Business Loans Glossary: Part 1 - Accounting Concepts to Debtor Days

Like any area of activity, business loans and finance raising have its own jargon and this series of articles are intended to give brief plain English explanations for some of the common terms used from 'accounting concepts' through to 'yield'.

This four part guide is intended as a practical one for owner managers and so it is important to realise that these are my own 'practical' definitions and descriptions, and therefore shouldn't be relied on as technical or exact ones.

I haven't gone into detail on listing a company as anyone going down this route will need to engage professional advisors. 'The Practical Guide To Listing' can be downloaded from the London Stock Exchange's website and this contains a useful glossary of the terms used in connection with floating a company on a stock exchange.

Accounting concepts - The fundamental assumptions that in the past were always supposed to be the basis any set of accounts, see prudence, accruals concept, historical cost convention and going concern. Accounting standards have however now changed towards a mark to market approach (see below) which now trumps the concept of prudence.

Accruals concept - The accounting concept that revenues and costs should be dealt with in the period to which they relate.

Acid ratio - Ratio used to indicate the company's ability to pay its current liabilities out of its liquid assets (cash and debtors).

Adverse - Items which adversely affect your credit rating such as mortgage arrears, County Court judgments or insolvency proceedings.

AIM - The alternative investment market; a public UK stock market with lower criteria for obtaining a listing than a full stock market floatation.

Asset based finance - Lending that is based on specific classes of asset such as commercial mortgages based on property, factoring or invoice discounting based on your debtor book (and sometimes stock), leasing, hire purchase, or chattel mortgages based on plant and machinery; and often an important element in the financing of buy-outs.

Asset based lenders (ABLs) - Lenders who will advance against the security of a particular class of assets, more generally lenders who will do so across a number of types of asset such as an invoice discounter who will also lend against property.

Assets - Items owned by business which can be used by it and to which a value can be attached.

Availability - The funds you have available to be paid to you (drawn down) by your factor or invoice discounter

Benchmarking - Comparison of your business against other similar competing businesses.

BIMBO - See buy out.

Block discounting - Lending against a stream of future rental or contractual income.

Book value - The value of assets as shown in the accounts of the company. Since book values are generally based on the historic cost of the asset, net of the accumulated depreciation since it was purchased, they often bear little or no relation to the asset's current market value.

Bootstrapping - The process of running a business to create sufficient cash internally to support its own growth, as in the expression 'to pull yourself up by your own bootstraps'.

Breakeven - The level of sales at which the gross profit or contribution is sufficient to cover the overheads so that the business makes neither a profit or a loss.

Bridging loan - A short-term loan usually designed to bridge the period before another transaction can be completed.

Burn rate - An American term used to describe the rate at which a company is using up (burning through) its cash resources.

Business angel - A wealthy individual, often a retired businessman who has already sold one business who is interested in investing funds personally in smaller or start up companies. Will often be looking for an active role in management of the company.

Buy out - The purchase of an existing established business from its owners. This can be by its existing managers (a management buy out or MBO); by new mangers coming in from outside the business (a management buy in or MBI); or by a combination of existing and new managers, (a buy in / management buy out, BIMBO). Where one venture capitalist buys out another's stake this is known as a secondary buy out.

Buy in - See buy out.

Capital - Capital is a term which is widely used in a number of different but related ways. Capital essentially refers to a stock of cash which can be invested in assets but this stock can be made up of differing elements and calculated in different ways depending on what you are looking to discuss. Capital can therefore include:

• 'Loan capital' which is the sum borrowed by way of a loan (also known as the loan principle).

• 'Share capital' is the cash invested by the shareholders in the shares of the business.

• A 'capital account' is a partner's share of the retained profits of the business.

• A 'capital asset' is generally a fixed asset such as a property or plant and machinery which has absorbed cash; or

• a 'business's capital' can refer up the total funding base of a business, which usually means its shareholders' funds and its long term borrowings.

So ensure you understand which sense is being used whenever the term is mentioned.

Capital expenditure (capex) - The purchase of fixed assets.

Cash flow forecast - A projection of a business's cash receipts and payments over a period.

Charge - Security taken by a lender, can either be fixed where the lender has to give permission for the sale of the assets, or floating where you are free to buy and sell the relevant assets (such as stock) on a day to day basis.

Chinese walls - Internal arrangements in a finance company or a firm of professional advisors where information is not passed between different departments so as to maintain confidentiality and prevent conflicts of interest.

Commercial finance broker - Business that arranges borrowings for you from appropriate asset finance companies.

Concentration limit - restriction imposed by factor or invoice discounter on the percentage any single debtor can be of the debtor book.

Contingency - allowance in a cash flow forecast for unforecast payments.

Contingent liability - A potential liability of the business which may arise as a result of some specific event.

Contract hire - See leases.

Contribution - See gross profit.

Creditor - Person to whom the business owes money ('Payable' in the US).

Creditor days - A measure of the period of credit being taken from suppliers by a business.

Crown debt - Money due to HM Revenue and Customs for PAYE/NI or VAT.

Current assets - Liquid assets used by the company such as debtors and cash, together with stock, which is intended to be sold as part of the company's normal trading operations.

Current liabilities - All sums of money which are due to be paid by a business within the next 12 months.

Current ratio - The value given by dividing the current assets by the current liabilities. See also acid ratio.

Debenture - Technically, a written acknowledgement of a debt but more usually the document by which a lender such as a bank takes a charge or security. In the US, also used to describe a publicly traded debt or bond.

Debt - Money lent to a business which has no right to a share of ownership or profits, will need to be repaid and usually carries an interest charge.

Debtor - Someone who owes your business money.

Debtor days - A measure of the amount of credit being given to customers by a business.

The next article in this jargon busting guide to business loans and finance raising covers topics from 'debtor finance' through to 'insolvency'.