. ### Hallucination A hallucination is when an AI states something false as if it were true, such as a made-up statistic, a wrong price, or a law that doesn't exist. A hallucination reads just as confidently as a correct answer, so check any number, name, date, or legal claim before it goes to a customer. ### Memory Memory is a feature that lets an AI assistant remember details about you across separate chats, such as your business name or how you like emails written. You can usually view, edit, or turn off what an assistant remembers in its settings. ## What terms come up when setting AI up for your business? Projects, skills, connectors, and the other setup features below turn a general chat tool into one that knows your business, so you stop re-explaining the basics every time. ### Project A project is a workspace inside ChatGPT or Claude where related chats, uploaded files, and instructions live together. A project for your business means you upload your price list and policies once instead of pasting them into every chat. ### Custom GPT A custom GPT is a version of ChatGPT set up with its own instructions and files for one job, which you can share with your team or the public. Custom GPTs only work inside ChatGPT. ### Skill A skill is a saved set of instructions, and sometimes templates or scripts, that teaches an AI how to do one specific task the same way every time. Skills use an open format called Agent Skills: a folder containing a SKILL.md file. Anthropic created the format and released it as an open standard, and it now works in Claude, ChatGPT, and many other AI tools. A prompt is a one-time request. A skill is the routine you set up once and run again and again, like chasing late invoices every Friday. Every skill on Skills for Small Business uses this format. ### Business profile A business profile is a short file describing your business that you give to an AI tool: what you sell, who your customers are, your prices and policies, and how you talk. With a business profile, AI tools stop asking the same basic questions and write as if they know your business. > **Skill:** [Write your business profile](https://www.skillsforsmallbusiness.com/skills/start-here/write-your-business-profile/) ### File upload A file upload is adding a document, spreadsheet, PDF, or image to a chat so the AI can read it. Uploading an export from your invoicing or booking system is often the fastest way to give AI real numbers to work with. ### Connector A connector links an AI assistant to another app you use, such as Gmail, Google Calendar, Google Drive, or Notion, so the AI can read from it or take actions in it with your permission. Without a connector, you copy and paste information or upload exports instead. ### MCP (Model Context Protocol) MCP is an open standard for connecting AI apps to outside tools and data. The official MCP site compares it to a USB-C port: one standard plug that works with many devices. Many connectors are built on MCP, but you rarely need to set it up yourself. ### API An API is a way for one piece of software to talk to another. AI companies sell API access so developers can build AI into other apps, and API use is billed separately from a chat subscription. Most small business owners never need to use an AI API directly. ## What do agents, automations, and workflows mean? Agents, automations, and workflows describe AI doing work for you instead of answering one question at a time. ### Agent An AI agent is AI that works through a multi-step task on its own: it decides what to do next, uses tools, and checks its own results. Asking ChatGPT to draft one email is a chat. Having AI go through 15 open invoices, check the inbox for replies, and draft the right reminder for each one is agent work. ### Automation An automation is work that runs on its own when something triggers it or on a schedule, like sending a reminder the day after an invoice is due. Traditional automation tools follow fixed rules. AI adds judgment, such as picking which reminder fits a client who already promised to pay. ### Workflow A workflow is the series of steps you follow to finish a job, like "pull open invoices, check for replies, draft reminders, send." Writing a workflow down is the first step to handing it to AI or to a new hire. ### Scheduled task A scheduled task is an AI job set to run on its own at a set time, like every Friday morning. Several AI assistants now support scheduled tasks, which is what turns a skill into a routine you don't have to remember to start. ### Approval step (human in the loop) An approval step is a point where an AI routine stops and waits for a person to review its work before anything goes out. People also call this keeping a human in the loop. Every skill on Skills for Small Business drafts first and asks for your approval before sending, posting, or changing anything. > **Skill:** [Chase late invoices](https://www.skillsforsmallbusiness.com/skills/get-paid/chase-late-invoices/) ## What should I know about AI and my business data? A few settings and habits keep customer and business information safe while you use AI tools. ### Model training setting The model training setting controls whether your conversations can be used to train an AI company's future models. In ChatGPT the setting is called "Improve the model for everyone," under Settings, then Data controls. In Claude's Free, Pro, and Max plans it is the model training setting in Privacy settings. Check the setting before you paste in business details. ### Consumer plans vs. business plans Consumer plans are the free and individual paid plans of AI assistants, and business plans are the team and enterprise versions. OpenAI says it does not train on data from its business plans by default, and Anthropic says its 2025 change to consumer training settings does not apply to its commercial plans. If several people on your team use AI with customer information, a business plan is worth the extra cost. ### Sensitive data Sensitive data is information that could hurt a customer, employee, or your business if it leaked: card numbers, bank details, Social Security numbers, passwords, health information, and employee records. Leave sensitive data out of AI chats, or replace it with placeholders like [customer name] before you paste. ## FAQ **What's the difference between ChatGPT and an AI agent?** ChatGPT is an AI assistant that answers one message at a time. An AI agent works through a multi-step task on its own, using tools and checking results along the way. ChatGPT and Claude can both act as agents when a task calls for it. **What is a skill in ChatGPT or Claude?** A skill is a saved set of instructions that teaches an AI how to do one task the same way every time. Skills use the open Agent Skills format, a folder with a SKILL.md file, which works in Claude, ChatGPT, and many other AI tools. **What does MCP mean in AI?** MCP stands for Model Context Protocol, an open standard for connecting AI apps to outside tools and data like your email, calendar, or documents. Many AI connectors are built on MCP, so most people use it without setting anything up. **Is my business data used to train AI?** On consumer plans, it depends on your settings: ChatGPT and Claude both let you turn model training off. OpenAI says it does not train on business-plan data by default, and Anthropic's consumer training setting does not apply to its commercial plans. **Which AI terms do I actually need to know?** To get started, learn six: prompt, project, skill, connector, agent, and hallucination. They cover how to ask for help, how to set AI up for your business, how to hand it routines, and when to double-check its work. ## Where this information comes from Definitions of the newer terms come from the organizations that publish each standard or setting. - [Agent Skills overview](https://agentskills.io), agentskills.io (the open Agent Skills standard): What a skill is (a folder with a SKILL.md file), that Anthropic created the format, and which AI tools support it. - [What is the Model Context Protocol (MCP)?](https://modelcontextprotocol.io/introduction), modelcontextprotocol.io: The definition of MCP and the USB-C comparison. - [Data controls in ChatGPT](https://help.openai.com/en/articles/7730893-data-controls-in-chatgpt), OpenAI Help Center: The "Improve the model for everyone" setting and where to find it. - [Business data privacy, security, and compliance](https://openai.com/business-data/), OpenAI: That OpenAI does not train on business-plan data by default. - [Updates to our consumer terms](https://www.anthropic.com/news/updates-to-our-consumer-terms), Anthropic: The model training setting for Claude Free, Pro, and Max, and that commercial plans are not affected.