Business Loans: Common Terms & Definitions
Adverse credit is a term used to describe previous problems in maintaining payments on credit commitments. Adverse credit can include missed payments, defaults, CCJs (County Court Judgements), IVAs (Individual Voluntary Arrangement) and bankruptcy.
An arrangement fee is a charge levied by lenders for setting up your business loan. The arrangement fee is usually added to the loan and charged only on completion of the application process.
APR stands for annual percentage rate and is a tool used to show the true yearly cost of borrowing funds, by including any fees and charges in addition to the interest charged.
Asset-based finance is a borrowing tool used to fund businesses. The assets provide security to the lender and can be made up of almost any asset, including equipment, machinery, property and unpaid invoices.
Business Cash Advance
A business cash advance is a funding line for businesses that take payments through their card machine. A lump sum is loaned to the business, with repayments being made by taking a percentage of future credit and debit card receipts.
A business plan is used to detail exactly what a business (usually a start-up business) is looking to do, what their goals are and how they will hit them. The plan is usually written in detail and tends to cover a wide range of issues from financial to operational and marketing to employee requirements.
The credit committee is the name of the team within lending institutions who undertake the final sign off of applications, where required.
Credit history is a record of an individual’s previous account conduct on any debt held. It shows any payments that were made on time, late or completely missed,alongside any defaults and CCJs.
Crowdfunding is the practice of taking small amounts of money from a large number of people to successfully fund a loan or project.
Commercial finance is an area of the financial services industry which offers loans and other finance to businesses.
In business loan circles, a debenture is a type of floating charge security which is issued over a company. It is designed to ensure the lender is repaid in the event of an insolvency on the part of the borrower.
Debt consolidation is the process of taking on new debt to repay old debt. It is usually undertaken to reduce monthly payments, or the total interest paid.
EBITDA – Earnings before interest, tax, depreciation and amortization is a measure of the companies true operating performance. It is used to assess the underlying affordability of a proposed business loan.
A fixed rate is an interest rate which will not move up or down in line with any indices. Fixed rate business loans to SMEs are usually set for the life of the loan.
The interest rate is the percentage of the loan which is charged to the borrower as a cost of borrowing money.
Net profit is the actual profit of a company after all expenses have been deducted. Net profit is the figure that UK companies are usually taxed on.
A personal guarantee is a personal commitment to repay a business debt in the event of the company falling into default.
Profit & Loss
Profit and loss (P&L) is the financial statement that is designed to show the revenue and costs incurred by a business. P&Ls usually cover a quarterly or annual cycle.
Financial projections are a forecast of the future financial performance of a business. Projections are usually based on predictions or a business plan.
Secured borrowing refers to a loan or mortgage that is secured against property or assets.
The total money taken by a business during their accounting period. Turnover usually refers to the annual turnover of a business, how much is taken in one year.
Unsecured borrowing refers to a loan which is granted without any security. A personal loan is an example of unsecured borrowing.
Working capital is the money held by a company, which can be used for operational costs. Working capital is calculated as ‘current assets minus current liabilities’.