The world of finance is awash with phrases, words and terms that can often sound confusing. Here, we demystify those for you, with a bitesize explanation of each term.
We’ve grouped them into sections: Asset Finance, Refinance, Unsecured Loans, Invoice Finance, Property Finance, Bridging Finance, Development Finance.
Asset finance
VAT deferral
When the lender will fund the VAT for up to 3 months. This allows our clients to claim the VAT back from HMRC, to their bank, before having to pay it back to the lender. It also enables them to put their entire deposit towards the cost of the asset, reducing the amount owed to the bank
Zero deposit
When no deposit is required for an asset purchase. Our experience in putting applications together and our close relationships with specific lenders gives our clients the best chance of securing a zero-deposit approval. We assess the asset(s) being purchased along with the borrowing companies’ financials to put together the strongest possible proposal.
Stage payments
When a lender will pay the supplier in stages instead of a lump sum. This is often used to match supplies payment term when the might require a percentage of the final amount at different stage (order, delivery, install and completion).
Hire purchase agreement
Structured finance agreement typically over a 2-7 year term with fixed interest. VAT has to be paid for upfront (unless VAT deferral is agreed), usually along with an additional deposit. The business owns the asset at the end of the term.
Finance Lease agreement
Structured finance agreement typically over a 2-7 year term with fixed interest. VAT is paid for throughout the term of the agreement so upfront cost can be lower than a Hire Purchase agreement. At the end of the agreement there are 2 main options. 1, hand the asset back to the funder. 2, sell that asset and keep up to 99% of the sale proceeds. There are also various methods of how you get the asset back on to your balance sheet – this is lender dependant.
Seasonal payments
When a HP or Lease payments is repaid in keeping with the borrowing companies seasonal cash flow. We can negotiate terms that allow businesses to pay a higher monthly sum during their busier months, then a lower amount when they traditional have less cash coming into the business.
Structured agreements?
When a HP or Lease payment is repaid at a higher monthly amount at a certain stage during the overall term. This can be especially helpful when hire companies are purchasing an asset for a specific contract. They might want to pay a higher monthly amount when they have the guaranteed work, this leaves them with a much lower amount to pay when the contract is over and they need to find new work for the asset.
Quarterly payments
When a HP or Lease agreement is paid back every quarter rather than monthly’s. Used as a cash flow tool when the borrowing company receives large chunks of income which aren’t guaranteed every month.
Multi lender funding
When we use two or more lenders to raise finance for one company at the same time. All lenders will have a maximum exposure their credit team will allow for a company. For a business that is buying a lot of assets at the same time, we overcome this hurdle by negotiating with multiple funders to secure the optimum finance for our clients.
Balloon payment
A pre-arranged final payment of a Hire purchase or lease agreement. This is a higher amount than the previous instalments and is used to keep the monthly payments lower.
Nonstandard assets
Assets the fall out of the traditional wheels and engine categories. These include CNC machines, IT equipment, biomass boilers, 3D printing equipment, storage containers etc
Settlement figure
If the borrower at any stage throughout an asset finance agreement wants to terminate the contract, they will ask the funder (or get the broker to ask) for a settlement figure. Some funders offer a ‘new business’ quote which is a discounted price if the borrower is taking out a fresh agreement with them.
Refinance
Sale & HP back
Sale & HP back is where you sell the asset to a lender who in turn provides you with an agreed amount that is in line with the current value of the asset. This product enables you to keep the asset on your balance sheet.
Sale & Lease back
Sale & Lease back is where you sell the asset to a lender who in turn provides you with an agreed amount that is in line with the current value of the asset. This product means you sell the asset to the lender and it is no longer on your balance sheet. At the end of the agreement there are various methods of how you get the asset back on to your balance sheet – this is lender dependant.
LTV
Loan-to-value gives you an indication of what size of loan you can get against an asset. E.g. an 80% LTV on an asset worth £100,000 would allow the business to borrow £80,000
Use of funds
Some lenders will not assist you on an asset refinance deal if the funds are to be used for working capital/cash flow. These lenders need the funds to be going toward a specific purchase e.g. you could refinance an asset to raise funds for a deposit for a new piece of equipment you are financing
Unsecured loans
CCJ
In England, Wales, and Northern Ireland, a court order may be lodged against you if you fail to pay an outstanding debt. A CCJ will damage your credit score and may result in credit denial. The details of the CCJ will be kept on your credit file for a period of six years.
Credit check
When an organization, such as a lender, contacts one of the credit agencies to gather information about your credit history. This aids them in comprehending your financial habits. This is something that lenders must do before they can complete your application.
Debt consolidation
The procedure of merging several debts into a single one. It may often help to simplify cashflows, and save money on interest payments.
Lending criteria
Basic criteria that must be met before you may apply for a loan. Your age, income, and residency status, for example. These may fluctuate depending on the lender.
Payment holiday
A stoppage or decrease in loan repayments that you and your lender have agreed to in advance. Some lenders have provided a payment holiday to clients who have been financially impacted by the coronavirus outbreak.
Unsecured loan
An unsecured loan is one that does not require any kind of security. Rather than using a borrower’s assets as collateral, lenders approve unsecured loans based on their creditworthiness. Because unsecured loans are riskier for lenders than secured loans, they require higher credit ratings to be approved.
Invoice Finance
Advance rate/Prepayment/Initial Percentage/IP
This is the percentage of the invoice value that will be made available to you when your invoice finance facility commences.
Aged Debtors Report/Sales Ledger/Accounts Receivable
This is a summary report of all outstanding balances for each of your debtors over a specific period. This report is generated from the invoice date.
Approved Debt
Approved debt is one which has been accepted by the invoice finance company as being eligible for prepayment or advance.
Arrangement Fee
Initial monetary charge for setting up the facility, charged by the Invoice Finance provider. This is deducted from the first payment.
Assignment of Debt
Assignment of Debt related to the legal mechanism by which an invoice finance firm obtains the right to collect cash directly from your debtors to repay amounts that they have advanced to you.
Audit/Survey
A pre-facility check the invoice finance provider will undertake to assess whether or not a facility will be offered. Usually reserved for larger deals where the facility limit is for a significant value.
Audit Trail/Back-Up Documents/Sales Documentation
The Documentation that is used to back up a sale ie Purchase Order, Delivery Note, Invoice
Availability (of Funds)/Funds Available
The amount of cash which is available for you to draw each day should you so require.
BACS
A BACS is a method of electronic payment and the initials stand for ‘Bankers Automated Clearing System’. Using this, funds may be transferred from the invoice finance providers account to your own bank account via this system. Although many banks now adopt a ‘faster payments’ policy for online payments, BACS typically take 3 working days to clear.
CHAPS
CHAPS is another form of payment for same day transactions. It stands for Clearing House Automated Payment System.
CHOCS
This simply stands for Client Handles Own Collections. It is a type of factoring facility where the client is able to handle their own credit management.
Confidential Invoice Discounting (CID)/Undisclosed Invoice Discounting
This is an invoice finance facility where funds are advanced as normal to a business by the invoice financier (discounter) and in doing so secured against the value of the business sales ledger / debtors, BUT where the funding relationship is confidential and not disclosed to your customers.
Confidential Factoring
This is a factoring facility where a factoring & invoice discounting provider makes contact with customers as if they were the actual client. This means that the customers are unaware of the factoring company’s involvement.
Credit Insurance/Bad Debt Protection (BDP)/Debtor Protection
Credit Insurance is more commonly referred to as Bad Debt Insurance or Bad Debt Protection. It provides a level of bad debt protection against non-payment by your customers under certain specific circumstances.
Credit Limit/Approval Limit
Whilst most companies have an idea of what credit limit they will extend to their customers, in invoice financing terms, ‘credit limit’ is in respect of what the invoice finance funder deems to be an acceptable/prudent level of credit.
Credit Rating
Limit as recommended by external agencies such as Experian
Credit Terms
These are the payment terms that are given to customers and indicate when payment falls due. An example would be 30-day terms and these should be shown on invoices.
Current Account
This indicates the usage or utilisation of the Invoice Finance facility and is made up of the amount of funds drawn on the invoice finance facility and the charges applied.
Current Assets
Current Assets include things like cash, debtors, stock and anything that you would expect to convert into cash within twelve months of your balance sheet date.
Discount Charge
The charge calculated daily on the debit balance of the Current Account.
Disclosed Invoice Discounting
An invoice finance arrangement similar to confidential invoice discounting but isn’t confidential. This means that your customer is aware that their debt has been assigned to a factoring & invoice discounting specialist but you still collect the debt.
Dispute
A situation where a customer does not pay an invoice due to a problem with the product or service.
Debtor Concentration/High Involvement
This term relates to how your customers are distributed across your debtor book in terms of value (and therefore risk).
Dilution/Erosion
The meaning of this term is in respect of anything that can reduce (i.e. dilute) the value of your outstanding customer invoices which you have already raised and are wanting an advance against. It covers things like credit notes and customer returns.
Disapproved Debts (Disapprovals)/Unapproved Debts
Disapprovals are debts which a factoring or invoice discounter will not provide funding against.
Disbursements/Additional Fee’s/Additional Charges
Disbursements are ad-hoc, one-off and usually very small charges typically levied for things like postage, stationery and call charges etc to do with exceptional or extraordinary activities involved in serving an invoice finance facility.
Factoring
A method of providing accelerated cash flow to a business using the sales ledger (receivables) as security to borrow money and where the lender also provides a full sales ledger management, credit control and collections service.
Facility Limit/Funding Limit
The maximum balance to which the current account can be drawn at any given time. This limit is often flexible by negotiation with the invoice finance company.
Minimum Service Fee
The minimum amount of service fee payable in any year and charged in any month as the amount equal to the difference between 1/12th of the minimum service fee and the actual service fee applied during any month (if less).
Overpayment Fee
Fee for payments on accounts outside the availability calculation.
Non-Recourse Factoring
Non-Recourse Factoring is a factoring facility where, under certain circumstances, the factor provides credit insurance as part of their overall funding package. This provides a level of bad debt protection against non-payment by your customers.
Notice of Assignment
A notice that is sent to customers informing them that the invoice has been factored and pledged as collateral. The NOA also informs the customer of the new payment address.
Proof of Delivery (POD)
This can be any document which confirms the successful delivery of goods or fulfilment of a service to an end Customer.
Reassignment
A debt previously assigned to an invoice finance company which has been returned to you.
Reconciliation
A process of matching the balance of your sales ledger to the balance recorded by the invoice finance company at the same point in time; this is typically undertaken at the end of each month.
Recourse Period
The time at which a debt moves from being approved to disapproved.
Refactoring Fee/Additional Factoring Fee
An additional charge made to cover the cost of collecting debts which have aged beyond the agreed credit period; this charge is usually expressed as a percentage of the amount outstanding.
Remittance Advice
A confirmation document from the customer detailing which invoices are to be paid in their next payment run.
Service Fee/Factoring Charge/Discounting Charge
The charge levied by an invoice finance company for the administration of your account. This is typically expressed as a percentage of sales and is likely to be higher for a full factoring service than for invoice discounting in view of the additional workload involved.
Staged Invoicing/Progress Payments
Where an invoice is raised for work completed but prior to the completion of all of the work detailed on the original purchase order.
Survey/Audit
This is a type of audit/due diligence undertaken by a factoring & invoice discounting specialist (in this case Skipton Business Finance) at a client’s premises prior to a facility being offered.
Take-On Debts/Initial ledger
The value of the ledger at the point when the facility commences. These debts will be “taken on” when the facility starts and will be used to create the initial availability.
Trust Account
This is the account set up for an invoice discounting client into which they pay the money they receive from debtors.
Verification
The process where a factoring company verifies the validity an value of a client’s invoice with the customer.
Working Capital
Current assets less current liabilities, representing the investment required to finance stock, debtors, and work in progress.
Property Finance
Commercial mortgage
A commercial mortgage is a loan used to purchase or remortgage a commercial premise.
Buy to let mortgage
A buy to let mortgage is a loan given to an applicant wishing to buy a property with the intention of renting it to another person or business.
Repayment type
You can choose to either pay the capital and interest off with your monthly payment or you can pay interest only. Interest only means the capital sum never decreases through the term of the agreement.
Interest rates
When you take out a mortgage, your lender will charge you interest, which is a fee for the loan, on top of the repayments of the value of the loan. Interest rates vary as they are based on a number of factors including the Bank of England base rate, your LTV and credit history. There are two types of rate, these are:
Fixed rate
This is where the rate of interest is fixed at the same level for a defined period in the mortgage.
Variable rate
A variable rate product usually follows the Bank of England base rate and as that increases so does your monthly payment
Overpayment
A perk of a facility that allows you to pay more than your agreed monthly payment – typically lenders will have a cap on this e.g. no more than 10% of the balance in 12-months.
Early Repayment Charge (ERC)
An Early Repayment Charge (ERC) is a fee that a mortgage borrower may be required to pay to the lender if they choose to pay off their mortgage before the end of the agreed loan term. This charge may be applied when a borrower wants to pay off their mortgage in full or make large overpayments. The charge is meant to compensate the lender for the loss of interest they would have otherwise received if the mortgage had been paid off over the full term.
Owner occupied commercial mortgage
Owner occupied commercial mortgages are similar to commercial mortgages, but the borrower intends to operate their business from the purchased property. They often have better terms than other types of mortgages, a higher loan to value and lower interest rates for example, as lenders see this loan as low risk.
Commercial investment mortgage
A commercial investment mortgage is a type of loan that is used to buy or refinance a commercial or semi-commercial property that is let to tenants. Many investors see a better return on their money from renting commercial premises than a standard building society savings account.
Loan to Value (LTV)
LTV is the difference between the amount borrowed and the value of the property and is often expressed as a percentage. The difference being the amount of deposit the borrower will have to contribute
Mortgage term
The mortgage term is the amount of time, usually defined in years, between the applicant receiving funds and when the loan has to be paid back in full to the lender and the expiration of the agreed conditions of the mortgage.
Interest only mortgage
An interest only mortgage is a loan where the borrower only pays the interest charged for some or all of the term. This means your repayments will be lower but because you aren’t paying back the value of the loan, you will still owe the same amount of money at the end of the term that you originally borrowed.
Bridging Finance
Rolled-up interest
The interest and some fees are added to the loan amount. You simply clear the entire amount plus interest at the of the loan in a single payment which can be more expensive but avoids monthly cashflow pressure.
Serviced interest
By servicing interest monthly you will reduce the redemption payment you need to make at the end of the loan, but obviously requires cashflow and will depend on length of the term.
Fire-sale value/90-day value
Due to the nature of bridging loans lenders tend to be more lenient on the credit status of the business. To counter this and make sure their exposure isn’t too high they provide a LTV against a fire-sale value/90-day e.g. if the lender needed to get rid of the property quickly the fire-sale/90-day value is what a valuer thinks the property could be sold for.
Exit
As bridging finance is a short term (1-24-month) facility lenders will want to be sure there is a plan/facility in place to exit the bridging facility. An exit could be the sale of the asset, other assets that would repay the bridge or you longer term mortgage
Development Finance specific
Light refurbishment
Funds are used for mainly aesthetic rather than structural changes to the property. For example: new kitchen, bathroom, windows etc
Heavy refurbishment
Funds are used for renovation – involving things like new plumbing, electrics, moving internal walls, partial demolition and rebuild, extensions, attic conversions and converting a property into apartments/flats
Ground Up Development
A major new-build project involving complete building plans that must be approved, and a team of architects, builders and tradespeople working together, requires more complex development finance with a more series of investment releases.
Development Exit Finance
Development Exit Finance enables you to repay any development finance before the sale of the development has been completed.
