01/05/2014

By Tracy Ewen, Managing Director at IGF,

Commercial finance can be a confusing area for accountants and business owners to navigate. An online search for accounting terms can often lead to glossaries packed with over 1000 entries – and many of these are almost impossible to understand.

So, we’ve compiled a list of the most important accounting terms related to credits, debits, finance and cashflow, as these form the lifeblood of any SME. We’ve tried to explain them in a way that will make the most sense to company directors.

Glossary of Commercial Finance Terms

Accounts Receivables – Legally enforceable claims made by a business to its customers, usually in the form of an invoice, as a method of payment for goods or services within an agreed frame of time. Accounts receivable are considered an asset and therefore show up on balance sheets under this category.

Approved Debt – A debt that is accepted by a third-party as eligible for funding, part of the Invoice Finance process. See ‘Invoice Finance’.

Arrangement Fee – Fee which is charged on the commencement of the agreement.

Asset Finance – A loan used to obtain tangible assets such as equipment. The repayment of the loan is spread out over the economic life of the asset. This results in the loan being fully paid off by the time the equipment is in need of replacing.

Asset-Based Lending – Many businesses have much of their capital tied up in physical assets, such as inventory and property. Using asset based lending, they can release the cash held within those assets, thereby gaining access to substantial sums of working capital.

Assignment of Debt – When a third-party is assigned a debt by a company (such as an invoice) with the intent of handling the debt on behalf of the company. See ‘Factoring’ and ‘Invoice Discounting’.

BDP – The charge for Bad Debt Protection on invoice value on selected debtors.

Cashflow – The measurement of money that’s going in and out of a business.

Debtor finance – A generic description of financing involving the value of a company’s accounts receivable ledger (generally invoices), this includes: invoice discounting, factoring, cash-flow finance, asset finance, invoice finance and working capital finance.

Discount Charge – The charge calculated daily on the debit balance of the Current Account and charged monthly.

Document Fee – Fee charged for the preparation of the documentation for the facility and charged to a current account within 30 days of the commencement of the facility.

Export Limit – The limit set in respect of debts from companies incorporated outside the UK.

Facility Limit – The maximum pre-agreed limit that the debit balance of the current account must not exceed at any time.

Factoring – A type of Invoice Financing that involves selling a percentage of unpaid invoices to a third-party to receive the money owed early. The third-party will then collect the full amount from the customer and pay you the remaining percentage when full payment is received minus an administration charge.

Funding Limit – The default limit set in respect of all debts due from a particular debtor at any time.

Growth finance – A type of finance aimed at small and medium enterprises (SMEs). This differs from other forms of finance in that a company’s eligibility for loans and financing is assessed on their viability as a business, rather than their collateral or track record.

Invoice – A bill that is issued to a buyer by a seller. A standard invoice typically includes information on products or services, their quantities and the agreed prices. The terms of payment are usually included as well, but not always.

Invoice Discounting – A type of Invoice Financing that is similar to factoring, but the company retains responsibility for collecting its own invoices.

Invoice Finance – Using a third-party to help acquire advance payment on invoices. There are two types of invoice finance: Factoring and Invoice Discounting, either can be disclosed or undisclosed.

Minimum Base Rate – The minimum rate used in calculation of the discount charge.

Minimum Service Fee – The minimum amount of service fee payable in any year and charged in any month as the amount equal to the difference between 1/12th of the minimum service fee and the actual service fee applied during any month (if less).

Overpayment Fee – Fee for payments on accounts outside the availability calculation.

Prepayment Percentage – The proportion of any approved debt that will be paid upon notification.

Purchase Ledger – A system that holds information on all of a business’ individual creditors. This contains information on invoices and credit notes (credit notes are similar to invoices, but are used to document the value of an order that a buyer returned or did not receive).

Recourse Period – The time at which a debt moves from being approved to disapproved.

Refactoring Fee – Fee charged to each debt that remains unpaid after a specified period.

Service Fee – Fee charged against the face value of the notified invoices, subject to a minimum aggregate amount per annum.

Working capital finance – Working capital is the capital of a business that is used in its day-to-day trading operations. This is calculated as the current assets minus the current liabilities; this is usually comprised of trade debtors (money owed to company) and creditors (money owed by a company). Working capital finance involves third-parties, using a company’s assets to offer a percentage of the assets’ value as a loan, to bridge the gap between payments to creditors and receiving payment from debtors.