| AIM |
Alternative Investment Market – a stock market aimed at usually smaller fast growth businesses |
| Angel |
See Business Angel |
| Asset Finance |
Loans specifically made against plant, equipment, vehicles or IT hardware and software |
| BIMBO |
A combination of Management buy-in and buy-out where the team buying the business includes both existing management and new managers |
| Book Debts |
What your customers owe you for goods or services supplied – the same as trade debtors |
| Breakeven |
The point at which your gross profit just covers your overheads or fixed costs. You are aiming to do a lot better than this! |
| Business Angel |
A private individual who invests smaller sums, usually in small or start up businesses and who may be able and willing to provide hands on experience and involvement |
| Business Property Finance |
See Sale and Lease Back |
| Capital Stake |
A share holding or investment in a company |
| Cash Flow |
The cash, as opposed to the profit, generated by a business |
| Commercial Mortgage |
A long term loan secured by business premises |
| Concentration |
The extent to which the book debts owing to a business are due from one or a few customers. The ideal is to have no more than say 10% owing from any one customer |
| Contract Hire |
A type of operating lease, often for a vehicle, where the leasing company takes an agreed level of responsibility for managing and maintaining the vehicle |
| Credit Control |
Making sure that your customers pay what they should, when they should! |
| Creditor Days |
The average number of days that you take to pay your suppliers’ invoices |
| Current Asset Ratio |
The key indicator of whether you can pay your creditors on time. The relationship between current assets like cash, book debts, stock and work in progress and current liabilities like overdraft, trade and expense creditors and other current debt. |
| Debenture |
A legal document that formalises the lenders charge over the assets of the company. |
| Debtor Days |
The average number of days that you allow your customers to pay your invoices |
| Due Diligence |
The detailed investigations that an investor will make before buying a share in your business |
| Factoring |
Contracting out your sales ledger management and debt collection, usually in exchange for an advance payment |
| Flotation |
Raising funds by arranging for your company’s shares to be quoted on a stock exchange |
| Gearing |
The relationship between a company’s debt and its share capital and accumulated reserves. Highly geared companies tend to be more vulnerable than those that borrow less in relation to their shareholders’ funds. |
| HNWI |
High Net Worth Individual – usually a distinguishing feature of a business angel |
| Incubator |
An organisation, often commercial, helping start-up and small businesses to grow. An incubator may take an equity stake, may provide premises, know how and interim management. |
| Interest Gearing |
How many times interest costs in a company’s profit and loss account are covered by profit, before interest and tax. How far would your profits have to fall before a lender’s interest wasn’t covered? |
| Interest Margin |
The margin between the interest you pay your lender and what your lender has to pay for the money in the first place |
| Invoice Discounting |
Selling your sales invoices (in confidence) to a finance house in exchange for cash. Debt management remains your responsibility |
| IPO |
Initial Public Offering – a first sale of shares on a stock exchange |
| MBI |
Management buy in – a new management team from outside buying an existing business from the existing shareholders, often with the help of a venture capital investor |
| MBO |
Management buy out – the existing management team buying a business from the current shareholders |
| Mezzanine Finance |
A halfway house between equity finance and ordinary debt finance, usually as part of a venture capital finance package. Sometimes unsecured, sometimes secured by a second charge on the company’s assets, therefore more expensive than ordinary loans |
| Mortgage |
A charge over property securing a long term loan |
| Net Tangible Assets (NTAs) |
The shareholders’ funds in a business; the difference between the total assets less any intangible assets like goodwill and the total of current and term liabilities. Also known as tangible net worth. |
| Net Worth |
Net worth is the difference between the total assets and the total current and term liabilities. Also known as (equity) shareholders’ funds, equity or net assets. |
| NWAS |
Net Working Assets to Sales – A measure of the working capital needs of a business. |
| OFEX |
A market maker for shares in member companies – not a full stock exchange listing |
| Over Trading |
Driving up sales to the point where the business runs out of working capital and may fail |
| P+L (Profit and Loss) |
Strictly, the calculation of gross profit on trading less fixed costs (or overheads), exceptional items, interest, taxation and dividends. Often taken to include the calculation of gross profit (sales less cost of sales). |
| PGs |
Personal guarantees.
TIP – Never give these without taking professional advice. |
| Quick asset ratio |
Similar to the current asset ratio, but excluding stock and work in progress. The relationship between cash, bank balances and book debts and current liabilities like overdraft, trade and expense creditors and other current debt. |
| Ratchet |
A mechanism whereby management’s equity stake may be increased (or decreased) on the occurrence of various future events, typically when the institutional investor returns exceed a particular target rate. |
| Risk Capital |
The shareholders’ funds in a business, which are always the last to be paid out in liquidation and which are therefore at the highest risk. |
| Sale and Lease Back |
The sale by a business of an asset (usually a property) to a finance house, which then leases the asset back to the business. A method of realising the value of an asset whilst retaining its use. |
| Sales Ledger Finance |
See ’Factoring’ and ’Invoice Discounting’ |
| Security |
An asset or assets charged to a lender to secure a borrowing. Also used to describe a guarantee or warranty. |
Self Help
(in the context of this site only) |
Looking for finance within your own business by better (financial) working methods |
| Sensitivity Analysis |
Illustration of how the financial projections in the business plan change, if the key assumptions are altered. |
| Shareholders Agreement |
This sets out the terms of an investment (usually venture capital or business angel). It often sets out the duties and obligations of the management team. |
| Stock |
The stock of goods for sale held by a business, often including raw materials and partly finished goods or work (work in progress) |
| Stock Turn |
The value of stock held in relation to the annual sales of the business. |
| Trade and Stocking Finance and Revolving Trade Facilities |
See Trade Finance |
| Trade Finance |
An imprecise term covering a number of different activities like seasonal and stocking finance, as well as import and export finance and funding for large one-off transactions. |
| Venture Capitalist |
The British Venture Capital Association defines venture capital as “a means of financing the start-up, development, expansion or purchase of a company, whereby the venture capitalist acquires an agreed proportion of the share capital (equity) of the company in return for providing the requisite funding”. |
| Warranty |
A document signed by shareholders providing legally enforceable assurances about the status of a company, particularly about taxation matters. |
| Working Capital |
The cash a company needs to operate on a day-to-day basis, particularly to fund the gap between trade credit and what is required to buy raw materials, work in progress, stock and trade debtors.
Whatever the reason for requiring funding, you must be well-prepared. Around one in ten of business loan applications are rejected, so you must make sure that you maximise your chances.
Preparation
The bank will expect you to know the market and have prepared all the numbers before approaching them. You must produce a clear, resilient business plan with positive (and realistic) cash flow forecasts.
It is worth speaking to a business advisor at your local Business Link or to your accountant. They will be able to provide you with sound advice and will help you draw up a solid business plan if required. Even the banks themselves provide guides on the sort of things they are looking for.
Click here to find out more about the business plan.
Credit references
Make sure that you verify your credit references before you approach the bank as they will check your credit references to assess whether you are an acceptable risk.
A credit report run on your business will include such things as your financial results, how long you take to pay your bills, court judgements, outstanding mortgages, credit recommendations and risk assessments. This can be obtained from Dun and Bradstreet.
Banks will also have their own credit assessment. Each one will have a different credit scoring system but all will assess the following:
- How good your security is.
- The proportion of financing required in debt (the less the better) and the strength of your balance sheet.
If you want to put more share capital into the business, this may reduce the interest rate imposed by the bank.
- Cash flow projections. They should be realistic and demonstrate that repayments can be comfortably made.
- The previous banking record.
- Previous financial performance of the business
- A full developed business plan with realistic financial forecasts.
- The cost of the financing for the bank.
By scoring well in the credit scoring system, you will also be in a position to negotiate more favourable borrowing terms.
Your checklist
According to the British Bankers Association, bank lending decisions are made around the CAMPARI model. When you approach your bank, you should make sure that the following questions can be answered either by you or by your business plan:
Character
Is the customer trustworthy with a good credit history?
Has he/she the experience and determination to make the plans a reality?
Ability
Is the customer capable of achieving what the business plan proposes?
Is the business plan clear and rational, showing projected and realistic cash flows?
For existing businesses, what is the profitability and trading history?
Has any market research been carried out/Does the customer know his market?
How good is the product?
Does the customer have the necessary experience?
Margin
How risky is the proposal, and what interest rate would reflect this risk?
Purpose
What is the purpose of the loan, and its relevance to the business?
Does the demand for the product or service justify the investment?
Is the type of finance being requested suitable?
Amount
Does the amount seem too little or too much?
How much is the proprietor putting in himself?
How have they worked out the amount asked for?
Tip: Ask for enough money, allowing for a margin of error in your forecasts. But don’t ask for more than you need, you’ll just pay more interest!
Repayment
Are they able to generate enough money to repay the loan and interest?
Insurance
Is there a contingency plan for repaying if things don’t work out as expected?
Can they provide any security against the loan in case things don’t work out?
Managing your bank relationship
The relationship that you build with the bank is extremely important. Whatever else you do, don’t forget these key points:
- Build a good relationship with your bank manager. They need to have confidence in your ability to run your business and manage your cash.
- Always communicate – whether the news is good or bad, keep your bank manager informed.
- Insist on a personal contact at the bank and talk to him or her regularly.
- Provide information without delay if the manager asks for it. Banks often say that the first indication of trouble is when the information stops arriving.
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