There is an abundance of jargon within the finance world, but as a rural SME it is important you understand it in the event you are seeking funding for growth.
You should feel confident when discussing your businesses financial needs, and the good news is that it doesn’t have to be complicated.
- Invoice Factoring and Discounting
- Personal Guarantees
- Working Capital
- Soft Asset
- Hard Asset
- Sale and leaseback / HP-back
- Know Your Customer
- Debt Service Coverage Ratio
- Annual Percentage Ratio
Invoice Factoring and Discounting
Factoring is a loan secured against a companies outstanding invoices. A factoring firm will lend upto 90% of an invoice and take on debt management and collecting payment responsibilities.
Once the invoices are paid, the factoring company will make the remaining balance less fees available to the client.
Discounting is similar, the only biggest differentiator is that the payment collections remain the responsibility of the client.
It is common for small ticket and soft asset finance agreements with small businesses that directors are asked to sign a personal guarantee.
This can provide additional security for lenders and enable them to fund equipment that would otherwise be declined.
In the event the business cannot pay, this then becomes the responsibility of the guarantor.
This can sometimes be referred to as a Directors Guarantee (DG) if given by a Director.
Working capital is a cash balance, it can be positive or negative and shows the difference between current assets and current liabilities.
These are assets that do not meet some or all DIMS (Durable, Identifiable, Moveable and Saleable) criteria.
These are assets that do meet the DIMS criteria.
Sale and leaseback / HP-back
This is an arrangement whereby a company sells some of its assets to a lender for a lump sum and leases the assets back. The company releases tied up capital whilst retaining full use of its assets.
Know Your Customer (KYC)
These are due diligence checks that take place when a customer first deals with a lender as part of the lenders anti-money laundering procedures.
The ratio of the amount lent compared to the actual amount of the loan. For instance, most asset finance agreements are typically a 90% Loan-to-Value.
Debt Service Coverage Ratio (DSCR)
The ratio of cash your business has available for paying or servicing its debt.
Annual Percentage Ratio
APR represents the yearly real cost of a loan including all interest and fees. This figure represents the total cost of borrowing so is important to know when you’re comparing finance.