4 May 2021
Our comprehensive A – Z of business finance is designed to help you understand the acronyms and terms you’ll come across as an SME owner. The finance sector is constantly evolving to meet the needs of business, with new terminology emerging every month. Bookmark this page to stay ahead of the curve!
An asset based loan (ABL) is business finance that is secured via a company asset. The funds are often used to boost cash flow in the short-term. Examples of assets that can be used include property, equipment, vehicles or accounts receivable
Advisory, or advisory accounting, refers to an accounting approach that provides accounting services alongside value-added services like strategy and consulting. Advisory, is one of the three levels of accounting services that most accountants offer.
Advisory services help businesses translate their accounting data into actionable and profitable business decisions.
When you apply for a business loan the lender will assess your financial circumstances in order to decide whether or not the finance is affordable and suitable. The lender will complete an affordability assessment to work out if you can meet the repayments.
While exploring different loan or credit card options you’re likely to come across the term Annual Percentage Rate (APR). The APR is the total cost of the loan over the course of a year, taking into consideration interest and the standard fees you’ll pay.
Alt-fi (short for Alternative Finance) refers to modern types of finance that don’t come from traditional or mainstream lenders, such as a high street bank. Crowdfunding, invoice finance and merchant cash advances are all examples of alt-fi.
An accountant is a person who delivers accounting or accountancy services, such as financial reporting and taxation. Chartered accountants have a membership with the Institute of Chartered Accountants or the Association of Chartered Certified Accountants.
An acquisition takes place when a business buys the majority or all of another business’ shares in order to gain control of it. If you purchase over half of a company’s stock and assets, you can make decisions without the other shareholders having to approve.
Have you ever found yourself in need of a piece of equipment for your business but don’t have the cash to pay for it upfront? Asset finance enables you to spread the cost of the asset over a longer term. You can also release cash from the value in assets you own.
Artificial intelligence (AI) is the technology that allows computers and machines to mimic the human mind’s perception, learning, problem-solving and decision-making processes.
An API (application programming interface) acts as a go-between for two applications, enabling them to communicate with each other. Essentially, the API works by assuming the role of messenger, delivering messages to and responses from apps on your behalf.
A bridge loan is a type of short-term business finance designed to provide an immediate cash flow boost. It’s often used by those who need to cover an immediate cost until they can secure a longer-term solution or pay off their obligation in full.
In finance, a broker is an expert in the field whose job it is to find their clients the best finance deal for their needs. Commercial brokers often have working relationships with banks and other types of lenders, including alt-fi and specialist lenders.
A business’ financial plan that takes revenues and costs into account is called a budget. A budget deficit is when the company spends more than it makes whereas a budget surplus happens when its revenue exceeds its expenses, resulting in excess funds.
The term business banking simply refers to a business’s financial interactions with a bank or lender that provides business finance, credit, savings and checking accounts.
A business expense is something you pay for as a result of running your business. An expense falls into one of two categories: tax-deductible and non-tax deductible. Unlike the latter, tax-deductible expenses can be taken from your company profits.
A business plan is a document that defines a business’ objectives. It should contain detailed road maps for how the business plans to achieve its marketing, financial and operational goals. Lenders will often ask to see a company’s business plan when they apply for finance.
A management buy-in (MBI) is when an external manager or management team purchases a company (or a majority stake in it) and takes over the management of the company.
A management buy-out (MBO) is when a company’s existing management team purchases a company (or a majority stake in it). In doing so, they “buy out” the current owner and take control of the company themselves.
A business finance specialist is someone who specialises in a particular area of business finance. For example, they may use their expertise to find finance for businesses. Often, they hold a BS degree in Finance, Economics or another related field.
The Bank Referral Scheme helps businesses owners who’ve been unsuccessful with the major banks. Businesses are referred to a British Business Bank-designated finance platform like Funding Options, who will help them secure finance from an alternative source.
Capital is the funds a business has available in order to meet the day-to-day costs associated with running it, such as paying staff and buying inventory. It includes cash and financial assets, and covers working capital, debt, equity, and trading capital.
The money that flows in and out of a business each month is referred to as “cash flow”. A cash flow statement is a document that contains information about the cash a company receives from its operations and what it spends over a specific period of time.
Some business finance options require the borrower to offer collateral - an asset that acts as security for the loan. It’s designed to protect the lender, so that if the business fails to meet the repayment terms, the lender can sell the asset to recoup some or all of the losses.
Corporate finance is concerned with the sourcing of funding, capital structuring and investment decisions for corporations. One of the main aims is to maximise shareholder value through both short and long-term strategic financial planning.
Personal and business credit scores are numerical scores based on the individual or company’s credit history. When you apply for a credit card, mortgage, personal or business loan, the lender will look at your credit score to decide if you qualify for the funds.
In the old days, sourcing business investment usually meant pitching to a few individuals to obtain large sums of money. As the term suggests, crowdfunding is a way of raising finance that involves asking a large number of people each for a small amount.
A cryptocurrency (such as Bitcoin, Ripple and Litecoin) is a digital currency that uses secure technology to facilitate payments and record who owns what. Cryptocurrency – or ‘cryptoassets’ – are usually held by people who expect to make a return on investment.
A challenger bank does what it says on the tin – it challenges traditional banks, competing with them to offer more flexible and accessible financial products to customers.
Connect is Funding Options’ dedicated digital platform that enables Advisory Partners to access a vast lender panel on behalf of their clients through one quick and simple application. Connect users can track and manage applications in one place.
A debenture is a written agreement between a business finance lender and a borrower; it’s designed to provide the lender with security over the borrower’s assets. A debenture can only be used with limited company or limited liability partnership.
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase.
The debt-to-equity ratio is a financial ratio that shows the relative proportion of shareholders' equity and debt used to finance a company's assets.
If an individual or business doesn’t pay back money they owe, the lending company may hire a debt collector to recover the funds in return for a fee or percentage of the amount recouped.
Debt financing is when a company raises funds or expenditures or working capital by selling debt to investors. Debt consolidation is a type of debt financing. It involves taking out a single business loan to pay off multiple loans.
A drawdown is how much an investment has decreased from its peak, before it recovers to reach the peak again. They’re used to calculate the risk of investments, compare the performance of funds and keep track of personal trading performance.
Equity is the money that a company’s shareholders would receive if its assets were liquidated and all its debts paid off. In accounting, it’s calculated by subtracting a business’ liabilities from the value of its assets.
The Enterprise Finance Guarantee (EFG) is a government scheme designed to support lending to businesses that would otherwise be unable to access business finance due to insufficient security.
Effective annual interest rate can refer to the real interest rate associated with finance or the real return on an investment that pays interest, such as a savings account. When calculating the effective annual interest rate, the effects of compounding are taken into consideration.
Export finance is designed to help a business trade goods internationally by enabling it to retain positive cash flow during the process. The time it takes for a shipment to be collected by the importer after it’s left domestic customs can be lengthy.
A claim against a property by an entity that isn’t the owner is known as an encumbrance, and it can impact the free use or transferability of the property. In accounting, ‘encumbrance’ is used to describe funds in an account that are reserved for a specific liability.
Online businesses in need of funding for cash flow or growth may choose to apply for ecommerce finance. It covers flexible finance options such as invoice factoring, revolving credit facilities, short-term business loans and merchant cash advances.
In business finance, your eligibility is whether or not you’re able to be approved for a loan or finance facility. In order to get approved, you’ll need to meet the lender’s eligibility criteria. Lenders will assess your credit score and turnover when making a decision.
If you receive a finance approval, it means that you’ve met the lender’s qualification and underwriting requirements. In some instances, a finance approval can be offered on a conditional basis pending further information and verification.
A loan fee is a cost attached to a loan or finance facility that isn’t the principal amount or interest. Typical business fees associated with business finance include application fees, processing fees, overdraft fees, late payment fees and early payment fees.
Flexible business overdrafts are designed to provide companies with access to additional working capital at short notice. You might use an overdraft facility to cover a late payment or unexpected bill, or to give your business’ cash flow a quick boost.
The Financial Conduct Authority (FCA) is the conduct regulator for nearly 60,000 financial services firms and markets in the UK. The FCA’s goal is to make financial markets work well for individuals, SMEs, corporations and the UK economy as a whole.
Funding Options’ Funding Cloud connects businesses, lenders and partners to facilitate fast, accurate and secure access to funding at scale. It provides a clear path to financial freedom for SMEs through precise lender matching and real-time funding decisions.
Businesses operating in the financial technology (Fintech) sector compete with traditional financial models and institutions by delivering innovative solutions and services.
According to the World Economic Forum, “green finance is any structured financial activity that’s been created to ensure a better environmental outcome.” It includes loans and investments that help develop green projects or reduce the impact on the climate – or both.
Depending on the scheme in question, government loan schemes are designed to help UK businesses start up, recover, trade or grow. The Recovery Loan Scheme, for instance, enables businesses to access finance to aid their recovery following the lockdown.
A guarantor is a third party who guarantees a loan, mortgage or other financial agreement. For example, if you agree to provide a personal guarantee for a business loan your company is taking out, you’ll have to pay it back if your business defaults on the loan.
Growth finance includes capital loans and mezzanine finance and debt finance and is utilised by high-growth businesses. Bear in mind that the lender has the rights to convert to an ownership or equity interest in the company if the repayment terms aren’t met.
Hire purchase allows businesses to spread the cost of an asset, such as a vehicle or piece of equipment, over a set period of time. After putting down a deposit, the borrower pays in monthly instalment until the asset is paid off, at which point they own it.
A hedge fund is an investment vehicle that is unregulated. Using different strategies and financial tools, a hedge fund’s aim is to make a return on investment. Hedge funds are usually arranged as a limited liability company or limited partnership.
It can take businesses weeks or even months after invoicing to receive the funds. With invoice factoring, a lender advances most of the money owed. The lender also provides credit control services to help ensure that clients pay on time.
Invoice finance is the umbrella term for finance types that allow you to borrow money based on what your customers owe. The lender advances most of the value of the invoice immediately and the final amount minus the lender’s fee is credited when the client pays.
Interest is one of the costs associated with borrowing money. It’s calculated as a percentage of the finance and is paid to the lender for the privilege of using their funds. It’s typically calculated as an annual rate, although it can also be quoted for shorter or longer periods.
Inflation is the rate at which the price of goods and services rise (deflation represents a fall in prices). In the UK, inflation is calculated by measuring changes in the cost of living through the CPI – Consumer Price Index, and is exhibited as a percentage.
Import finance is used by businesses to alleviate cash flow issues when bringing goods into the country. Delays and complexities associated with imports can put a financial burden on the importer, as they have to pay for the goods well in advance of their delivery.
Inventory is what a business buys in order to sell on. It can be purchased wholesale and sold on at retail price or the business can buy the materials and parts and create the product themselves before selling it on to their customers.
An investment is something you buy in the hope that it’ll be worth more and generate income in the future. Assets and other entities that people typically invest in range from bonds and stocks to commercial or residential properties and businesses.
Investment banking is designed to create money for companies, governments and other groups. Investment bankers are the specialists who help these entities plan and manage the finance side of large-scale projects.
When two parties (individuals or companies) come together to start a business, they form what’s known as a joint and venture. As well as sharing ownership of the business, they share the returns, risks and governance that goes with it.
Ron Kalifa OBE carried out an independent review to identify priority areas to support the UK’s Fintech sector. The Kalifa Review outlines objectives for supporting the growth and adoption of UK Fintech, and for maintaining the sector’s reputation on the global stage.
Property, vehicles and types of industrial or business equipment are examples of assets that can be leased. The lease itself is a contractual agreement that says the lessee (person or business using the asset) agrees to pay the lessor for its use.
A leaseback is an arrangement in which the company that sells an asset can lease back that same asset from the purchaser. In a sale-leaseback transaction, the seller of the asset becomes the lessee and the purchaser becomes the lessor.
A lender is a financial institution that provides money to a business under the condition that it will pay it back alongside interest and fees. Funds can come in the form of a loan, invoice finance facility, overdraft or one many other alternative finance options out there today.
Lendtech companies like Funding Options help businesses - including sole traders and limited companies - to access business finance. Some business owners use lendtechs when they’re refused finance from traditional high street lenders.
Much like a lendtech, a lending platform aggregates a wide range of lenders onto one, easy to navigate online platform. It means that instead of having to spend hours searching the internet, you can locate a suitable finance option in a few easy steps.
A leveraged buyout (LBO) is the purchase of a company by its existing management team using a significant amount of borrowed money. A leveraged buyin (LBI) is when an outside management team uses finance to acquire the company.
A line of credit, or a revolving credit facility, is a form of finance that permits business to access additional funds on an ‘as needed’ basis. It’s a flexible form of business finance and much like an overdraft, it comes with a set maximum amount.
In finance, LTV stands for loan-to-value and it’s calculated as a ratio. The LTV ratio expresses the ratio of the loan amount to the value of the asset being purchased. It’s used a lot on mortgage lending to work out the size of deposit required.
The speed at which a business can convert its assets into cash is referred to as its ‘liquidity’. This includes assets such as property and industrial/business machinery as well as non-cash assets like stock, equipment, and money owed by debtors.
When a company goes into liquidation its assets are sold (or ‘liquidated’) and the funds used to repay the creditors to which the business owes money. As a result, the company ceases to exist. The two types are compulsory liquidation and creditor's voluntary liquidation (CVL).
The term loss making is used to describe a business (or part of one) that doesn't make a profit, e.g. “They run an extensive business empire, but many of the firms are loss making.”
A secured or unsecured loan is a sum of money that is provided by a lender to an individual or business. The principal amount must be paid plus interest and any fees. Both parties need to agree to the terms of the loan before the money is advanced.
A business’ management accounts usually comprises its profit and loss account together with its balance sheet and cash flow statement. The company can compile its own management accounts but it’s likely that an accountant will do it for them.
A merchant cash advance (MCA) is a flexible form of business finance whereby the company receives a sum from a lender which it pays back through a percentage of its customer card payments. It can be useful for businesses with no assets or a limited credit history.
A management buyout (MBO) is when a business’ existing managers acquire most or all of a business, thus taking over the ownership and management.
A management buyin (MBI) is when an external manager – or a management team – buys a company and takes over the management of it.
While mergers and acquisitions are frequently used interchangeably, they actually mean two different things. An acquisition is when a company buys another outright. A merger refers to the coming together of two firms to form a new legal entity.
A mortgage term is the time between when the funds are drawn and the date at which the mortgage must be repaid to the lender. Mortgage terms for commercial premises – property that isn’t your residence – can last from three to 25 years.
To understand mezzanine finance, it helps to think of it as a finance option that ‘tops up’ funding for a large project. It can be used as a third option alongside a business loan and equity fundraising. (Mezzanine stems from the Latin for ‘in the middle.)
Microfinance provides business owners that are otherwise excluded from obtaining finance with access to the capital they need. Microfinance is unsecured so the borrower doesn’t need to provide capital, however interest rates can be high.
Negative equity is when the value of a property drops below the balance that’s outstanding on its mortgage. To calculate negative equity, simply take the property’s market value and subtract what remains on the mortgage.
Total revenue – total expenses = net profit
A company’s net profit is how much it makes after operating costs, taxes, interest and depreciation have been subtracted from its revenue. In the business world, it’s often called the “bottom line” or net earnings. (Net profit = total revenue – total expenses.)
Net asset value (NAV) refers to a company’s total losses minus its liabilities. Often used as a peer-share value for a mutual fund, closed-end fund or ETF. For investment funds, the NAV is calculated at the end of the trading day and depends on the closing market prices of the portfolio's securities.
The interest rate prior to inflation being taken into account is known as the nominal interest rate. A loan’s advertised interest – where account fees or compounding of interest aren’t factored in – can also be called “nominal”.
Open banking facilitates the sharing of financial information online in a secure way, with the individual's permission. APIs enable third party providers (TPPs) to tap into information quickly and seamlessly, making it easier for lenders and other companies to create more personalised experiences for consumers.
Over lending is when lenders provide loans to customers (either individuals or businesses) who can’t or aren’t willing to pay them back according to their terms.
Peer-to-peer (P2P) lending enables people to lend money to individuals or businesses. The recipient must pay the money back in full, plus interest. P2P websites act as marketplaces, uniting individuals or businesses looking for a loan with lenders.
As an alternative type of financing, private equity works by investors investing money directly in a company or by getting involved in its buyout. From venture capital to complex leveraged buyouts, there are many different types of private equity.
When a business experiences growth, it might decide to become a public limited company (PLC). A PLC’s shares are sold on the stock market and people who buy them are known as the ‘shareholders’. Shareholders own part of the business and have a say in how it’s run.
PAYE stands as 'pay as you earn' and refers to the tax employees pay on their income. The tax is subtracted from their salary before they get paid for their work. The tax is sent directly from your pay to HMRC by the employer alongside National Insurance.
If you’re looking to fund a large-scale residential, commercial or mixed-use property development, you’re likely to be in the market for property development finance. It’s an umbrella term that covers term loans, mortgages and bridging loans and other finance types.
A company’s revenue refers to the income it generates from its operations. It’s known as the ‘top line’ or gross figure that costs are subtracted from in order to work out the company’s net income, which is a company’s total profit after taxes and expenses, etc.
Refinancing takes place when a company replaces an existing debt with another one under different terms. For example, a business might decide to refinance its mortgage loan on a commercial property to increase or decrease the loan’s term.
A revolving credit facility allows you to withdraw money to fund your business, repay it and then withdraw it again on a ‘tap in, tap out’ basis. You can access pre-approved funds as required and interest is typically charged on the amount withdrawn while it's outstanding.
Property investors, landlords and developers use refurbishment loans to upgrade their residential or mixed use property before renting it out to tenants. Compared with developments, refurbs are usually small scale projects that don’t require as much finance.
The Recovery Loan Scheme (RLS) provides financial support to UK businesses to help them recover and grow following the coronavirus pandemic. The finance can be used for any legitimate business purpose – including managing cashflow, investment and growth.
Supply chain finance is also known as supplier finance or reverse factoring. It’s designed to boost a business’ cash flow by enabling the borrowing business to set longer payment terms to their suppliers while providing other suppliers to receive early payments.
Companies with complex financing needs that can’t be served by one type of business finance alone may benefit from what’s known as ‘structured finance’. Structured debt finance are non-transferrable, and include products such as collateralized debt obligations.
Simply put, a secured business loan is when you ‘secure’ your loan using a business asset – such as machinery, property or vehicles – as collateral. For this reason, secured lending is also commonly referred to as ‘asset-backed’ lending.
Small and medium-sized enterprises (SMEs) make up over 99% of the UK’s business population. An SME is a business with fewer than 250 employees. There were 6 million SMEs in the UK in 2020, and between 2019-20, the total business population grew by 1.9%.
In finance terms, solvency is the extent to which a business’ current assets exceed its current liabilities. The term is also used to describe a business’ ability to meet its long-term financial obligations in order to prosper and grow.
A tax is a charge that taxpayers have to pay. It’s imposed by governments to fund their spending and public services. Avoiding taxation or failing to pay is against the law.
If you’re self-employed or run a business, your tax return is what you submit to HMRC every year to share details of your income. Based on your income and expenditure, your tax return also shows you how much tax you owe.
Wholesalers, distributors and importers sometimes use trade finance to get the cash they need to buy inventory or stock from suppliers. Trade finance is a type of working capital finance – similar to invoice finance and supply chain finance.
Her Majesty's Treasury (also known as the Exchequer) is the UK Government department that develops and delivers the government’s public finance and economic policies. Rishi Sunak is the current Chancellor of the Exchequer.
A business’ turnover is its total sales over a set period of time. It’s otherwise known as ‘income’ or ‘gross revenue. Profit, on the other hand, is how much it makes after taxes and expenses have been accounted for.
Underwriting is the practice financial lenders carry out when assessing whether or not you meet their criteria for a loan. The process is administered by an underwriter, who looks at your application and credit file to determine the level of risk to the lender.
If an asset is described as “unencumbered” it means it’s owned by one person or entity and doesn’t have a creditor claim or lien on it. An “encumbered” asset, on the other hand, has an outstanding debt (such as an unpaid property mortgage) on it.
A unicorn is a private company that’s valued at more than $1 billion. Cazoo, Gousto and Gymshark were among the UK companies to achieve unicorn status in 2020.
Unlike a secured business loan, an unsecured business loan is one that doesn’t require the borrower to use an asset – such as property or machinery – as security. Although security isn’t required, the lender may still ask for a personal guarantee to mitigate risk.
Also known as a supplier, a vendor is simply a company that sells things to another company. Retail outliers, for instance, usually have a number of vendors they purchase goods from at wholesale prices before selling them on at retail prices to customers.
Venture capital is a type of private equity financing for startups or early-stage companies with high growth potential (or those that have already demonstrated accelerated growth). Venture capital is provided by venture capital firms or funds.
If you don’t want to buy a vehicle (or multiple vehicles) for your business outright, or it doesn’t make financial sense to do because it could impede your cash flow, you might decide to explore vehicle contracts such as car leasing or hire purchase.
Value added tax (VAT) is the tax we have to pay when we purchase goods or services. The rate of tax in the UK currently stands at 20%. Your VAT return provides an overview of the VAT relating to your business’ sales and purchases.
In a financial context, yield is the earnings that an investment accumulates over a set period of time. It’s usually written as a percentage based on the amount invested, present market value or the security’s face value. It incorporates interest and dividends earned.
A zero interest rate policy, or ZIRP, is established when a bank sets its target short-term interest rate at 0% or thereabouts. It’s designed to encourage more borrowing by providing cheaper access to personal and business finance.
Are you looking to grow your business or boost your cash flow using business finance? With so many flexible options on the market today, now’s the time to explore your options.
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