Cutting through the complexities of finance jargon

A

  • AER – annual equivalent rate.
  • APR – annual percentage rate – rate devised to give consumers a “level playing field” when comparing products. Rate includes fees and ‘all costs of borrowing’.
  • Advance – loan amount.
  • Adverse credit – see credit impaired.
  • Asset Protection – equipment protection against loss or damage for the duration of the Finance Agreement.
  • Arrears – missed mortgage payments.
  • Annual service charge – a payment made to cover any additional repairs.

B

  • Balloon rental – payment made at a specified time as part of a leasing agreement which is significantly larger than the other payments.
  • Base rate – usually applies to rate set by the Bank of England on a monthly basis and used by banks as a basis for setting loan rates. Can also be applied to an interest rate used by a lender as a starting rate to which a margin is applied according to the perceived risk.

C

  • Contract hire – a leasing arrangement whereby an asset is leased for a set term, rather than for the life of the asset. Usually used for cars.
  • Commercial loan – funding arrangement between a business and a financial institution.
  • Credit impaired – a damaged credit rating due to CCJs, arrears, IVA or bankruptcy.

D

  • Directors guarantee – a leasing company can sometimes call on directors to give their personal guarantee in order to approve funding.
  • Document fee – covers administration and paperwork costs involved in completing the lease deal such as registration etc.

E

  • Echo sign – web based electronic signature system.
  • End of lease – the date where the primary lease period finishes. After this time, you must return or purchase the assets or extend the lease for a further period of time.

F

  • Factoring– a lender (factor) provides funding to a business against outstanding debtors along with a sales ledger management service. This includes the credit control function including the collection of overdue debts). A factoring facility is usually disclosed to the debtor. See also invoice discounting, recourse and non-recourse.
  • Finance lease – a leasing arrangement whereby all the risks and rewards of ownership of an asset are ascribed to the lessee. The lessor expects to recover the costs and profit for the asset in the initial term of the lease.
  • Fixed term – a contract which as an agreed duration and end date.
  • FCA – the Financial Conduct Authority regulates the financial services industry in the UK.
  • FLA – the Finance and Leasing Association is the industry body for the asset finance, consumer finance and motor finance sectors.

H

  • Hire purchase – (also known as lease purchase) a leasing arrangement whereby the lessee pays the lessor a regular amount every month to lease an asset and takes ownership of said asset at the end of the term.

I

  • Invoice discounting – invoice discounting offers businesses cash against unpaid invoices. However, an invoice discounting arrangement is normally undisclosed to the debtor. In addition, the client retains control of the sales ledger management. This product is suitable for larger, more established businesses with good sales management and credit control functions. See also factoring.

L

  • Lease purchase – (also known as hire purchase) a leasing arrangement whereby the lessee pays the lessor a regular amount every month to lease an asset and takes ownership of said asset at the end of the term.
  • Lessor – an organisation or financial institution which is responsible for providing the funding to the customer.
  • Lessee – the company or individual that requires leasing for the agreed assets.

M

  • Management accounts – a summary of accounting information such as balance sheet and cash flow required by managers to make short-term financial decisions.
  • MBI/MBO – management buy-in/buy-out.
  • Margin – rate of interest charged by a lender over and above a given base rate, usually determined by risk perceived by lender.
  • Minimum term – a lease which runs for a minimum period of time. Once this has been served, the payment will continue at the same rate unless notice is given to the lessor to end the lease.

N

  • Non-recourse – type of factoring/invoice discounting including bad debt protection. The lender (factor) takes the risk for non-payment of the debt. If a factored invoice is unpaid by the debtor, the factor will not claim the monies back from the customer.

O

  • Operating lease – a contract that allows for the use of an asset, but does not convey rights of ownership of the asset. An operating lease is not capitalized; it is accounted for as a rental expense in what is known as “off balance sheet financing.” For the lessor, the asset being leased is accounted for as an asset and is depreciated as such. Operating leases have tax incentives and do not result in assets or liabilities being recorded on the lessee’s balance sheet, which can improve the lessee’s financial ratios.
  • Option to purchase – the lessee can purchase the leased item at the end of the finance agreement or within a named time period.
  • Off-balance sheet – an asset or financing which doesn’t appear on the company’s balance sheet. Leasing is an example of off-balance sheet financing as the assets are rented and monthly payments are only recorded.

R

  • Recourse – type of factoring/invoice discounting whereby the customer takes the risk for non-payment. If a factored invoice is unpaid by the debtor, the factor will reclaim the monies from their customer. See also non-recourse.

S

  • Secured – lending against an asset, where the asset is assigned to the lender as security in event of default.
  • Self-certification – a borrower certifies their own income. Usually used in cases where the borrower is self-employed and is unable to supply trading accounts. In certain cases a lender is willing to lend money if the borrower self-certifies their income. Because the associated risk with this kind of product is higher, the rates charged by the lender tend to also be higher.

T

  • Tax deductible – item or expense able to be deducted from a taxable gross income.

With thanks to the NACFB for providing some of these explanations.

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This article provides general information to be used for your reference only and is not intended as a substitute for financial advice specifically directed at your business and taking account of the particularities of your situation.