|ABL Asset-based lending
|Lending facilities that are secured on assets such as trade debtors, process plant and machinery and stock/finished goods.
|All monies a business is owed in return for the provision of its services. Also referred to as Trade Debtors.
|Also referred to as the Quick ratio, it’s a robust measure of a company’s ability to pay its short-term debts, in that stock is excluded from asset value. Calculated as liquid assets/current liabilities.
|The process whereby an individual or company purchases a share or controlling stake in a company.
|AML Anti money laundering
|Checks undertaken by a lender to ensure that the borrower is conforming to AML requirements and that the source of any funds being introduced into the business may be readily identified.
|The repayment profile of the loan, typically monthly interest and capital repayments.
|The success fee charged by the lender to the business borrower to cover the cost incurred of the loan application process.
|Measure of operational efficiency – shows how much revenue is produced per £ of assets available to the business. (sales revenue/total assets less current liabilities).
|Anything owned by the company having a monetary value, e.g., ‘fixed’ assets like buildings, plant and machinery, vehicles (these are not assets if rented and not owned) and potentially including intangibles like trademarks and brand names, and ‘current’ assets, such as stock, debtors and cash.
|The Balance Sheet is one of the three essential measurement reports for the performance and health of a company along with the Profit and Loss Account and the Cashflow Statement. The Balance Sheet is a ‘snapshot’ in time of who owns what in the company, and what assets and debts represent the value of the company. (It can only ever be a snapshot because the picture is always changing.) The Balance Sheet is where to look for information about short-term and long-term debts, gearing (the ratio of debt to equity), reserves, stock values (materials and finished goods), capital assets, cash on hand, along with the value of shareholders’ funds. The term ‘balance sheet’ is derived from the simple purpose of detailing where the money came from, and where it is now. The balance sheet equation is fundamentally: (where the money came from) Capital + Liabilities = Assets (where the money is now). Hence the term ‘double entry’ – for every change on one side of the balance sheet, so there must be a corresponding change on the other side – it must always balance. The Balance Sheet does not show how much profit the company is making (the P&L does this); although previous years’ retained profits will add to the company’s reserves, which are shown in the balance sheet.
|BIMBO Buy-in management buyout
|The acquisition of a business from the owners by the existing management team with external executives.
|The amount of revenue required for a business to cover its fixed overheads, calculated by fixed overheads/gross margin percentage.
|In a financial planning context, the word ‘budget’ (as a noun) strictly speaking means an amount of money that is planned to spend on a particularly activity or resource, usually over a trading year, although budgets apply to shorter and longer periods. An overall organizational plan therefore contains the budgets within it for all the different departments and costs held by them. The verb ‘to budget’ means to calculate and set a budget, although in a looser context it also means to be careful with money and find reductions (effectively by setting a lower budgeted level of expenditure). The word budget is also more loosely used by many people to mean the whole plan. In which context a budget means the same as a plan. For example, in the UK the Government’s annual plan is called ‘The Budget’. A ‘forecast’ in certain contexts means the same as a budget – either a planned individual activity/resource cost, or a whole business/ corporate/organizational plan. A ‘forecast’ more commonly (and precisely in my view) means a prediction of performance – costs and/or revenues, or other data such as headcount, % performance, etc., especially when the ‘forecast’ is made during the trading period, and normally after the plan or ‘budget’ has been approved. In simple terms: budget = plan or a cost element within a plan; forecast = updated budget or plan. The verb forms are also used, meaning the act of calculating the budget or forecast.
|Funding taken on by a business which is repaid over a fixed period usually as a combination of principal + interest. The loan may be secured or unsecured.
|Capex Capital Expenditure
|Money spent by businesses on physical assets which are accounted for on the balance sheet and expensed on the profit & loss account via a depreciation charge to reflect the need to replace assets over time.
|The value of all resources available to the company, typically comprising share capital, retained profits and reserves, long-term loans and deferred taxation. Viewed from the other side of the balance sheet, capital employed comprises fixed assets, investments and the net investment in working capital (current assets less current liabilities). In other words: the total long-term funds invested in or lent to the business and used by it in carrying out its operations.
|The movement of cash in and out of a business from day-to-day direct trading and other non-trading or indirect effects, such as capital expenditure, tax and dividend payments.
|Cash flow statement
|One of the three essential reporting and measurement systems for any company. The cashflow statement provides a third perspective alongside the Profit and Loss account and Balance Sheet. The Cashflow statement shows the movement and availability of cash through and to the business over a given period, certainly for a trading year, and often also monthly and cumulatively. The availability of cash in a company that is necessary to meet payments to suppliers, staff and other creditors is essential for any business to survive, and so the reliable forecasting and reporting of cash movement and availability is crucial.
|CFADS Cash flow available for debt service
|Probably the definitive measure of operating cash flow and a key measure used by lenders in the lending decision. It shows the amount of cash a business generates to cover its debt payment obligations. Calculation: EBITDA +/- changes in working capital +/- corporation tax +/- capex +/- dividends.
|CID Confidential invoice discounting
|A funding facility that is secured on the trade debtors of the business and the funding available increases or decreases monthly in proportion to the value of trade debtors.
|COGS Cost of goods sold
|The directly attributable costs of products or services sold, (usually materials, labour, and direct production costs). Sales less COGS = gross profit.
|The amount of money offered or received when buying or selling a business. In some cases, consideration can take forms other than cash such as shares in another company. Consideration is typically on completion with a portion deferred to provide some protection for the purchaser.
|The provision of commercial finance advice to clients around, fundraising, acquisitions, disposals, management buy outs or due diligence.
|Cost of debt ratio
|Despite the different variations used for this term (cost of debt, cost of debt ratio, average cost of debt ratio, etc) the term normally and simply refers to the interest expense over a given period as a percentage of the average outstanding debt over the same period, i.e. cost of interest divided by average outstanding debt.
|The terms and conditions of the loan between the lender and the borrower to enable the lender to protect their position. Covenant tests are reviewed at agreed points in the year. Typical tests include minimum cash balances, interest cover and profit thresholds.
|Cash and anything that is expected to be converted into cash within twelve months of the balance sheet date.
|Money owed by the business that is generally due for payment within 12 months of balance sheet date. Examples: creditors, bank overdraft, taxation.
|The relationship between current assets and current liabilities, indicating the liquidity of a business, i.e., its ability to meet its short-term obligations. Also referred to as the Liquidity Ratio.
|The extent to which the total revenues (or turnover) of a business is derived from a few large customers or accounts
|A specified amount of consideration is not paid on completion but is paid at a specific point in the future. This could be 6 months, 1 year, 2 years or even longer after the transaction has completed.
|The apportionment of the non-cash cost of a capital item over an agreed period, based on life expectancy or obsolescence. For example, a piece of equipment costing £10k having a life of five years might be depreciated over five years at a cost of £2k per year. In which case the P&L would show a depreciation cost of £2k per year; the balance sheet would show an asset value of £8k at the end of year one, reducing by £2k per year; and the cashflow statement would show all £10k being used to pay for it in year one.
|The opposite of an acquisition whereby the owner sells their stake in a business or company.
|A dividend is a payment made per share, to a company’s shareholders by a company, based on the profits of the year, but not necessarily all of the profits, arrived at by the directors and voted at the company’s annual general meeting. A company can choose to pay a dividend from reserves following a loss-making year, and conversely a company can choose to pay no dividend after a profit-making year, depending on what is believed to be in the best interests of the company.
|The successful completion of the bank loan application process results in the transfer of funds from the lender to the borrower’s bank, net of any associated fees and costs.
|DSCR Debt service coverage ratio
|A key measure to show the ability of a company to use its operating income to repay all its debt obligations, including repayment of principal and interest on both short-term and long-term debt. Calculation is EBITDA-Capex/Interest + Principal.
|DD Due diligence
|The analytical process undertaken on an acquisition or lending transaction to give comfort over an area of risk. For example, a funder may ask for financial DD to be carried out on the forecasts of a business to ensure that these appear realistic, or a buyer may seek legal DD to ensure that all contracts are up to date.
|Consideration that is payable in the future, but unlike a deferred payment is dependent on the future performance of the business. For example, a seller could receive an additional 25p for every £1 of turnover more than £1 million over the next 2 years.
|EBITDA Earnings before interest, tax, depreciation and amortisation
|EBITDA = Earnings before Interest, Taxes, Depreciation, and Amortisation. (Earnings = operating and non-operating profits (e.g., interest, dividends received from other investments). Depreciation is the non-cash charge to the balance sheet which is made in writing off an asset over a period. Amortisation is the payment of a loan in instalments. A very important figure in the lending decision as most lenders will offer a multiple of the most recently achieved EBITDA figure.
|ERC Early repayment charge
|A fee to cover termination of the loan by the borrower prior to the designated term. Typically, this requires a small administration fee and an additional interest payment.
|The legal document that defines all the terms, restrictions and obligations of the loan between the lender and the borrower
|A document summarising the terms of the loan which is credit-backed and subject to successful completion of the legal agreements and any KYC requirements.
|Assets held for use by the business rather than for sale or conversion into cash, e.g., fixtures and fittings, equipment, buildings.
|A cost which does not vary with changing sales or production volumes, e.g., building lease costs, permanent staff wages, rates, depreciation of capital items.
|The financial model developed to enable the business to manage cash, plan resources and determine investment requirements. Most businesses track actual results to forecast monthly to monitor progress. Lenders will require forecast P&L, balance sheet and cash flow as part of the lending application process.
|The ratio of debt to equity, usually the relationship between long-term borrowings and shareholders’ funds.
|Any surplus money paid to acquire a company that exceeds its net tangible assets value.
|GM Gross margin
|Sales revenue less cost of goods or services sold. Also referred to as gross profit and abbreviated to simply ‘margin’. As a % metric it is calculated as gross margin/sales turnover. Different sectors will have different margins. Gross margin % and its stability is an important factor in the lending decision.
|The percentage of the principal charged by the lender to cover the cost of capital provided to the borrower.
|An invoice finance facility where a lender releases cash against debtors within 24 hours of an invoice’s issue, freeing up capital to boost the client’s cash flow. Unlike factoring however, the client retains control of the sales ledger management. There is also a non-recourse option that incorporates debtor protection to protect against debtor non-payment, as well as a confidential offering to conceal the facility from the client’s customers.
|A popular method of finance, where a finance provider buys a company’s invoices at a discount and is then responsible for getting full reimbursement from the debtor. Often used by businesses to speed up their access to cash flow.
|A funding solution that primarily releases capital against debtors through invoice discounting and factoring to boost the client’s cash flow but can additionally provide funding against other assets on the balance sheet through asset-based lending, including stock, property, plant and machinery.
|IPO Initial public offering
|An American term that has come into UK terminology. The transition of a private company owned by a several shareholders to one listed on the stock market and owned by the public and often institutions.
|ITS Indicative term sheet
|A document summarising the terms of the loan which is normally credit-backed but subject to due diligence and legal agreements.
|KPI Key performance indicators
|The set of measures or metrics that a management team uses to monitor the progress of the business towards it short, or longer term, goals.
|KYC Know your client
|Documentation required by the lender from the Directors and shareholders with significant control to prove their identity. Typically, via the provision of a passport or driving licence and a recent utility bill. KYC is increasingly becoming an automated, online process.
|The amount of debt on a company’s balance sheet versus its total book value. A lender will consider the leverage or lending multiple it will consider relating to the EBITDA of the business. Typically, lenders operate in the 1x to 3x EBITDA range.
|General term for what the business owes. Liabilities are long-term loans of the type used to finance the business and short-term debts or money owing because of trading activities to date. Long term liabilities, along with Share Capital and Reserves make up one side of the balance sheet equation showing where the money came from. The other side of the balance sheet will show Current Liabilities along with various Assets, showing where the money is now.
|London inter-bank offered rate. The benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans. The 3-month rate is often used as a basis for business loan pricing allowing for a lender margin.
|Indicates the company’s ability to pay its short-term debts, by measuring the relationship between current assets (i.e. those which can be turned into cash) against the short-term debt value. (Current assets/current liabilities). Also referred to as the Current Ratio.
|The inability of the business to pay its normal debt obligations when they fall due.
|Loan tenure or term
|The fixed period over which the lender will advance funds to the borrower.
|LTV Loan to Value
|A term used principally on property debt such as mortgages. It is the % by which the amount borrowed is covered by the value of the property. i.e., if you borrowed £800k against a property worth £1m the LTV would be 80%.
|M&A Mergers and Acquisitions
|Often used as a term to describe a team or service completing merger or acquisition transactions, “The M&A team” or “M&A activity”.
|Also referred to as MI, or management information, these are monthly financial statements produced by the accounting function as part of the financial control processes of the business. A lender will want to satisfy themselves that the borrower has a good finance function and is producing prompt and accurate financial information.
|MBI Management Buy In
|A transaction whereby ownership of the business passes to new incoming management.
|MBO Management Buy Out
|A transaction whereby ownership of the business passes to the existing management of the business.
|The fee charged by a lender to cover the costs of monitoring the loan during the tenure.
|Total assets (fixed and current) less current liabilities and long-term liabilities that have not been capitalised (e.g., short-term loans).
|Net current assets
|Current Assets less Current Liabilities. A positive figure indicates there are sufficient current assets to pay for all current obligations. If the net amount is negative, it could be an indicator that a business is having financial difficulties and will need additional funding.
|Net profit can mean different things, so it always needs clarifying. Net strictly means ‘after all deductions’ (as opposed to just certain deductions used to arrive at a gross profit or margin). Net profit normally refers to profit after deduction of all operating expenses, notably after deduction of fixed costs or fixed overheads. This contrasts with the term ‘gross profit’ which normally refers to the difference between sales and direct cost of product or service sold (also referred to as gross margin or gross profit margin) and certainly before the deduction of operating costs or overheads. Net profit normally refers to the profit figure before deduction of corporation tax, in which case the term is often extended to ‘net profit before tax’ or PBT.
|Net working capital
|The cash available to a business to spend, calculated by current assets – current liabilities.
|The generic name given to the company formed to acquire a business as many acquisitions are completed by a newly formed limited company.
|Until 2010 the only business lending was via the main high street banks. Although the majority of business lending is still via the top 5 banks there are now multiple specialist, non-bank lenders available to provide funding options for businesses ranging from online, technology-driven marketplaces to relationship-focused cashflow lenders.
|Traditionally lenders would require applicants to provide several months bank statements to support their loan application. With the arrival of Fintech there is an increasing tendency for this information to be provided by “open-banking” which enables the lender to have online, secure, time-bound, read-only access to the applicant’s business bank account.
|The profit of a business after overheads are deducted from the gross margin. It includes depreciation costs but is before interest costs and taxation.
|Borrowing from a bank through the business current account. 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.
|An expense that cannot be attributed to any one single part of the company’s activities. It is usually a longer-term cost that may not be reduced in the short term.
|P&L Profit and loss account
|One of the three principal business reporting and measuring tools (along with the balance sheet and cashflow statement). The P&L is essentially a trading account for a period, usually a year, but also can be monthly and cumulative. It shows profit performance, which often has little to do with cash, stocks and assets (which must be viewed from a separate perspective using balance sheet and cashflow statement). The P&L typically shows sales revenues, cost of sales/cost of goods sold, generally a gross profit margin (sometimes called ‘contribution’), fixed overheads and or operating expenses, and then a profit before tax figure (PBT). A fully detailed P&L can be highly complex, but only because of all the weird and wonderful policies and conventions that the company employs. Basically, the P&L shows how well the company has performed in its trading activities.
|PG Personal Guarantee
|Directors are sometimes required to provide personal guarantees for loans or other types of transaction. These are legal agreements which enable the lender to recover part of the principal in the event of default.
|Preparing for exit
|The process of preparing a company for sale often due to the planned retirement of the owner. This spans a wide range of actions and can be undertaken 2-3 years in advance in some cases. It is often done in collaboration with a corporate finance firm or the company’s accountant.
|The gross loan amount that the lender will advance to the borrower
|Financial information providing the illustrative effect to new financing, combination, or other change in the status of a business concern.
|Same as the Acid Test. The relationship between current assets readily convertible into cash (usually current assets less stock) and current liabilities. A sterner test of liquidity.
|Repaying an existing loan using a new loan that is typically on better terms (possibly with a new lender) which may be more effective for the business in the long-term.
|The accumulated and retained difference between profits and losses year on year since the company’s formation.
|The profit of a business after all deductions, including any dividends that may be paid to shareholders. It shows on the balance sheet as an increase in retained earnings over the previous period.
|ROCE Return on capital employed
|A fundamental financial performance measure. A percentage figure representing profit before interest against the money that is invested in the business. (Profit before interest and tax, divided by capital employed, x 100 to produce percentage figure).
|ROS Return on Sales
|The percentage of profit made to sales (or turnover) value, calculated by operating profit/sales.
|Sales and leaseback
|Selling commercial property or assets to a financier who will then lease it back over a fixed period in return for regular payments, plus interest, to release capital to boost the client’s cash flow.
|Also known as Sales or Turnover, the invoiced value of goods and/or services delivered by the business to its customers and accounted for in the P&L on a monthly basis.
|The charge taken over the assets of the borrowing business. Typically, this is a first ranking all assets debenture.
|The balance sheet nominal value paid into the company by shareholders at the time(s) shares were issued.
|A measure of the shareholders’ total interest in the company represented by the total share capital plus reserves.
|SPA Share Purchase Agreement
|The legal document defining the main contract terms and obligations between the buyer and seller to purchase share capital within a company.
|The generic name given to the company being pursued by the individual or business buyer.
|All monies a business is owed in return for the provision of its services. Also referred to as Accounts Receivable.
|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.
|A cost which varies with sales or operational volumes, e.g., materials, fuel, commission payments.
|Current assets less current liabilities, representing the required investment, continually circulating, to finance stock, debtors, and work in progress.
|Working Capital Facility
|A lending facility that is designed to meet the day-to-day cash requirements of the business. Examples of a working capital facility could be overdrafts, a CID line or stock finance (where a loan is based on and secured by the amount of stock held).