Nov 29, 2022
Every line of work has its fair share of jargon. It’s useful to industry insiders who need a quick way to talk about their work. But to those on the outside, it can be a bit of a barrier. That can be a problem.
Our industry – business finance – has plenty of jargon. And if you don’t know the terms, it can be hard to understand your options. We want to change that. Here at Hexa, we’re determined to help Welsh SMEs see finance more clearly. That means helping them understand their options, and walking them through the terminology.
Here, in alphabetical order, are some of the most common terms in the world of business financing – all explained in a simple way to help businesses.
Here we’re referring to your company accounts. These are documents you file every financial year showing your business’s financial performance. They will normally include a balance sheet and profit and loss statement.
APR stands for annual percentage rate. It just means the yearly charge for a loan. It’s written as a percentage to make it easier to compare rates across different providers. APRs don’t apply to all finance products so be sure to ask for your finance partner to explain the differences.
This means taking financing (usually a hire purchase or lease agreement) to purchase/rent a physical asset. The asset could be anything from a piece of plant machinery to office equipment. Businesses look to do this when either they don’t have the upfront capital, or would rather pay over time for that asset.
A balance sheet is a statement reporting a business’s assets (what you own), liabilities (what you owe) and shareholder equity (your business’s net worth).
Business finance refers to a range of options to provide funds to a business, such as grants, loans, invoice finance and asset finance agreements.
Capital allowance is a form of tax relief that businesses may be able to claim on capital expenditure. In other words, if you invest in an asset for your business, you may be able to deduct some or all of the value from your corporation tax bill.
The amounts vary according to the type of asset. But it’s worth bearing in mind if you’re considering asset financing, because it could reduce your tax bill.
Capital expenditure, or CapEx, simply means any investment in physical assets like land, property, machinery, technology, etc. CapEx goes on your balance sheet – unlike operating expenses.
A credit rating is an assessment of how credit-worthy a borrower is. In other words, it scores the level of risk to a lender. The lower the risk, usually the lower the interest payments will be.
Cross company guarantee
This is where one or more companies acts as a guarantor for another applying for financing. For instance, the guarantee could come from a larger company on behalf of one of its subsidiaries.
Also known as a personal guarantee, this is where a director personally pledges to repay a debt if the business becomes unable to do so. This is a form of security.
FCA (Financial Conduct Authority)
The FCA is a UK financial regulator. It is independent of government, but has significant power to set minimum standards in the industry. We’re regulated by the FCA, and committed to its standards.
A finance broker, or intermediary, is someone like us here at Hexa! We act as a link between businesses seeking funding, and our funding partners.
This is a lease that expires at the end of the term, with no option to extend.
This is an alternative way of purchasing an asset through borrowing. You purchase it over an agreed period of time (see term) through monthly/quarterly instalments. Over that term, you use the asset but you’re not the legal owner. You become the owner at the end of the term after paying all payments due.
Interest is the cost of borrowing, normally written as a percentage. The amount of interest you pay for a finance agreement will depend on the level of risk.
Invoice financing is a way of releasing cash flow into your business. When you issue an invoice, a funder will immediately make available a percentage of that value. This essentially means you don’t have to wait to receive payment.
The term simply describes how long a finance agreement lasts. By convention it’s often written in months.
In business, a lease is a contract where you rent an asset through monthly payments.
The lessee is the borrower in a leasing agreement – i.e. you, the customer.
The lessor is the party that provides the funding in a leasing agreement – i.e. the funder.
This is a type of agreement that runs for a minimum term. At the end of that term, it may continue for the same monthly payments, unless the lessee chooses to end it. Be sure to check the terms and conditions within your agreement or speak to your finance partner.
Operating expenses (also known as OpEx) are a business’s day-to-day costs, like rent, wages and utilities. OpEx is distinguished from capital expenditure. Depending on the type of agreement, finance payments may be accounted for as operating expenses.
Profit and loss statement
A profit and loss (P&L) statement shows a business’s income, costs and expenses over time.
Rate per thousand
The rate per thousand is how some finance rates are calculated. It’s the rental amount you have to pay for every £1,000 of financing.
This is any financing to help a business transition to green energy. As signers of the Welsh Government’s Green Growth Pledge, we’re passionate about this kind of funding at Hexa.
Residual value/balloon payments
Residual value is the expected value of an asset at the end of the finance term. Some finance agreements make use of residual values to lower your monthly/quarterly payments. Be sure to check where the asset risk sits, whether that’s with the funder or you as the customer.
Security is something that you offer as collateral for a loan, to reduce the risk to the lender. See the director’s guarantee for an example.
In finance, underwriting is the process of estimating the level of risk that a funder is taking on. In practical terms this will include looking at things like your credit rating and accounts.
Partnering with Hexa
We hope these definitions help. If you think your business would benefit from financing, it’s always best to seek advice first. For a trusted guide to your options, contact Hexa today.