The last thing that small and growing businesses need when considering finance options is to be faced with a wall of jargon that makes it difficult for to make the right choice. To navigate through the alternative finance marketplace, some knowledge of the most commonly-used terms may be helpful.
Order book – This is a record of all the orders placed with the business, either electronically or manually. This document is often viewed by lenders and is regarded as a measure of the company’s trading success.
Profit & loss – Profit & loss accounts are usually prepared annually and provide a record of the company’s turnover. Lenders may want to view this when considering an application for a loan.
Debtors’ ledger – The ledger sets out all the customers to whom goods have been sold on credit. This is another document that lenders will probably want to view when considering your application. Depending on how much money is owed to the business, it may be possible to leverage the debt in order to access the finance needed to fund growth plans.
Gearing ratio – This is a measure of how much equity has been invested in the business versus any loans that have been secured by the business to date. A high gearing means there is a high proportion of debt to equity and could affect loan values in some instances.
Adverse credit – This means the business has a bad credit rating. This may be because the business has defaulted on repayments in the past. This could make it difficult to secure finance.
Loan covenants – These are conditions placed on the business by the lender as part of a loan agreement. These covenants can vary considerably from lender to lender but, for example, they can stipulate minimum revenue expectations and set limits for capital expenditure. Defaulting on these covenants can carry stiff penalties and could undermine the management team’s control of the business.
Working capital – This is a term used to describe the amount of capital available to a business at any one time. It is calculated by deducting any current liabilities from the company’s assets. Lenders may wish to take a closer look at how the company is managing its working capital before deciding to provide finance.
Invoice factoring – This is when businesses sell their sales invoices to a third party in exchange for a pre-agreed lump sum which they can draw upon to finance their growth plans or to improve cash flow. Businesses also benefit by no longer being responsible for changing debt and processing invoices.
From community based loans to spot factoring, there are still more definitions that can be explained.
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