Business Finance Jargon Buster
When it comes to Business Finance, there is a lot of terminology for smaller businesses to grapple with.
To help, we’ve compiled a list of some of the most frequently used financial and business accounting terms. We hope you find this useful!
Accounting Period
The time frame used for financial reporting, normally months, quarters or years.
Adverse Credit
Adverse credit typically describes a poor credit rating. When you apply for and use credit, such as a credit card, loan or mortgage, your application and repayment activity is logged by credit reference agencies for up to six years. You will be scored on the way you repay your loan; this is known as a credit rating or credit score. If you fail to keep up with repayments, pay less than agreed, receive a CCJ or are subject to bankruptcy, you will incur an adverse credit rating.
Annual Accounts
Also known as financial, company or statutory accounts. Businesses must produce an annual set of Accounts detailing Business Finances.
Accounts Receivables
Payments outstanding to a business for goods or services supplied to customers which have not yet been paid. Generally in the form of invoices raised but unpaid.
Amortisation
In general, amortisation refers to the reduction in value of an intangible asset over its lifetime. In the case of a business loan, an amortising loan is where you pay a fixed monthly instalment, with the amount of interest paid monthly reducing as the loan capital is repaid.
Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) is the rate of interest you agree to pay on money borrowed, and a useful way to compare how much interest you would pay on loans from different providers. Lenders are legally required to display APR’s on all Credit Agreements.
Arrangement Fee
An arrangement fee is an administration cost charged by lenders for setting up certain credit agreements. Business loans, mortgages and car finance agreements typically include arrangement fees.
Arrears
An account is placed in arrears if you miss your payment date and fall behind with your repayments. You are legally obliged to repay the outstanding amount, as agreed at the outset of the arrangement.
Assets
Items of value owned by a company.
Asset Finance
Asset Finance allows businesses to access equipment, machinery, or other assets by paying instalments over an agreed time period rather than in one lump sum.
Audit
An official inspection of a company’s accounts.
Bad Debt Protection
A type of insurance product that can either be stand alone or combined with an Invoice Finance facility to protect against the non-payment of receivables.
Balance Sheet
A summary of a company’s assets, liabilities and capital at a given point in time.
Bankruptcy
Bankruptcy occurs when a person or business fails to meet its financial obligations and can no longer settle any outstanding debts. Filing for bankruptcy will negatively impact your credit rating.
Base Rate
Set by the Bank of England, this is the country’s base rate of interest and influences the rate of interest on financial products and services.
Bootstrapping
Building a company without external investment, often relying on personal savings and running with the lowest possible operating costs
Break-even Point
The point in time when revenues exactly match expenses.
Broker
A broker sources finance for a borrower from a lender in exchange for a commission payment. Commonly known as a commercial finance broker, business finance broker or financial intermediary.
B2B
Commercial finance products are classed as B2B or business-to-business transactions and are offered exclusively to businesses rather than individuals.
B2C
The term B2C or business-to-consumer refers to the direct selling from a finance provider to a consumer or end-user.
Capital
Anything invested into a company that has a tangible value or benefit to its own, such as a machinery, patents, or financial assets like cash.
Capital Expenditure (CAPEX)
Funds used by the company to buy, maintain or improve its fixed assets such as buildings, vehicles, equipment, or land.
Cashflow
The movement of cash into and out of a business.
Corporation Tax
Paid by UK companies on their profits.
Cost-push Inflation
Cost-push inflation occurs when production input costs, such as wages and raw materials, rise and producers pass the increased costs on to consumers through price rises.
County Court Judgement (CCJ)
A County Court Judgement – also known as a CCJ – is issued by a County Court if a person or business fails to meet repayments on an outstanding debt. If the debt is not settled within an allotted time stipulated by the court, typically one month, the CCJ will be placed on the debtor’s credit record with credit reference agencies for up to six years.
Creditor
A person or firm that has lent your business money or to whom you owe money.
Credit File
A credit file is a detailed account of the borrowing history of a person or business. The file is held with credit reference agencies and used by lenders to assess the credit worthiness of a borrower. You are able to review your credit file by contacting a credit reference agency, such as Experian or Equifax.
Credit Rating
A credit rating is used by lenders to determine your ability to meet your financial obligations. When you apply for and use credit, your application, repayment activity and any CCJ or bankruptcy notices are logged by credit reference agencies for up to six years. Lenders can obtain details of your credit history to evaluate your merit as a borrower. If you have a good credit rating, lenders will typically grant you more funds than if your rating is poor.
Credit Search
Prior to processing an application for credit, lenders will review your credit history and rating via information held by credit reference agencies. This data is used to determine whether you are credit worthy and the amount you can borrow.
Debtor
A person or firm that owes money to your business.
Debt Consolidation
Debt consolidation is the act of combining all your outstanding debts and transferring them to a single business loan arrangement. Borrowers typically do this to lower monthly interest rates, extend repayment terms and make the debt more manageable.
Default
To default is to fail to meet a repayment due date. Depending on the terms, some lenders can impose penalties should a default occur. A default on your account will adversely affect your credit rating.
Demand-pull Inflation
Occurs when demand is high, and suppliers increase prices until demand reduces.
Depreciation
The reduction in value of assets over time, usually due to wear and tear.
Development Finance
Development Finance is a short-term loan used in the development of a residential property. It can be used to finance a new construction or the refurbishment of an existing property.
Dividends
Money paid by a company from its profits to its shareholders.
EBITDA
A form of operating profit. It stands for earnings before interest, taxes, depreciation, and amortisation.
Earnings per Share (EPS)
A measure of how much profit a company is making for its shareholders.
Economies of Scale
Equity
Used by analysts to determine the financial health of a company. It also represents what would be left if all of a businesses’ assets were liquidated and the debt paid off.
Equitable Charge
An equitable charge is an arrangement in which a debtor chooses to use an asset as security for some type of financial obligation, such as a business loan. While the debtor retains control and use of the asset, the creditor has a claim on that asset in the event that a default on the obligation should take place.
Factor Rate
The factor rate expresses, as a decimal, the amount of interest a lender charges on a loan. To find out how much interest you will pay in total, multiply the factor rate by the amount of finance you wish to loan.
FCA
The Financial Conduct Authority, otherwise known as the FCA, is the regulator of financial services firms and financial markets in the UK.
Financial Management
Planning, analysing, monitoring, organising, reviewing, and controlling a company’s finances.
Financial Services Compensation Scheme (FSCS)
The FSCS protects the customers of authorised financial services companies operating in the UK should a firm fail to pay a claim against it. Insurance policies and brokering, deposits, investments and mortgages are covered under this scheme.
First Charge (Mortgage)
The primary loan taken out on a property is known as a first charge mortgage. Should an individual default on a mortgage payment, the lender providing the first charge mortgage will have the first claim on the funds raised from the sale of the property.
Fiscal Year
Also known as a financial year, this is a set period used to calculate financial statements. A firm’s fiscal year can run over any 12-month period, although the most common year-ends are March 31 and December 31.
Fixed Cost
A cost that a company incurs regardless of its output volume. Fixed costs usually include, for example, rent, interest, and salaries.
Gross
The total amount of money a company has earned in a period of time before deductions such as taxes.
Guarantor Loans
Should you lack sufficient funds or have a poor credit rating to secure a loan, a third-party person – typically a family member – can act as a co-signer to your loan agreement. In doing so, they commit to repaying your loan on your behalf should you fail to do so.
Hire-purchase agreement (“HPA” or “HP”)
A hire purchase arrangement involves the lender obtaining the asset from a third party and leasing it to the borrower. The borrower then has an option to buy the asset at the end of the term (hire then purchas
Income Statement
An annual summary of both income and expenses that determines the net income/profit of a business.
Inflation
A percentage figure that represents how much prices of goods and services increased over a specific period.
Insolvency
When a company becomes unable to pay off its creditors, or its liabilities exceed its assets.
Invoice discounting
A form of Invoice Finance where the borrower handles their own internal credit control process.
Invoice Factoring
When a business sells its invoices to a third party, which will then add their own fee to the charges and seek the money from the debtor.
Invoice finance
Invoice finance is a catch-all term for any kind of financing service which is based on using a businesses’ invoices as security to advance cash.
Lender
The lender provides the funds for and stipulates the terms of your finance agreement.
Liquid Asset
An asset that can be easily converted into cash.
Liquidity
The ease with which a company’s assets can be converted into cash.
Loan Purpose
The reason why you are seeking the loan. Financial providers can offer funds for specific purposes, such as mortgages and car finance agreements.
Loan Term
The length of time in which the loan must be repaid.
Loan to Value (LTV)
The Loan to Value (LTV) is typically expressed as a percentage that represents the loan amount in relation to the value of asset against which it is secured. The LTV is typically associated with mortgage arrangements.
Margin
The amount of money a company makes, expressed as a percentage. For example, a gross profit of £1m on sales of £10m is a 10% profit margin.
Merchant Cash Advance
Merchant Cash Advance is a business finance model designed for businesses taking debit and credit card payments from their customers. Businesses can borrow a lump sum, then repay it gradually in small amounts through their customers’ card payments.
Monthly Repayments
This term refers to the amount a borrower is required to pay each month with interest to reduce the loan amount.
Mortgage
A mortgage is a secured loan taken out to purchase a private or commercial property. The property is offered as security against the loan.
Negative Equity
When the value of an asset is less than what you initially paid.
Net
The amount of profit left after deductions such as tax have been made.
Nominal Interest Rate
An interest rate that isn’t adjusted for inflation.
Open Banking
Open Banking refers to the process of banks and other financial institutions opening up data for regulated providers to access, use and share.
Operating Expenditure (OPEX)
On-going costs for running a business, service or system that includes day-to-day expenditure.
Operating profit/loss
The profit or loss a company makes, which reflects how a business is performing.
Overheads
Costs that do not change regardless of the level of production and are not typically involved with the cost of production, such as rent.
Patent
An official legal document stating that a company has the sole right to make, use, or sell a particular invention.
PAYE
Stands for Pay As You Earn. A method of collecting income tax on behalf of the Government by taking it directly from your employees’ wages.
Personal Guarantee
A contractual agreement made between a borrower and a lender where the borrower individual guarantees to fulfil all or certain obligations under the loan agreements should the borrower default.
Present Value
Comparison of the money available to the company in the future with the value of money it currently holds, such as due to interest.
Product Elasticity of Demand (PED)
The degree to which demand for products or services changes due to changes in price.
Profit and Loss Account
A financial statement that shows the income and outgoings of a company over a certain period of time showing the net profit or loss for that time.
Real Interest Rate
The rate of interest minus the current rate of inflation.
Regulated
Regulated financial products must comply with regulations stipulated by the Financial Services Authority. Any complaints regarding the handling of these products can be referred to the Financial Ombudsman Service. Consumers who use regulated financial products are protected by the Financial Services Compensation Scheme.
Return on Investment
The earning power of an asset or activity measured as a ratio of the net income of the activity to the operational cost. ROI lets a company know whether an activity is profitable enough to continue.
Revenue
Money received by, or owed to, a company for goods or services provided.
Revolving Credit Facility
A revolving credit facility (RCF) is a type of business finance that enables businesses to quickly draw down or withdraw funds, repay, and withdraw again. They work in a similar way to a bank overdraft.
Second Charge (Mortgage)
Should you have any equity in a property for which you already have a mortgage, you can offer it as security against a second loan, known as a second charge mortgage.
Secured Loan
A secured loan requires to you offer one or more assets, such as property, machinery, vehicles or trademarks, as security or collateral against the loan. Should you default on the loan, the asset may be seized by the lender.
Security
Typically required by lenders against a loan, such as premises or plant equipment.
SME
SME Finance comprises a range of products designed specifically for small to medium sized enterprises.
Tier 1/2/3 Lenders
A Tier 1 lender typically has the best rates on the market and in order to get these rates they lend to businesses with a lower credit profile. A Tier 2 lender isn’t the cheapest but also doesn’t have ridiculously expensive rates – they tend to sit right in the middle and accept a higher level of risk from their customers. A Tier 3 lender has higher interest rates and will lend to higher risk businesses.
Turnover
The total sales of a business during a specified period.
Underwriting
Underwriting is the process of assessing and verifying an applicant’s creditworthiness and the risks associated with lending them funds.
Unregulated
Unregulated financial products are not monitored by the Financial Conduct Authority and do not offer the consumer access to any statutory protection.
Unsecured Loan
An unsecured loan does not require any assets to be offered as security against the finance agreement.
Venture Capital
Capital invested into projects with long term growth potential but also higher risks, such as start-up businesses.
Working Capital
Funds a business uses in day-to-day trading. An indication of liquidity, it shows the business’s ability to meet its current obligations.
If you would like to know more about any of these terms, or to discuss your Business and Commercial Finance requirements, get in touch with us today: 01204 398816
Information correct on date of publication
