Business Loans Glossary

Like any other area of activity, business loans and finance has its own jargon. This section sets out brief explanations for some of the common terms used in business finance.

Property finance enquiries Plant and machinery finance enquiries Trading cash flow finance enquiries

The downloadable guide The practical guide to listing available from the London Stock Exchange’s website (www.londonstockexchange.com) contains a useful glossary of terms associated with floating a company on a stock exchange.

Accounting concepts The fundamental assumptions that underlie any set of accounts, see prudence, accruals concept, historical cost convention and going concern.
Accruals concept The accounting concepts that revenues and costs should be dealt with in the period to which they relate.
Acid ratio Ratio used to indicate the company’s ability to pay its current liabilities out of its liquid assets (cash and debtors).
Adverse Items which adversely affect your credit rating such as mortgage arrears, County Court judgments or insolvency proceedings.
AIM The alternative investment market; a public UK stock market which has lower criteria for obtaining a listing than a full stock market listing.
Asset based finance Lending that is based on specific classes of asset, eg commercial mortgages based on property, factoring or invoice discounting based on debtor book (and sometimes stock), leasing, hire purchase, or chattel mortgages based on plant and machinery. Often an important element in the financing of buy-outs.
Asset based lenders Lenders who will advance against the security of a particular class of assets, more generally lenders who will do so across a number of types of asset such as an invoice discounter who will also lend against property.
Assets Items owned by business which can be used by it and to which a value can be attached.
Availability The funds you have available to be paid to you (drawn down) by your factor or invoice discounter
Benchmarking Comparison of your business against other similar competing businesses.
BIMBO See buy out.
Block discounting Lending against a stream of future rental income.
Book value The value of assets as shown in the accounts of the company. As book values are generally based on the historic cost of the asset less depreciation since it was purchased, they often bear little or no relation to the asset’s current market value.
Bootstrapping The process of running a business so as to generate enough funds internally to support its own growth, from the expression ‘to pull yourself up by your own bootstraps’.
Breakeven The level of sales at which the gross profit or contribution is sufficient to cover the overheads so that the business makes neither profit or loss.
Bridging loan A short-term loan usually designed to bridge the period before another transaction can be completed.
Burn rate An American term used to describe the rate at which a company is using up (burning through) its cash resources.
Business angel A wealthy individual, often a retired businessman who has already sold one business who is interested in investing funds personally in smaller or start up companies. Will often be looking for an active role in management of the company.
Buy out The purchase of an existing established business from its owners, can be by its existing managers, an MBO, new mangers coming in from outside (a management buy in, MBI), a combination (buy in management buy out BIMBO) or where one venture capitalist buys out another’s stake (secondary).
Buy in See buy out.
Capital Capital is a term which is widely used in a number of different but related ways. Capital essentially refers to a stock of cash which can be invested in assets but this stock can be made up of differing elements and calculated in different ways depending on what you are looking to discuss.Capital can therefore include:

• ‘Loan capital’ which is the sum borrowed by way of a loan (also known as the loan principle).

• ‘Share capital’ is the cash invested by the shareholders in the shares of the business.

• A ‘capital account’ is a partner’s share of the retained profits of the business.

• A ‘capital asset’ is generally a fixed asset such as a property or plant and machinery which has absorbed cash; or

• a ‘business’s capital’ can make up the total funding base of a business, which usually means its shareholders’ funds and its long term borrowings.

So ensure you understand which sense is being used whenever the term is mentioned.

Capital expenditure (capex) Purchase of fixed assets.
Cashflow forecast A projection of a business’s receipts and payments over a period.
Charge Security taken by a lender, can either be fixed where the lender has to give permission for the sale of the assets, or floating where you are free to buy and sell the relevant assets (such as stock) on a day to day basis.
Chinese walls Internal arrangements in a finance company or a firm of professional advisors where information is not passed between different departments so as to maintain confidentiality and prevent conflicts of interest.
Commercial asset finance broker Business that arranges borrowings on your behalf with appropriate asset finance companies.
Concentration Limit imposed by factor or invoice discounter on the percentage any single debtor can be of the debtor book.
Contingency Allowance in a cashflow forecast for unforecast payments.
Contingent liability A potential liability of the business which may arise as a result of some specific event.
Contract hire See leases.
Contribution See gross profit.
Creditor Person to whom the business owes money
Creditor days A measure of the amount of credit being taken from suppliers by a business.
Crown debt Money due to HM Revenue and Customs for PAYE/NI or VAT.
Current assets Liquid assets used by the company such as debtors and cash, together with stock, which is intended to be sold as part of the company’s normal trading operations.
Current liabilities All sums of money which are due to be paid by a business within the next 12 months.
Current ratio The value of the current assets divided by current liabilities. See also acid ratio.
Debenture Technically, a written acknowledgement of a debt but more usually the document by which a lender such as a bank takes a charge or security.In the US, also used to describe a publicly traded debt or bond.
Debt Money lent to a business which has no right to a share of ownership or profits, will need to be repaid and usually carries an interest charge.
Debtor Person who owes the business money.
Debtor days A measure of the amount of credit being given to customers by a business.
Deferred consideration Where a seller of a business allows the buyer time to pay the purchase price.
Depreciation The writing off to the profit and loss account of the cost of a fixed asset over time.
Disallowed Debt that is not available for factoring or invoice discounting (eg because it is too old).
Discounted cashflow The value of money to be received in future periods, discounted back to its equivalent today (as money to be received at some future date is by definition less certain and therefore less valuable than cash in hand now).
Dividend Payment to shareholder out of profit.
Dividend policy A company’s approach as to whether to pay dividends to shareholders or to retain profits within the business.
Drawdown See availability.
Due diligence The purchaser’s process of detailed investigation and review prior to completing a purchase.
Earn out Where the price to be paid for a business is determined by its subsequent performance.
EBIT Earnings before interest and tax. The underlying profit from trading before it is affected by the business’s tax status or financing. (earnings is an American term and the UK equivalent is PBIT – profit before interest and tax.)
EBITDA Earnings before interest, tax, depreciation, and amortisation, used as a measure of the cash generated by trading activities.
Equity (1) Money put into your business by investors in return for a share of its ownership and profits.
Equity (2) The value of the difference between the market value of an asset (eg a machine on a finance lease or hire purchase arrangement, or property subject to a mortgage) and the outstanding borrowings.
Equity gap The difficulty faced when looking to raise equity funding at a level higher than business angels are likely to provide, but lower than the level at which venture capitalists want to invest.
Escalator See ratchet.
Excess Overdraft levels greater than the agreed facility.
Facilities Banking term for the package of loans agreed with the client (eg overdraft facility and mortgage on the premises), which will be set out in a facility letter.
Factoring Lending money based on the security of a company’s debtors where the lender takes over the collection process (contrast with invoice discounting).
Financial assistance Rules under the Companies Act to prevent a company’s own assets being used to buy it except by using a whitewash report,
Financial promotion The act of seeking investment, governed by tight regulation with potentially severe criminal penalties.
Fixed assets Assets owned by a business such as property or plant and machinery to be used over a number of years, the cost of which is written off each year by a depreciation charge.
Fixed charge See charge.
Flotation The process of listing a company’s shares for sale on a stock exchange also known as listing or an Initial Public Offering (IPO).
Floating charge See charge.
Funding gap The difference between the amount of credit you are receiving from your suppliers and credit you are providing to customers (your terms of trade) together with the time it is taking to turn purchases into sales; which determines the degree to which your working capital required funding.
GAAP – Generally accepted accounting practice Generally Accepted Accounting Practice. This means that your accounts have been prepared in accordance with normal accounting conventions. Note that American and UK GAAP have some significant differences and you will need professional advice if this is an issue.
Gearing Borrowing. A company is said to be highly geared (in US: leveraged) if it is largely funded by way of loans rather than share capital.
Going concern The accounting assumption that the business will continue to trade into the future.
Grants Cash provided to you without you having top pay interest or give a share in your business, which you do not have to repay if you meet the terms on which it is provided.
Gross profit Your turnover or sales, less the costs of the goods sold.
Hardcore Apparently permanent level of overdraft.
Headroom Available level of unused overdraft facility.
Hire purchase Arrangement where an asset can be bought using instalment payments.
Historical cost convention The assumption that the value of assets on the balance sheet is recognised at the original cost of purchase, less any depreciation or subsequent write-down to reflect a loss of value.
Initial public offering (IPO) See flotation.
Insolvency Being unable to pay debts as they fall due. The Insolvency Act sets out a number of tests including failure to deal with a statutory demand or to pay a judgment debt, and liabilities exceeding assets, each of which would be taken by a court as proof of insolvency.
Invoice discounting Lending money based on the security of a company’s debtors where the borrower remains responsible for the collection process (contrast with factoring).
Initial public offering (IPO) See flotation.
Internal rate of return (IRR) The discount rate at which a net present value calculation gives a zero result, which in turn means that the discount rate equates to the return generated by the project or investment.
Joint and several liability The position in a partnership where all the partners are jointly liable for the partnership’s debts, while each partner is also individually (severally) liable for all the debts of the partnership.
Lease Arrangement where a finance company purchases an asset and rents it to you. Can be long term finance leases, short term operating leases or contract hire, where you have responsibility for maintaining and servicing the asset
Letter of credit Document issued by bank to a supplier confirming that the bank will settle their invoice on presentation of the appropriate documents.
Leverage American term for gearing.
Liabilities The amounts of money a business owes to others.
Limited liability company (ltd) Company where the shareholders’ (members) liability to contribute to the company’s assets is limited to the unpaid amount of the shares that they own which means that they are not liable to contribute any further cash even if the company cannot pay its debts.
Limited liability partnership New form of partnership structure which gives the partners some protection from the business’s debts.
Liquidity Availability of cash to meet liabilities.
Listing See flotation.
Loan to value Ratio of the sum a lender is prepared to advance against the value of the asset to be taken as security.
Management accounts Periodic accounts prepared for use within the business rather than for public filing.
Mark to market Accounting approach which states assets and liabilities at current market values. Contrast with historical cost convention.
Matching (1) The principle that the type of finance should match the type of use the funds are to be put, eg long term stable finance for long term investment, short term flexible finance for working capital requirements.
Matching  (2) Accounting concept, see accruals.
MBI See buy out.
MBO See buy out.
Mezzanine Loans made in excess of normal available security.
Mortgage A term loan secured on property (or when on plant and machinery, a chattel mortgage).
Net present value A discounted cashflow, less the amount of money you have to pay to acquire it.
Nomad Nominated advisor to a company seeking a stock exchange listing.
Non-status lending Lending based on the value of the security (such as pawn broking) rather than on an assessment of the borrower’s ability to keep up repayments.
Ofex A privately traded listing where shares are dealt in on the basis of individual trades. Often used by small companies to obtain speculative money as an alternative to venture capital, but is significantly less liquid than other stock market listing as there are no active market makers trading the shares.
Off balance sheet debt Types of arrangements such as sale and leasebacks where a business has the equivalent of a loan but without having to show a liability on the balance sheet.
Open market value How much an asset will fetch if sold on the open market. Also known as fair market value.
Overdraft The extent to which cash has been drawn out of a current account to leave a negative balance.
Overheads Expenditure on a business’s indirect costs which are not specifically attributable to the costs of particular goods sold.
Overtrading Trading at a higher level than your available cash is able to support.
P/E ratio Price to earnings ratio – how many times the current level of earnings someone is prepared to pay to acquire an interest in a company. A high P/E multiple usually indicates an expectation of high growth (ie E is expected to grow significantly reducing the P/E ratio down to a more normal level). Inverse of yield.
Package lender See structured loans.
Partnership Two or more people engaged in business together for profit. See joint and several liability.
Payable See creditor.
Payback period How long it will take to recover an investment at current level of earnings.
PBIT See EBIT.
Personal guarantee Agreement that an individual will pay a company’s debt if the company is unable to do so.
Preference shares A share in the company with rights to dividend payment, superior to ordinary shares, but do not normally have voting rights.
Preferential creditors Nowadays limited to some sums due to employees, preferential creditors are paid out of the floating charge assets before the floating charge holder, see charge.
Priority agreement Agreement between lenders to vary the normal order in which their security would rank for payment.
Private company Any company that is not a public company and is therefore not entitled to offer its shares for sale to the public.
Property development finance Finance to cover site purchase and building costs designed to fund property development.
Prospectus A package of information prepared for provision to potentially interested investors in a flotation.
Prudence The accounting concept of recognising losses as soon as they can be identified, but profits only once they have been earned.
Public limited company (PLC) A company that meets statutory requirements about the level of its issued share capital and which may therefore be entitled to sell shares to the public (although not all PLCs are listed on a stock exchange).
Quick ratio See acid ratio.
Ratchet Arrangement for increasing management’s shareholding if business hits targets.
Receivable See debtor.
Recourse Arrangement where a factor or invoice discounter can recover any advance made to you in respect of any debt that is subsequently not recovered. In a  non-recourse arrangement you have protection from this happening.
Regulated loan A loan where a first charge is given on a domestic property or on a commercial property where over 40% of the area is used as your residence.
Reserves (1) A business’s retained earnings.
Reserves (2) Reduction of your availability applied by a factor or invoice discounter to cover any potential exposure (eg to supplier contras).
Rolling bridges The use of a series of bridging loans typically to fund a phased property development project.
Sale and leaseback A way of raising cash by selling an asset and then renting it back.
Second round funding Further equity investment into a business with an existing external investor (eg by a venture capitalist to develop a business that has had start up or seed money from a business angel).
Secondary buy out See buy out.
Section 320 Provision in the Companies Act that prevents a director purchasing substantial assets (broadly anything worth more than £100,000 or 10% of the net assets of the company) without first obtaining the consent of the shareholders.
Security (1) A source from which a debt can be repaid if the borrower does not make repayments in the normal way, such as a charge over property or other assets.
Security (2) A document acknowledging that the holder has certain rights (eg repayment of a debt from the issuer).In the US can be extended to cover a share certificate.
Self certification The process whereby a borrower confirms that they are able to make repayments on a loan rather than proving it by providing accounts.
Share capital The capital contributed to a company by its shareholders.
Shareholders funds The total book value of a company (the net assets on its balance sheet) which is owned by shareholders.
Small Firms Loan Guarantee A DTI scheme where the Government provides a guarantee to lenders for loans made to young businesses.
Sole trader An individual in business in their own name.
Stapled finance A package of potential borrowings pre-arranged for the buyer by the seller of a business.
Statement of source and application of funds Statement showing how profits generated by the business combine with investment in or realisation of assets, together with credit received or repaid, result in a movement in the businesses cash.
Stock (1) A company’s trading stock comprising raw materials, work in progress, and finished goods stock.
Stock (2) A company’s shares.
Stock days A measure of the time taken to convert goods purchased into sales.
Stock exchange A market in which shares and other securities can be traded.
Structured loans Loans from an asset based lender across more than one type of asset (eg factoring and a property loan).
Sub prime Borrowers with significant levels of adverse making them unattractive to mainstream lenders.
Swing Movement in a bank current account.
Syndication Situation where a number of funders join together to each fund a share of a project.
Term loan A loan repayable by an agreed level of instalments over a period of years.
Terms of trade See funding gap.
Top up funding Additional mezzanine or equity finance to cover the difference between total costs of a property development project and the sums available under normal property development finance.
Trade finance Specialist funding of trading transactions such as importing goods for resale.
Transaction at undervalue Selling an asset at less than its fair value. In the event of an insolvency, a liquidator will review significant transactions preceding the insolvency and can act to set aside transactions at undervalue.
VC Venture Capital or Venture Capitalist.
Veil of incorporation The protection offered to shareholders by a company’s limited liability.
Vendor finance See deferred consideration.
Venture capitalists (VC) A firm set up to hold investors’ money and to invest it in high growth opportunities. Generally look to achieve a return of 30% per annum and hold investments for three to five years before selling. Generally tend not to be interested in deals below say, £0.5m investment. (See equity gap, business angel.)
Whitewash report or agreement Accountant’s report used to enable a business’s assets to be used as security on which to raise money to buy it.
Work in progress A contract which is not yet complete or goods which are in the process of manufacture but which are not yet finished.
Working capital A business’s current assets less its current liabilities.
Working capital cycle The concept that a business’s working capital turns over as it goes through its cycle of trade; suppliers providing goods which become stock and then debtors once sold, with the cash received from debtors then being used to pay suppliers.
Yield The amount of return received (E for earnings) for the price (P) paid. Usually shown as a percentage.

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Property finance enquiries Plant and machinery finance enquiries Trading cash flow finance enquiries
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