Glossary

The worlds of banking and finance rarely make for easy reading. The use of jargon, acronyms and complex combinations of financial principles often leaves the most experienced economists in disagreement – let alone a creative starting up their very first business.

To help you navigate all the technical language you may encounter when trying to access finance, we have put together this glossary of terminology and principles that are used every day when discussing money. We hope it can be of use to you!

Definitions

Assets

Things that provide income or some other value to their owner such as IP, property or royalties.

Base Rate

The key interest rate set by the Bank of England. It is the overnight interest rate that it charges to banks for lending to them. The base rate – and expectations about how the base rate will change in the future – directly affect the interest rates at which banks are willing to lend money in sterling.

Bill

A debt security- or more simply an IOU. It is very similar to a bond, but has a maturity of less than one year when first issued.

Bond

A debt security, or more simply, an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. They can be issued by companies, banks or governments to raise money. Banks and investors buy and trade bonds.

Business Angels

Business angels are individuals who make equity investments in high-growth businesses. Some invest on their own, some as part of a syndicate.

Capital

For investors, it refers to their stock of wealth, which can be put to work in order to earn income. For companies, it typically refers to sources of financing such as newly issued shares.

Capital Gain

If you purchase 1,000 shares at £1 each and eventually sell them for £10 each, you have made a capital gain of £9,000.

Corporation Tax

Corporation tax is paid by UK companies on their profits.

Credit Rating

The assessment given to debts and borrowers by a ratings agency according to their safety from an investment standpoint – based on their creditworthiness, or the ability of the company that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted. Ratings of BBB- or higher are considered “investment grade”.

Debt Factoring

Debt factoring involves selling invoices to a factor which pays an advance – typically 85% – on all approved invoices. The factor will then work on behalf of the business – managing the sales ledger and collecting money owed by customers. Once a customer settles an invoice with the factor, the factor will release the remaining balance less their fees.

Default

A default occurs when a borrower has broken the terms of a loan or other debt, for example if a borrower misses a payment.

Dividends

An income payment by a company to its shareholders, usually linked to its profits.

Equity

The value of a business or investment after subtracting any debts owed by it. The equity in a company is the value of all its shares.

Equity Finance

Equity finance enables the raising of share capital from external investors in return for handing over a share of the business. The main providers of equity finance for SMEs are venture capitalists (VCs), business angels and for start-ups, friends and family.

Exit

An exit is when either a company owner or investor sells their stake to another investor, to another business (for example, AOL buying The Huffington Post) or publicly in shares through the stock exchange or on another public market.

Hedge Fund

A private investment fund which uses a range of sophisticated strategies to maximise returns including hedging, leveraging and derivatives trading.

Investment Trust

A company quoted on the stock exchange that exists only to invest in other companies.

Invoice Discounting

Invoice discounting is similar to Debt Factoring in the way money is drawn against invoices, but the business retains control over the administration of the sales ledger. Discounters have strict requirements regarding the quality of sales ledger systems and procedures.

Insolvency

A situation in which the value of a borrower’s assets is not enough to repay all of its debts. If a borrower can be shown to be insolvent, it normally means they can be declared bankrupt by a court.

Leveraged Buyout

The acquisition of a company using borrowed funds. The idea is that the debt will be repaid by money raised from the acquired company.

Liquidity

How easy something is to convert into cash. Your current account, for example, is more liquid than your house.

Match Funding

A stipulation set by financiers that recipients of a grant or loan must themselves raise a certain percentage of the capital, generally a sum equal to that being granted.

Money Markets

Global markets dealing in borrowing and lending on a short-term basis.

Opertaing Profit/Loss

The profit or loss a company makes from its principal trading activity and before any exceptional items are taken into account.

PPI

The Producer Prices Index, a measure of the wholesale prices at which factories and other producers are able to sell goods in an economy.

Private Equity Fund

An investment fund that specialises in buying up troubled or undervalued companies, reorganising them, and then selling them off at a profit.

ROI

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

Supplier Finance

Supplier finance or, as it is sometimes called, reverse factoring is an option for businesses that regularly supply a far larger organisation. Once the buyer has approved the invoice, the payment – less a fee – is made immediately (and ahead of terms) by the financier. This allows the supplier to receive quick payment while allowing the buyer to repay the financier according to the original contract terms.

Toxic Debts

Debts that are very unlikely to be recovered from borrowers.

Vertical Merger

A merger between two firms in the same industry but at different production stages.

Working Capital

A measure of a company’s ability to make payments due in the next 12 months. It is calculated as the difference between the company’s current assets (unsold inventories plus any cash expected to be received over the coming year) minus its current liabilities (what the company owes over the same period). A healthy company should have a positive working capital. A company with negative working capital can experience cash flow problems.

Yield

The return to an investor from buying a bond implied by the bond’s current market price. It also indicates the current cost of borrowing in the market for the bond issuer.