12th August 2015

The A-Z of SME Lending

Small and medium sized enterprises (SMEs) have a variety of finance available to them – and increasingly, from non-traditional sources – the challenge lies in understanding the type of finance that fits your business requirements. To assist, we’ve put together an A-Z guide of some of the most commonly used terms.

Arrangement fee: The arrangement, or administration fee, is the amount charged by the lender for setting up the loan or facility.

Asset based lending: This generally means a loan secured by assets, for instance property or machinery. Businesses often use this type of finance to fund working capital or an acquisition, particularly if they are experiencing high growth.

Bullet repayment: This refers to one payment for the whole of the loan at the end of the term, rather than equal monthly payments.

Business Growth Fund (BGF): The BGF was formed in 2011 by the 5 major UK banks to provide a source of long term capital for businesses with a turnover of over £5m.

Business Plan: This is an essential document for any new business, detailing what you want to achieve and how. The written plan should describe the business and typically includes your vision, objectives, marketing strategy, sales and financial forecasts.

Cash flow forecast: This is a vital piece of any business plan, detailing how a business anticipates the cash will flow in and out of the business over a specific time period.

CDFI (Community Development Financial Institution): Social enterprises that lend money and provide support for businesses and individuals that are struggling to borrow money from traditional finance suppliers.

Chambers of Commerce: An organisation that acts as a network with the aim of helping and supporting local businesses.

Comparison websites: These work as a ‘shop window’ for Alternative Finance in the same way that sites such as moneysupermarket.com or comparethemarket.com do for insurance or credit cards. They can often be a good starting point for SMEs looking for finance.

Credit check: Before you borrow money for your business, a credit check will be run by the lender (e.g. via Experian) – this is essentially to determine your ability to pay back money borrowed and provides a summary of your financial history.

Crowdfunding: A way to raise money by asking a large amount of people for a relatively small amount of money each to fund a new business venture, often in return for shares or equity in the company.

Crowdlending: This refers to the practice of individuals lending money directly to businesses with fixed terms and interest (also Peer to Peer lending). As with Crowdfunding, the risk is typically distributed across a group of individual lenders.

Due Diligence: The checks put in place prior to issuing a contract or completing a business transaction. This is an investigation into a company’s background to establish financial credentials and growth prospects, and includes an evaluation of Profit and Loss trends, management and risks.

Default: When a borrower fails to meet the payment terms for a loan.

Debenture: A charge over all of the fixed and floating assets of a company, typically taken by a lender to secure a loan or overdraft. A debenture gives the lender the right to appoint a receiver in the event of default.

Enterprise Investment Scheme (EIS): The Enterprise Investment Scheme was designed to help smaller, higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. The Seed Enterprise Investment Scheme (SEIS) complements the EIS, with the purpose of helping small, early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies.

Financial Conduct Authority (FCA): The FCA is the UK Financial Regulatory body and operates independently to regulate financial firms providing services to consumers and businesses.

Federation of Small Businesses (FSB): With more than 200,000 members, this not for profit organisation aims to represent and protect the interests of small businesses in the UK.

Funding for Lending Scheme (FLS): The FLS was initially launched in 2012 and is designed to incentivise banks and building societies to boost their lending to the UK real economy.

Government grants: Small businesses grant schemes are available in certain regions or sectors.

Hardcore: a term used in banking to describe the part of an overdraft facility that is not cleared each month by trading income. Hardcore borrowing is often moved over to a loan to allow it to be repaid by instalments.

Hire purchase: a form of business loan typically associated with capital expenditure, for example vehicles or plant and machinery.

Independent Financial Adviser (IFA): This refers to someone whose profession is to offer independent advice and recommend financial products to individuals.

Intermediaries: This is a person or service operating between two trading parties – for example, a Finance Broker.

Invoice Finance: Money raised by businesses against the value of their outstanding invoices to customers (debtors).

Joint liability: Where there is joint liability on a loan, the parties involved have equal responsibility for the repayment of debt.

Key Performance Indicators: a set of ratios and measures used by a lender to assess the current trading performance of a business and its ability to service existing and requested liabilities.

Leasing: Leasing allows companies to use business assets without taking ownership of them. Ownership typically sits with banks or other financial institutions who rent the assets to the business.

Liquidity: The amount of available cash or assets available within a business.

Mezzanine finance: Mezzanine finance sits alongside existing financing and is used to fund business expansion, in the event of a default the lender can convert the outstanding balance to equity in the company.

The National Association of Commercial Finance Brokers (NACFB): Founded in 1992, the NACFB supports SMEs by providing a range of facilities to finance brokers that allow them to recommend the best source of commercial finance.

Non Utilisation fee: A fee applicable if the balance of a facility is left undrawn.

Overdraft: a very common form of business borrowing designed to smooth out differences in timing between income and expenditure in any given period. Ideally, an overdraft will only be used for short periods and the current account that it is attached to will swing in and out of credit.

Private Equity: A source of investment in high growth private businesses, often from investors looking for a substantial return in the relatively short term.

Pension-led Funding: A form of borrowing whereby SME owners can invest in the growth of their companies by accessing the value accumulated in their pension fund.

Personal Guarantee (PG): An agreement made by a person or organisation to be responsible for a debt in the event of a default.

Quick ratio: An accounting ratio used by lenders to assess the amount of cash or near cash in a business that is available to cover short term liabilities.

Regional Growth Fund (RGF): A government scheme for UK businesses looking for funding of less than £1m.

Revolving credit: This gives SMEs access to a short term amount of credit that can be drawn and repaid depending on the customer’s cash flow requirements. Typical examples are overdrafts and credit cards.

Secured Loans: Typically used to borrow a larger amount, a secured loan uses business or personal assets (e.g. your home) as collateral.

Start-up: Start-up companies are any form of new businesses, from lifestyle businesses to high growth endeavours.

Traditional lending: Lending provided by members of the established financial services industry e.g banks, factoring and asset finance companies.

Unsecured loan: A loan whereby the lender has no claim over your assets if you default.

Venture Capital: Capital provided to start-ups or early stage businesses, often in return for an equity stake in the business.

Working Capital: The amount of cash (or near cash) that is needed to run the business on a day to day basis.

Xeno Currency: a currency that trades in markets outside of its domestic borders. BitCoin might be described as a form of Xeno Currency. Borrowing and repaying in BitCoin is a very niche activity and remains the preserve of only a few early adopters.

Yield: The financial return on an investment.

Zero rated: This refers to goods or services that attract the usual rate of VAT, but customers must be charged 0%. Examples of zero rated products are children’s clothes, books and newspapers.

If you would like to find out more about flexible growth funding from Credit4, give us a call on 020 3637 0570 or read more on our homepage.