Business Finance Jargon Buster

The world of commercial finance comes with a whole load of jargon! If you’re new to business finance, our handy guide will have you knowing your APRs from your Personal Guarantees, and what the difference is between a Secured Loan and Unsecured Loan.

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.

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.

Annual Percentage Rate (APR) 

The APR (Annual Percentage Rate) indicates the actual rate of interest, including all fees, charges and administrative costs, payable over a year. It is expressed as a percentage and, under the Consumer Credit Act, lenders are legally required to display APRs on all credit agreements.

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.

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.

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.

Assets

An asset is anything owned by you or your company that has a monetary value, such as property, land, vehicles and machinery. Secured lending products require you to offer your asset as a form of security against your loan; it can be seized by the lender should you fail to meet your repayments.

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.

Bad Debts Protection

A type of insurance product that can be combined with an Invoice Finance facility to protect against the non-payment of receivables.

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.

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.

Balance Sheet

A statement showing the financial position of a business.

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.

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.

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.

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 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.

Debt to equity ratio

The proportion of shareholder equity to debt.

Default 

To default is to fail to meet a loan 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.

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.

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.

Equity 

The term equity is used to describe the value of an asset owned by you once any debts secured against it have been settled.

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.

FCA 

The Financial Conduct Authority, otherwise known as the FCA, is the regulator of financial services firms and financial markets in the UK.

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.

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.

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 purchase).

Invoice discounting

A form of Invoice Finance where the borrower handles their own internal credit control process.

Invoice factoring

A form of Invoice Finance where the lender handles the borrower’s own internal credit control process.

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.

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.

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.

Monthly Repayments 

This term refers to the amount a borrower is required to pay each month with interest to reduce the loan amount.

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.

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.

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.

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.

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.

SME 

SME Finance comprises a range of products designed specifically for small to medium sized enterprises.

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.

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.

Unsecured Loan 

An unsecured loan does not require any assets to be offered as security against the finance agreement.

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.

If you would like to know more about any of these terms, or to discuss your business finance requirements, just get in touch with us today.