A Glossary of Alternative Business Financing Terms
The world of alternative finance can be a complicated one. This is especially true for a small business schooled in familiar terms such as overdrafts, loans and grants now looking to other methods of start-up financing that they perhaps struggle to comprehend. Indeed, The Telegraph makes the valid point that many business owners are 'ignorant' of alternative finance.
With a reported 60% of 300 businesses surveyed having sought additional funding over the past year, usually as a way of managing short-term cash flow problems, the knowledge seemingly doesn't match up to the demand.
So, in order to help small to medium-sized business owners navigate the tricky waters of alternative financing, ABN AMRO Commercial Finance have kindly prepared this useful glossary of terms commonly heard in the field.
- Acquisition Financing
- This describes a loan offered to a business or consortium seeking to purchase the stock or assets of another company. Also known as a 'buyout' or 'bootstrap' loan.
- Advance Rate
- Should a client have a contractual advance rate of 60% and asks their lender for £100,000, they will be given a loan of £60,000 straight away followed by the remaining £40,000 upon collection of their outstanding invoices. This is what's known as the advance rate and is closely tied into invoice discounting, described in more detail below.
- The valuation of property or stock against which a loan is drawn, the appraisal value is associated with the concept of asset based lending, again described below.
- Asset Based Lending
- ABL is the practice of lending against a client's assets, commonly plants or machinery, property and stock. It is therefore popular amongst manufacturing companies and can be combined with factoring, defined below.
- Bulk Handling
- This term refers to the way the lender handles information obtained from accounting records and reporting, provided by the borrowing client. It is not usually necessary to provide details of the client's payees.
- Commercial Financing
- An umbrella term used to describe the various methods of alternative financing available to companies. It is not to be confused with factoring, as commercial financing assumes that all loans will be repaid, whereas factoring assumes the lender may take a loss should the client not be able to collect monies from outstanding invoices due to insolvency on the part of their payees.
- Double Assignment
- The alignment of a borrower's receivables to the lender.
- Enterprise Finance Guarantee (EFG)
- A way for borrowers with insufficient security to raise finance by having up to 75% of their loan guaranteed.
- Allows businesses with a turnover of under £500,000 to gain access to working capital immediately upon raising of invoices, to the value of 90% of said invoices. As mentioned previously, factoring mitigates against non-payment of receivables through a bad debt protection service on the part of the lender.
- Import Finance
- Also known as trade finance, it is used by borrowers looking to buy from overseas, with up to 100% of the value of the imported goods offered in the form of a loan until the client's UK customer pays for the goods.
- Invoice Discounting
- Similar to factoring, but designed for businesses with a turnover of £500,000 or over.
- Letter of Credit
- Traditionally used in international transactions and therefore import finance agreements, a letter of credit is the lender's way of stipulating that an overseas supplier will be paid for their goods.
- Revolving Credit
- Refers to secured financing on receivables, property or stock in which the outstanding amount changes from time to time.
- Should a borrower take out two or more forms of alternative financing, there is an agreement with the lender that one should take priority over the other(s). This is called subordination.