Glossary of Financial Terminology
A
Accounts receivables
All monies a business is owed in return for the provision of its services.
Acquisitions
The process where one business purchases the shares and assets of another, ultimately taking control of that company.
Advance rate
Expressed as a percentage of the full invoice value, this is the sum that is released by the funder after the client raises an invoice, typically within 24 hours of its issue.
Aged debt report
A report, usually generated from the invoice date, summarising the outstanding balances for each of the client’s debtors over a specific period.
Approved debt
The debts the invoice finance company are prepared to fund or purchase.
Asset based lending
A funding solution that releases cash against assets on a business’ balance sheet, including property, plant, machinery, stock and debtors.
Assets
Anything that a company owns with a residual monetary value.
Assignment of debt
The mechanism by which the funder obtains the legal rights to collect monies directly from the client’s debtors, from which the funder retains the factoring charge before forwarding the difference to the client.
Associated businesses
Any other business that a company either wholly or partially owns, or has an element of control over.
Availability (of funds)
The amount of cash the client is able to draw each day should they require. This figure is calculated by multiplying the approved debts by the advance rate, minus the amount already drawn plus charges accrued to date.
B
BACS
Bankers’ Automated Clearing System: the process whereby funds are transferred electronically from one bank account to another, taking three days to clear.
C
Cash flow
A measure of a company’s immediate financial health that is calculated by cash receipts less cash payments over a specific period in time.
Cash flow finance
Any funding solution that is primarily aimed at easing a company’s immediate cash flow.
CHAPS
Clearing House Automated Payment System: a telegraphic transfer whereby funds can be processed and cleared on the same day for a small fee.
Commercial banking
The term used to describe the range of banking facilities available to businesses from high-street banks, including overdrafts and traditional bank loans.
Commercial property mortgages
A long-term loan typically provided by banks or building societies to provide cash to purchase a commercial property. Repayments on the loan, plus interest, are made at a fixed or variable rate at monthly or quarterly intervals, depending on a company’s individual circumstances.
Concentration
The percentage of the client’s sales ledger value that is accounted for by its biggest client(s).
Confidential Invoice Discounting (CID)
An invoice finance facility where a funder releases cash against a business’ debtors within 24 hours of the issue of invoices. The confidential aspect does not disclose the use of such a facility from the business’ customers and allows the client to retain control of its sales ledger management.
Contra-trading
A relationship whereby a business buys and sells products to and from the same customer.
Cost of funds
The interest /discount rate a client will be charged on top of the money they are lent, typically expressed in the amount over the specific bank’s base rate or LIBOR.
Credit insurance
Trade credit insurance protects businesses from debtor non-payment that could arise from insolvency or protracted default (i.e. non-payment after six months), where the lender assumes the risk and will pay the client a percentage of the sales ledger value in such an event. This can either be provided as a standalone product or incorporated into a non-recourse invoice finance facility, and is subject to designated credit limits.
Credit limit
Designated limit assigned by an Insurer. Also, the amount of credit a client is prepared to extend to any of its customers.
Credit management
A term used to describe a company’s management of its accounts receivable.
Current account
The account which shows the financial obligation between the invoice financier and a client; this is a total of all prepayments made and all fees accrued on the account less all collections received from the client’s customers.
Current assets
Any assets that are expected to be converted into cash within 12 months of entry onto the balance sheet, including stock and debtors.
D
Debt
Monies owed to a business or organisation in the form of loans, overdrafts and outstanding invoices.
Debt collection
The process of retrieving monies owed. This can either be performed in-house or be outsourced to a specialist debt collection agency or provided as part of an invoice finance facility via the factoring company.
Debt finance
Corporate finance facilities where the client borrows money such as loans, bonds, mortgages or overdraft agreements.
Debtor protection
Debtor protection is incorporated into a non-recourse invoice finance facility, safeguarding the client from debtor non-payment as the funder assumes the risk, subject to designated credit limits. It is similar to credit Insurance, only it is provided by the funder, saving the client 5% insurance premium tax.
Disbursements
Charges debited by the funder from the client’s account to offset a valid expense – e.g. Charges for a legal process / letter and CHAPS fees
Dilution
The ratio of credit notes issued by the client to invoices. This also accounts for write-offs and reassignments.
Direct lease
A funder purchases an asset on a business’ behalf before leasing it to the client in return for regular payments, plus interest.
Disapproved debts (Disapprovals)
Debts against which a lender will not provide funding for reasons such as they are too old (typically from 90 or120 days, depending on the funder), irrecoverable, disputed by the debtor, or if the debtor is renowned for its bad credit history.
Disclosed discounting
An invoice finance facility where the funder releases capital against debtors within 24 hours of an invoice’s issue, boosting the client’s cash flow. Unlike Confidential Invoice Discounting (CID), the customers are aware of the funder’s involvement. The client retains the collection function in-house.
Discount charge
The sum (equivalent to interest) that is charged on the amount of borrowing. This is usually applied daily and debited monthly.
E
Economic life
The period within which an asset has an economic value and is efficiently functional.
Equity
The value of an ownership interest in property, including shareholders’ equity in their business.
Equity finance
A funding solution where an investor purchases shares in a business to provide a cash injection that boosts its growth potential.
Export debts
Debts accrued from the sale of goods and services to overseas customers who can be invoiced in either sterling or another currency.
F
Facility limit
The maximum amount a business’ current account balance can be drawn at any one time. This figure can vary in line with turnover.
Factoring
An invoice finance facility where a lender releases cash against debtors within 24 hours of an invoice’s issue, freeing up capital to boost the client’s cash flow. The factor further provides a dedicated sales ledger management service to recover the debts on behalf of the client. There is also the additional option of a non-recourse facility that incorporates debtor protection, thus protecting the client from debtor non-payment.
Factoring charge
The service fee charged by a factor that is usually expressed as a percentage of the client’s sales ledger value, although some operate at a fixed annual fee, which is debited monthly.
Factoring company
A lender that releases funding against a business’ accounts receivable while additionally providing a dedicated sales ledger management service.
Fair Market Value
The price at which an asset is sold and bought in the open market.
Finance
Corporate funding provided through the purchase of assets in return for a security interest.
Fixed assets
Assets owned by the business that are unlikely to be quickly converted into cash, including property, fixed machinery, fixtures and fittings.
Full service factoring
Also known as non-recourse factoring, this is an invoice finance facility where a lender releases cash against debtors within 24 hours of an invoice’s issue, freeing up capital to boost the client’s cash flow. The factor further provides a dedicated sales ledger management service to recover the debts on behalf of the client, while the facility additionally incorporates debtor protection to protect the client from debtor non-payment.
G
No Terms.
H
No Terms.
I
Ineligibles
The value of debts disapproved by the funder, commonly because of disputes, overdue balances, and those invoices that are above the client’s designated funding limit.
Initial Percentage (IP) or Initial Pre-Payment (IPP)
See ‘Advance Rate’.
Invoice discounting
An invoice finance facility where a lender releases cash against debtors within 24 hours of an invoice’s issue, freeing up capital to boost the client’s cash flow. Unlike factoring however, the client retains control of the sales ledger management. There is also a non-recourse option that incorporates debtor protection to protect against debtor non-payment, as well as a confidential offering to conceal the facility from the client’s customers.
Invoice finance
A funding solution that primarily releases capital against debtors through invoice discounting and factoring to boost the client’s cash flow, but can additionally provide funding against other assets on the balance sheet through asset based lending, including stock, property, plant and machinery.
J
No Terms.
K
No Terms.
L
Lease
A funder purchases an asset before leasing it to a business in return for regular payments, plus interest, to help the client purchase an asset without compromising its cash flow.
Lease rate
The payments due to the lessor by the lessee in return for renting an asset, determined by its value, the duration of the lease and the interest to be paid.
Lessee
The Company who rents an asset from a financier in return for regular payments.
Lessor
The Company who supplies an asset to a lessee in return for regular payments, and has full ownership and responsibility over its maintenance costs.
LIBOR
London Interbank Offer Rate – Charged as an alternative to the base-rate.
M
Management Buy-In (MBI)
A new management team assumes control of a company after acquiring its shares or assets.
Management Buy-Out (MBO)
The existing management team assumes control of its parent or non-group company after purchasing its shares or assets.
Master Lease
Via a contractual arrangement, additional assets are able to be leased keeping the same terms and conditions, without having to renegotiate the contract.
Merger
The joining of two companies to create a single, larger entity.
N
Net working capital
The cash available to a business to spend, calculated by working out its current assets less its current liabilities.
Non-recourse facility
An invoice finance solution which benefits from the addition of debtor protection to shield the company against debtor non-payment through either insolvency or protracted default, subject to designated credit limits.
O
Over-advance / Over-payment
Where the funder occasionally releases additional cash, over and above the amount available under the agreed terms, on a discretionary basis and for a short period, ranging from a single day to a few weeks to help the client deal with a period of limited cash flow.
P
Prepayment
See ‘Advance rate’.
Purchase option
An option following a lease contract that allows the lessee to purchase the asset outright at either its fair market value or a predetermined amount.
Q
No Terms.
R
Reassignment
A debt that has been returned to the client from its funder.
Reconciliation
Matching the balance of the client’s sales ledger to the balance recorded by its invoice finance provider; a process usually undertaken at monthly intervals, to reflect the previous month-end position. Deadlines for this process vary from funder to funder.
Recourse facility
An invoice finance facility that provides access to cash but does not incorporate bad debt protection through credit insurance, potentially leaving the client vulnerable to debtor non-payment through customer insolvency or protracted default.
Recourse period
The period in which a funder will advance monies against an outstanding invoice. This typically ranges from 60-120 days, although it can sometimes cover up to 150 days.
Refactoring fee
A charge issued by some funders (relating to factoring facilities only) to cover the cost of collecting debts that have outstretched the recourse period, usually reflected as a percentage of the outstanding amount. This enables funders to cover their administration cost on overdue accounts, whilst charging a lower cost for those customers who pay quicker and are thus representing the funder and their client alike with a lower level of risk.
Refinance
Repaying an existing loan using a new loan that is typically on better terms (possibly with a new lender) which may be more effective for the business in the long-term.
Residual value
The value of an asset following a lease period.
Restructure
Altering the business’ structure through downsizing and reviewing the current funding facilities to meet its financial requirements, or to adapt to changes in the marketplace.
S
Sale and leaseback
Selling commercial property (can include assets) to a financier who will then lease it back over a fixed period in return for regular payments, plus interest, to release capital to boost the client’s cash flow.
Sales finance
See ‘Invoice finance’.
Service fee
The price charged by an invoice finance provider for its services, typically expressed as a percentage of turnover. This will typically be higher through a factoring facility than with an invoice discounting service.
T
Take-on
The initial process whereby the invoice finance provider uploads its client’s sales ledger information onto their system.
Take-on debts
The sales ledger value that the invoice finance provider will be taking on at the commencement of the facility.
Term sheet
A document showing the final quote.
Trade finance
A funding solution to help businesses overcome the difficulties associated with overseas trading, particularly assisting those that primarily operate in the import and export markets. It provides funding to purchase raw materials and goods from abroad whilst ensuring payment is received for the client’s goods and services, maintaining their healthy cash flow.
Turnaround
A fast, effective and positive change in a company’s performance levels after an intensive care management strategy is employed.
U
Useful life
See ‘Economic life’.
V
Venture capital
The cash a venture capitalist injects into a business in return for a proportion of its shares to boost its cash flow, helping it to grow, whilst additionally providing expertise on running it.
W
Working capital
The immediate cash a company has available to spend on assets and its day-to-day operations. This is calculated by deducting current liabilities from current assets.
Working capital management
The process of managing a company’s cash flow to ensure its immediate ability to trade isn’t compromised.
X
No Terms.
Y
No Terms.
Z
No Terms.
