Business Finance Jargon Explained

Business Finance Jargon: Your Essential A-Z Guide

Navigating the world of business finance can often feel like unravelling a complex web of jargon and acronyms. Whether you are taking your first steps into this realm or are a seasoned business owner, the vast amount of terms used can sometimes be bewildering.

At Pinpoint Finance, we believe in simplifying finance for everyone. Our mission is to make your journey through the intricacies of business finance as clear and straightforward as possible. You don’t need to be an expert in deciphering financial terminology – that’s where we come in!

However, a solid understanding of the basics can empower you to navigate the process with greater ease and confidence.

In this comprehensive guide, we’ve compiled the A-Z of business finance terms in a manner that’s easy to understand and user-friendly.

We’ve got you covered from APRs to Equity and Secured Loans to Unregulated Products. And if you ever need further explanation or have any queries, remember our team is always ready to assist.

A

• Accounts Receivables: This term refers to the money that is owed to a business for goods or services that have been delivered but not yet paid for. Typically represented as invoices that have been issued but remain unpaid, accounts receivables are crucial for a business’s cash flow management.
• Arrears: When an account is in arrears, it means that payment deadlines have been missed, and the account holder has fallen behind on their repayments. This situation often carries legal obligations to repay the outstanding amount as originally agreed upon.
• Annual Percentage Rate (APR): APR is a comprehensive measure that reflects the actual yearly cost of borrowing. It includes not just the interest rate but also encompasses all fees, charges, and administrative costs associated with a loan. Expressed as a percentage, the APR is a critical figure for borrowers to understand the total cost of a loan. In the UK, the Consumer Credit Act mandates lenders to display the APR on all credit agreements.
• Adverse Credit: This term describes a poor credit rating, which can result from various factors such as failing to keep up with repayments, paying less than the agreed amount, receiving a County Court Judgement (CCJ), or undergoing bankruptcy. Credit reference agencies log your credit and repayment activities for up to six years, affecting your credit score or rating.
• Amortisation: In finance, amortisation refers to the process of gradually reducing the balance of a loan over its term. For business loans, this means paying fixed monthly instalments that cover both the principal and the interest, with the interest portion decreasing over time as the principal is repaid.
• Arrangement Fee: This is a fee charged by lenders for setting up a loan or credit agreement. It’s an administrative cost that covers the processing of the loan and is typically found in agreements for business loans, mortgages, and car finance.
• Assets: Assets are items of value owned by an individual or a company. They can include tangible items like property, land, vehicles, and machinery. In secured lending, these assets can be used as collateral against a loan, meaning they can be seized by the lender if repayments are not met.
• Asset Finance: This is a financial arrangement that allows businesses to access equipment, machinery, or other assets by paying in instalments over a period rather than making a large upfront payment. It’s a way to spread the cost of acquiring assets.

B

• Bad Debts Protection: This is an insurance product that can be combined with an Invoice Finance facility. It protects businesses against the risk of non-payment of receivables, ensuring that the business’s cash flow is not adversely affected by bad debts.
• B2B (Business-to-Business): Refers to transactions or commercial activities between businesses rather than between a business and individual consumers. This term is often used in wholesale transactions, supply chain operations, or professional services offered between companies.
• B2C (Business-to-Consumer): This term describes transactions or services provided directly from a business to the end consumer. It typically involves retail transactions where businesses sell products or services directly to customers.
• Bankruptcy: Bankruptcy is a legal status where an individual or a business cannot meet its debt obligations. Declaring bankruptcy can significantly impact a person’s or company’s credit rating and ability to borrow in the future.
• Balance Sheet: A balance sheet is a financial statement that shows the financial position of a business at a specific point in time. It lists the company’s assets, liabilities, and shareholders’ equity, providing a snapshot of its financial health and stability.
• Broker: In business finance, a broker is an intermediary who helps source finance for a borrower from various lenders. Brokers are often used for their expertise in the financial market and their ability to find competitive rates and understand lender’s requirements.

C

• Cashflow Finance: is a way to use your business’s unpaid invoices to improve cash flow. Essentially, a specialist lender immediately advances you a percentage of the invoice value, and you get the rest (minus fees) when your customer pays you.
• Credit Rating: A credit rating is a measure lenders use to assess an individual’s or business’s ability to meet financial obligations. It’s based on a history of credit applications, repayments, and any CCJs or bankruptcy notices. A good credit rating can lead to more favourable loan terms.
• County Court Judgement (CCJ): A CCJ is a legal judgment issued by a county court against a person or business that fails to repay an outstanding debt. If the debt is not settled within the time stipulated by the court, the CCJ is recorded on the debtor’s credit file for up to six years, negatively impacting their credit rating.
• Credit File: A credit file is a detailed record of a person’s or business’s borrowing and repayment history. Held by credit reference agencies, it’s used by lenders to evaluate a borrower’s creditworthiness. Individuals and businesses can review their credit files by contacting agencies like Experian or Equifax.
• Credit Search: Before processing a credit application, lenders conduct a credit search to review an applicant’s credit history and rating. This information, obtained from credit reference agencies, helps determine the applicant’s creditworthiness and the amount they can borrow.

D

• Debt to Equity Ratio: This ratio measures the proportion of a company’s financing that comes from shareholders’ equity versus borrowed funds. It’s a key indicator of the financial leverage and risk profile of a business.
• Default: To default on a loan means to fail to meet the agreed repayment terms, such as missing a due date. Depending on the loan agreement, lenders may impose penalties for defaults, and it can adversely affect the borrower’s credit rating.
• Development Finance: This type of finance is a short-term loan used primarily for property development, such as constructing new buildings or refurbishing existing properties. It’s a key financial tool for developers and investors in the real estate sector.
• Debt Consolidation: Debt consolidation involves combining multiple outstanding debts into a single loan. This is often done to secure a lower overall interest rate, extend the repayment term, and simplify debt management.

E

• Equity: In finance, equity refers to the ownership value in an asset after all debts and liabilities against it have been settled. It represents the residual interest in the assets of a business or individual.
• Equitable Charge: An equitable charge is a type of security interest where an asset is used as collateral for a financial obligation, such as a loan. The debtor retains control of the asset, but the creditor has a claim on it in case of default.

F

• FCA (Financial Conduct Authority): The FCA is the regulatory body for financial services firms and financial markets in the UK. It aims to ensure that financial markets operate effectively and fairly, protecting consumers and the financial system’s integrity.
• Factor Rate: The factor rate calculates the total interest payable on a loan. It’s expressed as a decimal and indicates the interest a lender charges. The factor rate is multiplied by the loan amount to determine the total interest.
• Financial Services Compensation Scheme (FSCS): The FSCS is a UK scheme that protects customers of authorised financial services firms. It provides compensation if a firm fails to pay claims against it. The scheme covers various financial products, including insurance policies, deposits, investments, and mortgages.
• First Charge (Mortgage): A first charge mortgage is the primary loan on a property. In the event of a default on mortgage payments, the lender with the first charge has the primary claim on any funds raised from the sale of the property.

G

• Guarantor Loans: These are loans where a third party, typically a family member, agrees to repay the loan if the original borrower is unable to do so. This arrangement provides additional security for the lender, especially when the borrower has insufficient funds or a poor credit rating.

H

• Hire-Purchase Agreement (HPA or HP): In a hire-purchase agreement, the lender purchases an asset and leases it to the borrower. At the end of the lease term, the borrower can buy the asset, effectively combining hiring and purchasing.

I

• Independent Legal Advice (ILA): This is the guidance and counsel provided by a lawyer or legal expert who is not involved in the interests of any other parties in a particular transaction or legal matter. This type of advice is crucial when there may be potential conflicts of interest, for example, signing a personal guarantee.
• Invoice Discounting: This is a form of invoice financing where the borrower retains control over their own credit control process. Businesses use unpaid invoices as security to secure funding and manage customers’ collections.
• Invoice Factoring: Similar to invoice discounting, invoice factoring is a form of Invoice Finance where the lender takes control of the borrower’s credit control process. The lender advances funds against unpaid invoices and manages the collection of payments from customers.
• Invoice Finance: A broad term for financing services that use a business’s invoices as security to advance cash. It includes both invoice discounting and factoring, providing businesses with immediate access to funds tied up in unpaid invoices.

J

• Joint Venture (JV): A joint venture is a business arrangement where two or more parties agree to pool their resources for a specific task, project, or business activity. This can involve sharing knowledge, assets, risks, and rewards. Joint ventures are common in international business and can be used for various purposes, such as entering new markets, developing new products, or combining expertise for complex projects. In a JV, each party maintains its separate business identity while working collaboratively towards a common goal.

L

• Land Registry: The government department in the UK that maintains records of property ownership. When you buy a property, the change in ownership is registered here.
• Lender: A lender is an entity that provides funds under a finance agreement. Lenders set the terms and conditions of the loan, including interest rates, repayment schedules, and any collateral requirements.
• Loan Purpose: This refers to the specific reason why a loan is being sought. Financial providers offer loans for various purposes, such as purchasing property (mortgages) or vehicles (car finance).
• Loan Term: The loan term is the time the loan must be repaid. It affects the size of the monthly repayments and the total amount of interest paid over the life of the loan.
• Loan to Value (LTV): LTV is a ratio representing the loan amount as a percentage of the asset’s value against which it is secured. It is commonly used in mortgage arrangements to determine how much can be borrowed against the value of a property.

M

• Market Value: The estimated amount a property should sell in the current market. This value can fluctuate based on market conditions and property improvements or deteriorations.
• Mortgage: A mortgage is a secured loan specifically used for purchasing property. The property is security for the loan, securing the lender’s investment.
• Monthly Repayments: These are the payments a borrower is required to make each month to reduce the loan amount. Monthly repayments include both the principal and the interest components of the loan.
• Merchant Cash Advance: This business finance model is designed for businesses that take customers’ debit and credit card payments. Businesses receive a lump sum and repay it through a percentage of their daily card sales, making it a flexible repayment method in line with their sales.

N

• Negative Pledge: A negative pledge is a clause typically included in loan agreements, particularly unsecured loans, where the borrower promises not to pledge any of its assets as security for other debts without the lender’s consent. This clause is designed to protect the lender by ensuring that the borrower does not diminish its ability to repay the unsecured loan by subsequently prioritising other secured creditors. In essence, it restricts the borrower from taking actions that could potentially compromise the position of the current unsecured lender, such as securing other loans against the company’s assets. This is particularly important in maintaining the creditworthiness and asset base of the borrower from the perspective of the unsecured lender.

O

• Open Banking: Open Banking is a system where banks and other financial institutions share financial data with regulated providers. This allows for more innovative financial services and gives customers greater control over their financial data.

P

• Personal Guarantee: A personal guarantee is a contractual agreement where an individual guarantees to fulfil certain obligations under a loan agreement if the primary borrower defaults. This provides additional security to the lender.

R

• Revolving Credit Facility: A revolving credit facility (RCF) is a type of business finance that functions similarly to a bank overdraft. It allows businesses to draw down funds, repay them, and then withdraw again, up to a specific limit.

S

• Second Charge (Mortgage): A second charge mortgage is a loan secured against the equity in a property that already has a mortgage. It’s a secondary loan that uses the same property as collateral but ranks behind the first-charge mortgage in priority.
• Secured Loan: A secured loan is one where the borrower offers one or more assets as collateral. This could include property, machinery, vehicles, or trademarks. If the borrower defaults on the loan, the lender may seize the asset to recover the owed amount.
• SME (Small to Medium Sized Enterprises): SME Finance refers to a range of financial products and services specifically designed for small to medium-sized businesses. These products cater to the unique needs and challenges faced by smaller enterprises.

T

• Tier 1/2/3 Lenders: These terms refer to different categories of lenders based on their lending rates and risk profiles. Tier 1 lenders offer the best rates and typically lend to businesses with lower credit profiles. Tier 2 lenders offer moderate rates and accept a higher level of risk. Tier 3 lenders charge higher interest rates and cater to businesses with higher risk profiles.

U

• Unsecured Loan: An unsecured loan does not require any assets as collateral. These loans typically carry higher interest rates due to the increased risk to the lender.
• Underwriting: Underwriting is how a lender assesses and verifies an applicant’s creditworthiness and the risks of lending them funds. It involves evaluating the borrower’s financial history, credit rating, and the purpose of the loan.
• Unregulated: The Financial Conduct Authority (FCA) does not monitor unregulated financial products. These products do not offer the consumer access to statutory protections like a regulated mortgage product.

V

• Valuation: A professional assessment of a property’s value conducted by a surveyor on behalf of the lender. This ensures the property is worth the price and is suitable security for the mortgage. It’s important to note that a valuation is not a detailed survey of the property’s condition.
• VAT (Value Added Tax): VAT is a type of consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed. In business finance, companies need to account for VAT in their pricing structures, bookkeeping, and financial reporting. They may charge VAT to their customers and may also reclaim VAT on goods and services they have purchased for business use. The specific rules and rates for VAT can vary depending on the country and the types of goods or services involved. In the UK, businesses are required to register for VAT if their taxable turnover exceeds a certain threshold.

W

• Working Capital: Working capital refers to the funds available for the day-to-day operations of a business. It is calculated as current assets minus current liabilities. This metric is crucial for assessing a company’s short-term financial health and ability to cover operational expenses, such as paying suppliers and employees. Adequate working capital is essential for maintaining smooth business operations and ensuring the company can meet its financial obligations as they arise.

Z

• Zero-Balance Account (ZBA): A zero-balance account is a type of bank account maintained at a zero balance. This arrangement automatically transfers funds from a master account to cover credits or debits issued against the zero-balance account. Businesses often use This type of account to manage cash flow efficiently, ensuring that funds are consolidated in a master account and only transferred to subsidiary accounts as needed to cover expenses.