Christian Debt Recovery

Long Term Debt Equity Equation

October 23rd, 2010 |

Author: Gavin

Business Loans Glossary: Part 3 – Invoice Discounting to Private Equity

This is the third article in this four part jargon busting guide to business loans and finance raising covers ‘invoice discounting’ through to ‘private equity’.

Invoice discounting – Lending money based on the security of a company’s debtors where the borrower remains responsible for the collection process (contrast with factoring).

Initial public offering (IPO) – See flotation.

Internal rate of return (IRR) – The discount rate at which a net present value calculation gives a zero result, which in turn means that the discount rate equates to the return generated by the project or investment.

Joint and several liability – The position in a partnership where all the partners are jointly liable for the partnership’s debts, while each partner is also individually (severally) liable for all the debts of the partnership.

Lease – Arrangement where a finance company purchases an asset and rents it to you. Can be long term finance leases, short term operating leases or contract hire, where you have responsibility for maintaining and servicing the asset

Letter of credit – Document issued by bank to a supplier confirming that the bank will settle their invoice on presentation of the appropriate documents.

Leverage – American term for gearing.

Liabilities – The amounts of money a business owes to others.

Limited liability company (Ltd) – Company where the shareholders’ (members) liability to contribute to the company’s assets is limited to the unpaid amount of the shares that they own which means that they are not liable to contribute any further cash even if the company cannot pay its debts.

Limited liability partnership – New form of partnership structure which gives the partners some protection from the business’s debts.

Liquidity – Availability of cash to meet liabilities.

Listing – See flotation.

Loan to value (LTV) – Ratio of the sum a lender will be prepared to advance to the value of the asset offered as security.

Management accounts – Periodic accounts prepared for use within the business rather than for public filing.

Mark to market – Accounting approach which states assets and liabilities at current market values. Contrast with historical cost convention and also note that this can imply including unrealised profits in accounts (as opposed to the prudence concept).

Matching (1) – The principle that the type of finance should match the type of use the funds are to be put, for example long term stable finance for long term investment, short term flexible finance for working capital requirements.

Matching (2) – Accounting concept, see accruals.

MBI – See buy out.

MBO – See buy out.

Mezzanine – Loans made over and above normal available security.

Mortgage – A term loan secured on property (or when on plant and machinery, a chattel mortgage).

Net present value (NPV) – A discounted cashflow, less the amount of money you have to pay to acquire it.

Nomad – Nominated advisor to a company seeking a stock exchange listing.

Non-status lending – Lending based on the value of the security (such as pawn broking) rather than on an assessment of the borrower’s ability to keep up repayments.

Ofex – A privately traded listing where shares are dealt in on the basis of individual trades. Often used by small companies to obtain speculative money as an alternative to venture capital, but is significantly less liquid than other stock market listing as there are no active market makers trading the shares.

Off balance sheet debt – Types of arrangements such as sale and leasebacks where a business has the equivalent of a loan but without having to show a liability on the balance sheet.

Open market value – How much an asset will fetch if sold on the open market. Also known as fair market value.

Overdraft – The extent to which cash has been drawn out of a current account to leave a negative balance.

Overheads – Expenditure on a business’s indirect costs, those that are not specifically attributable to the costs of particular goods sold.

Overtrading – Trading levels higher than your available cash (or other resources) are able to support, something that often ends in tears.

P/E ratio – Price to earnings ratio – how many times the current level of earnings someone is prepared to pay to acquire an interest in a company. A high P/E multiple usually indicates an expectation of high growth (where E is expected to grow significantly reducing the P/E ratio down to a more normal level). Inverse of yield.

Package lender – See structured loans.

Partnership – Two or more people engaged in business together for profit. See joint and several liability.

Payable – See creditor.

Payback period – How long it will take to recover an investment at current level of earnings.

PBIT – See EBIT.

Personal guarantee (PG) – Agreement that an individual will pay a company’s debt if the company is unable to do so.

Preference shares – A share in the company with rights to dividend payment, superior to ordinary shares, but do not normally have voting rights.

Preferential creditors – Nowadays limited to some sums due to employees, preferential creditors are paid out of the floating charge assets before the floating charge holder, see charge.

Priority agreement – Agreement between lenders to vary the normal order in which their security would rank for payment.

Private company – Any company that is not a public company and is therefore not entitled to offer its shares for sale to the public.

Private equity – US term for investors who undertake buy outs.

The last article in this guide to business loans and finance raising covers ‘property development finance’ through to ‘yield’.

About the Author

Mark Blayney is a business finance raiser and author. For more information on
business loans
or any aspect of finance for owner managed businesses contact him at:

http://www.business-loans-info.co.uk