Delving into the world of loans and business finance for the first time can be a daunting experience, but don’t let new words and concepts put you off!
This article has been put together to provide quick and concise definitions for some of the common business finance terms you might come across.
If you read to the end you’ll be able to navigate with ease through business finance products and open up your options when growing your business. Or, you can look up one term at a time as and when you come across them.
If there’s a term you’d like a definition for that we’ve not included, let us know and we’ll get it added, otherwise, dive in!
Administration
A formal procedure designed to protect a company, giving it time to implement operational or structural changes, with the aim of avoiding insolvency. Administration is performed by licensed administrators, and the company is given a temporary break from legal actions against it.
Asset
Any high-value item including property, vehicles, equipment, inventory or invoices, which can be used as collateral against a loan.
Bankruptcy
The legal status applied to a person who is unable to repay their debt in the UK. A bankrupt person will be absolved of the responsibility to deal directly with their creditors, but the status will have serious implications on their future life and business dealings.
Bridging finance
A loan secured against a property up for sale to allow immediate purchase of a new property. When the property is sold the loan is repaid.
Cash advance
A loan based on previous debit and card sales. Repayment is made weekly as a percentage of future card sales.
Collateral
An asset or assets of which the lender takes ownership to reimburse their losses if the associated loan cannot be repaid.
Commercial mortgage
A loan secured against a property being purchased. The property becomes the collateral and if the loan is defaulted on, the property is foreclosed and sold at auction with the lender taking the proceeds.
Crowdfunding
A method of finance where funding is secured from a range of lenders, who can either be members of the public or businesses.
Debt-to-income
A metric lenders may use when determining whether to make a loan and assessing a lender’s ability to repay. It is your monthly debt obligations divided by your gross monthly income.
Debt-to-worth
Another metric lenders may use when determining whether to make a loan and assessing a lender’s ability to repay. It is calculated by dividing an organisations liabilities by its stockholders’ equity, and indicates the proportion of debt and equity used by a company to finance its activities and assets.
Default
The failure to fulfil an obligation to repay a loan or mortgage.
Equity
The sum remaining when the value of your liabilities is subtracted from the value of your assets. This is the amount owned by the business owner(s) or shareholders.
Financial Conduct Authority (FCA)
The independent regulatory body overseeing financial services and markets in the UK, ensuring quality and integrity of service. Lenders are regulated by the FCA to ensure terms and conditions of secured finance products are correctly communicated to borrowers.
Foreclosure
The process by which a property is repossessed when an individual or business are unable to make their mortgage repayments. The property may then be auctioned, with the lender taking the proceeds to recoup their losses.
Insolvency
The equivalent term of bankruptcy when applied to a business, describing the state of not having enough assets to be able to pay money owed. Businesses are made insolvent through liquidation and administration.
Invoice financing
A loan where inventory products are collateral against money borrowed to purchase them and where the inventory is seized in case of default.
Leverage
Using borrowed money to increase the potential for, and likelihood of, a higher return on investment (ROI).
Liability
An outstanding financial obligation such as loan repayments which must be repaid from future business earnings.
Liquidation
The process by which a company is brought to an end: its assets are sold or redistributed.
Liquidity
The capacity of a business to meet their financial needs with readily available cash or assets which can quickly provide cash. Higher liquidity allows more flexibility in business activities.
Secured finance or secured loan
A loan where an asset is put up as collateral and, if the debtor defaults on the loan, the asset is used by the lender to repay the amount borrowed.
Unsecured finance or unsecured loan
A loan where no collateral is offered and where the decision to lend is based on the creditworthiness of the director or owners of a business. The responsibility to cover a defaulted loan rests on them.
