Understanding Finance Terminology
When starting or growing your business, you’re bound to be on a constant learning curve – and for someone without a background in finance, some of the jargon used can make things confusing.
Finance affects every business decision – from the number of employees hired, to your annual budget and long-term goals. Understanding finance is a skill that can help you not only individually, but have a big impact on the future of your business, and learning how to make sense of the most commonly used finance terminology can make the whole process easier when applying for finance, as well as help business owners feel more confident when discussing their needs.
We’ve put together a handy list of some of the most frequently used terms that you might come across in your search for business finance, to help you feel confident when deciding what type of finance is right for you and preparing your application.
Affordability checks
An affordability check involves determining whether you can afford to repay a loan when you borrow.
Assets
These are items of value that a business owns. They can be physical, tangible things, such as machinery, tools, vehicles, premises, computers, office furniture, etc, or non-physical, intangible things, such as intellectual property, brand identity, “goodwill” (ie reputation), customer base, in-house systems, etc. Both can be important when valuing a business for sale.
Asset finance
It is a finance option businesses can use to grow by acquiring much needed equipment, such as vehicle fleets, farm machinery and even aircrafts. You pay a regular amount to use the asset over an agreed period, avoiding the full cost of buying outright.
Assumptions
Financial assumptions are the guidelines you give your business plan to follow. They can range from financial forecasts about costs, revenue, return on investment, and operating and startup expenses. Basically, financial assumptions serve as a forecast of what your business will do in the future.
Balance Sheet
A balance sheet is a financial statement that shows a business’s assets and liabilities at a given point, while detailing shareholder equity (ie the amount shareholders would receive if a company’s total assets were liquidated and all debts repaid). Bottom line is the last line on a balance sheet that shows total profit or loss.
Bankruptcy
Bankruptcy is a legal proceeding initiated when a person or business is unable to repay outstanding debts or obligations.
Bridging loans
A business bridging loan is a type of commercial loan that allows you to borrow money over a shorter period of time than a typical bank loan, though often at a higher rate of interest.
Business loan
Business loans are very common and one of the first options for businesses looking to raise finance. The lender provides money that you, as the borrower, pay back, with interest, over an agreed period.
Capital
The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth. The four major types of capital include working capital, debt, equity, and trading capital.
Cash flow
Cash flow (or cashflow) describes the relationship between cash entering and leaving a business. Positive cash flow means more cash entering a business than leaving it. Cash-flow problems arise when you spend more than you make or when you don’t have sufficient cash to pay your short-term debts. Poor cash-flow management can kill even profitable businesses.
Cash flow forecast
Cash flow forecasting estimates the amount of cash that will be coming in and going out of the business to predict future cash balances.
Credit and fraud checks
A credit check, also known as a credit search, is when a company looks at information from your credit report to understand your financial behaviour.
Creditor
An accounting term used to describe a person or business to whom/which your business owes money. Your suppliers can be described as trade creditors. A debtor is a person or business that owes money to your business.
Credit broking agreements ( can also be called ‘broker’, ‘affiliate’ or ‘commission’ agreements’
Essentially a credit broker links somebody looking for consumer credit, a debtor with a company or individual willing to provide it, and a creditor, normally for a commission.
Debtor
A debtor is a person or business that owes money to another individual or institution.
Debt Relief Order (DRO)
A Debt Relief Order (DRO) is a way of dealing with your debts if you can't afford to pay them.
Established business
Let’s Do Business Finance counts an established business as any enterprise that has been trading for over 2 years.
Equipment leasing / purchasing
Equipment leasing is a type of financing in which you rent equipment rather than purchase it outright. You can lease expensive equipment for your business, such as machinery, vehicles or computers.
Loan ‘facilities’
An arrangement where a person or organization can borrow money up to a particular amount if and when they need it.
Government backed loans/Government backed guarantee
Government-backed business loans work very much like commercial business loans offered by banks and other lenders, with the exception that they are funded or guaranteed by the UK Government. This type of finance makes essential funding available to new and existing businesses owners.
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement ( IVA ) is an agreement with your creditors to pay all or part of your debts. You agree to make regular payments to an insolvency practitioner, who will divide this money between your creditors. An IVA can give you more control of your assets than bankruptcy.
Interest payments
Interest is the price you pay to borrow money or the cost you charge to lend money. Interest is most often reflected as an annual percentage of the amount of a loan. This percentage is known as the interest rate on the loan.
Liable/Liabilities
The opposite of assets, liabilities are what you owe other parties, such as bank debt, wages, and money due to suppliers, also known as accounts payable.
Open Banking
Open Banking refers to the process of banks and other financial institutions opening up data for regulated providers to access, use and share.
Performance indicators
Key performance indicators (KPIs) refer to a set of quantifiable measurements used to gauge a company's overall long-term performance.
Personal Survival Budget
A personal survival budget shows you the minimum amount you need to take out of the business as drawings. This is based on how much you need, not how much you would like to draw from the business each month. Remember, drawings are in anticipation of the profits the business will make.
Principal Private Residences
A Principal Private Residence (PPR) is a house or apartment which you own and occupy as your only, or main, residence.
Profit & Loss statement
Profit and loss (P&L) statement refers to a financial statement that summarises the revenues, costs, and expenses incurred during a specified period.
Recovery Loan
The Recovery Loan Scheme (RLS) is a government scheme aimed at supporting access to finance for UK businesses.
Start Up Loans
Start Up Loans are personal loans that are used to start a new business or grow an existing business that has been trading for less than 36 months. A Start Up Loan is a government-backed personal loan available to individuals looking to start or grow a business in the UK. All owners or partners in a business can individually apply for up to £25,000 each, with a maximum of £100,000 available per business.
Subsidy
A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government.
Loan ‘Terms’
The ‘term’ of a loan refers to the repayment period of the loan, so how long you have to make the repayments.
Trade finance
Trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce.
