If you are new to the world of business finance, then some of the terms used can be mystifying. That's why we've put together this simple glossary of the most common business finance terms you are likely to encounter.
Some of the terms have dedicated pages which you can jump straight to by simply clicking on the link provided.
Angel finance is where a person (normally someone of high net worth) invests in a company, business or individual – sometimes when all other funding options have been exhausted. This financial help can assist with both start-up ventures and for established businesses who are looking for extra capital to enable them to expand operations.
Angel investors can operate as individuals or as panels of providers – the latter enabling several angel investors to share the financial risk.
Angel finance is normally provided in exchange for ownership equity or convertible debt.
Also known as asset finance, this is any kind of borrowing that has been secured against a company or individual’s existing assets. For example, a commercial mortgage is a form of asset-based finance as it is secured against the property it is used to purchase.
Typically, the asset(s) this is secured against will be physical – e.g. vehicles, property (wholly owned), equipment or stock. In rarer instances, this can also include non-tangible assets such as debtors or intellectual property.
Asset-based finance is popular due to the flexibility and speed in which it can be arranged, as well as the benefit of using assets which are not normally considered by other lenders.
At the simplest level, a business loan is easy to understand. A business approaches a lender who then loans them funds. This is repaid by the business with interest over a fixed period. The process is very similar to a personal loan if unsecured.
Corporate venture capital
Sometimes just referred to as CVC, corporate venture capital is where an established company uses corporate funds to directly finance another business – normally a start-up company. Businesses do this in exchange for equity stakes in the new firm.
Normally, CVC is provided to smaller businesses who have some innovative or specialist role, and it is not unusual for the lending firm to also supply management and other business advice. CVC does not apply to any investments made through external third parties. CVC is provided directly to the borrowing firm with no intermediaries.CVC is important to the UK economy as it helps in recognising and supporting the innovative businesses of tomorrow.
Direct lending fund
This is where a business can borrow money from a fund that is then repaid with interest over time – much like an ordinary business loan. However, funds may have fewer restrictions and a different approach to risk – enabling them to lend where a traditional lender may not.
Equity crowdfunding is where a group of people get together to provide financial investment in a company. Typically, these tend to be start-up businesses or unlisted companies. Equity crowdfunding is normally done in exchange for shares in the borrowing company – allowing individuals to have part-ownership.
If the business flourishes and does well, then the ‘crowd’ benefit by seeing their shares rise in value. However, should the company do poorly or even fail, then the individuals in the ‘crowd’ could lose their entire investment.
However, the advantage of equity crowdfunding is that losses are diluted among the group of individuals investing.
Export finance is an umbrella term used for invoice factoring for export businesses exclusively. When dealing with overseas business, export firms can face long delays in payment terms. Export finance allows export businesses to sell their unpaid invoices to a third party, which will then seek repayment from the debtor.
Typically, the amount paid for an unpaid invoice will be a high percentage of its value, with the export finance provider retaining all the monies it recovers from the debtor.
If the export provider can’t recover all the debt then they could make a loss. This is the risk of export finance.
This can sometimes also be referred to as export trade finance.
A non-repayable loan or fund most often awarded by governments, institutions and larger organisations with the aim of promoting a specific business activity. For instance, they can be for the start-up of a business or to help it take on new apprentices, etc.
Sometimes also called mezzanine finance, growth finance is a complex but flexible form of debt financing that is most appropriate for high-growth businesses that wish to expand. Essentially, growth finances give the lender the ability to convert their debt into a share of ownership or equity interest if the loan is not paid back as agreed.
Simply put, hire purchase is an instalment plan. In this type of contract, a buyer agrees to make an initial deposit on goods with the remainder being repaid over a set period, plus interest.
Hire purchase is considered a form of asset finance. Rather than renting an asset, the purchaser is simply paying for the goods in instalments, but does not own them until the final payment is made.
Invoice factoring is a popular method of debtor finance.
In short, invoice factoring is where a finance provider buys a company’s invoices at a discount. The finance company is then responsible for getting full reimbursement from the debtor.
This is often used by businesses to avoid the risk of not being paid on invoices and to speed up their access to cash flow.
IPO/initial public offering
IPO stands for an initial public offering. This refers to when a private company’s owners decide to sell a portion of its firm to the public, which can then purchase shares in the company. Through this process, a private company becomes a public company.
A public offering is usually offered as a way to raise funds for expansion.
An overdraft is a form of debt and works very much in the same way for both individuals and businesses. It is a way of borrowing money from a bank or building society through your current account.
There are two types of overdraft – authorised and unauthorised. An authorised overdraft is agreed in advance with your bank. There will be a limit as to how much you can owe, and you can continue to spend normally up to this limit.
Unauthorised overdrafts occur when you have spent more than is in your bank account or gone over a set limit in your overdraft without first agreeing this with your bank.
Both authorised and unauthorised overdrafts will result in you being charged extra fees by your bank.
An overdraft is considered a temporary debt and, as such must be periodically reviewed by the bank, which can choose to withdraw this option if it so wishes.
Sometimes just called P2P lending or crowdlending, peer-to-peer is a way of lending money to businesses. It can be a potentially lucrative avenue but also one that may come with a high level of risk.
Peer-to-peer websites bring together groups of people who are interested in lending to those businesses who need a loan.
As a rule of thumb, the higher the interest rate, the higher the risk.
A private equity investment is normally one made by a private equity firm, venture capital business or angel investor. These involve the purchase and restructuring of companies that are not publicly traded.
Private equity firms raise funds from institutions and high net worth individuals with the intention of investing that money in buying and selling other businesses.
A loan provided by the Government or local body that people can use to set-up a new business. See also Grant.
Sometimes also called seed funding, seed capital or seed money, this is finance that is provided exclusively to start-up companies and businesses. This provides the initial capital for start-ups in exchange for an equity stake in the new company.
Generally, this type of funding just covers the very first costs a business might encounter and may be a stepping-stone toward additional funding.
These are a form of Government-backed personal loans for people who are either just starting a business or need investment for a business that is less than 24 months old. These are made available for a range of needs, including securing premises, marketing and stock purchase to name a few.
As a personal loan, these are unsecured.
Trade finance is an umbrella term that covers many financial products used by banks and companies to facilitate trade. This makes it easier for import and export companies to conduct business, as well as reducing the risks associated with both domestic and global trade.
Finance is most often provided for specific shipments of goods using letters of credit, bills of exchange and bank guarantees.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.