Business Loans Glossary: Part 2 - Debtor Finance to Insolvency

The second part of this four part plain English guide to business loans and finance raising covers 'debtor finance' through to 'insolvency'.

Debtor finance - Funding based on raising finance against your debtor book through factoring or invoice discounting.

Deferred consideration - Where a seller of a business allows the buyer time to pay the purchase price.

Depreciation - The writing off to the profit and loss account of the cost of a fixed asset over time.

Disallowed - Debt that is not available for factoring or invoice discounting (for example because it is too old).

Discounted Cashflow - The value of money to be received in future periods, discounted back to its equivalent today (as money to be received at some future date is by definition less certain and therefore less valuable than cash in hand now).

Dividend - Payment to shareholders out of the company's profits.

Dividend policy - A company's approach as to whether to pay dividends to shareholders or to retain profits within the business.

Drawdown - See availability.

Due diligence - A buyer's process of undertaking a detailed investigation and review prior to completing a purchase.

Earn out - Where the price to be paid for a business is determined by its subsequent performance.

EBIT - Earnings before interest and tax. The underlying profit from trading before it is affected by the business's tax status or financing. (earnings is an American term and the UK equivalent is PBIT - profit before interest and tax.)

EBITDA - Earnings before interest, tax, depreciation, and amortisation, used as a measure of the cash generated by trading activities.

Equity (1) - Money put into your business by investors in return for a share of its ownership and profits.

Equity (2) - The value of the difference between the market value of an asset (such as a machine on a finance lease or hire purchase arrangement, or property subject to a mortgage), and the outstanding borrowings.

Equity gap - The difficulty faced when looking to raise equity funding at a level higher than business angels are likely to provide, but lower than the level at which venture capitalists want to invest.

Escalator - See ratchet.

Excess - Overdraft levels greater than the agreed facility.

Facilities - Banking term for the package agreed with the client (such as overdraft facility and/or a mortgage on the premises), which will be set out in a facility letter.

Factoring - Lending money based on the security of a company's debtors where the lender takes over the collection process (contrast with invoice discounting).

Financial assistance - Rules under the Companies Act to prevent a company's own assets being used to buy it, except by using a whitewash report.

Financial promotion - The act of seeking investment, governed by tight regulation with potentially severe criminal penalties.

Fixed assets - Assets owned by a business such as property or plant and machinery to be used over a number of years, the cost of which is written off each year by a depreciation charge.

Fixed charge - See charge.

Flotation - The process of listing a company's shares for sale on a stock exchange also known as listing or an Initial Public Offering (IPO).

Floating charge - See charge.

Funding gap - The difference between the level of credit you obtain from your suppliers the level of and credit you allow your customers (your terms of trade) together with the time it is taking to turn purchases into sales; which will determine the degree by which your working capital will require funding.

GAAP (Generally Accepted Accounting Practice) - This means that your accounts have been prepared in accordance with normal accounting conventions. Note that UK GAAP has some significant differences to US GAAP so you will need professional advice if this is an issue.

Gearing - Borrowings. A company is described as highly geared (in US: leveraged) if it is largely funded by way of loans rather than share capital.

Going concern - An accounting assumption which says the business will be continuing to trade into the future.

Grants - Cash provided to you without you having to pay interest or give a share in your business, which you do not have to repay if you meet the terms on which it is provided.

Gross profit - Your sales or turnover, less costs of the goods sold.

Hardcore - Apparently permanent level of overdraft.

Headroom - Available level of unused overdraft facility.

Hire purchase - Arrangement where an asset can be bought using installment payments.

Historical cost convention - The assumption that the value of assets on the balance sheet is recognised at the original cost of purchase, less any depreciation or subsequent write-down to reflect a loss of value.

Initial public offering (IPO) - See flotation.

Insolvency - Being unable to pay debts as they fall due. The Insolvency Act sets out a number of tests including failure to deal with a statutory demand or to pay a judgment debt, and liabilities exceeding assets, each of which would be taken by a court as proof of insolvency.

The third article in this four part jargon busting guide to business loans and finance raising covers 'invoice discounting' through to 'private equity'.