Glossary

Arrangement/application fee

A one-off fee you may need to pay the lender to arrange finance. You may also be charged for any change or exceptional request.

Annual percentage rate (APR)

An estimation of the rate charged for your borrowing over a 12-month period expressed as a percentage. A lender is legally obliged to tell you the APR on your loan upfront.

Asset Finance

Asset finance is a type of finance used by businesses to obtain the equipment they need to grow. It usually involves paying a regular charge for use of the asset over an agreed period of time, thus avoiding the full cost of buying outright. The most common types of asset finance are leasing and hire purchase.

Commercial mortgage

This is quite similar to residential mortgages, in so much as the lender provides finance for a property, but in this case it is a trading premises or other commercial property. Unlike residential mortgages, the terms depend on a number of factors, such as the industry sector and risk profile of the business.

Collateral

An asset of value that can be used to guarantee a business loan.

Credit rating/score

A point system used by banks, lenders and other commercial businesses to determine the creditworthiness of a person or business. Your business credit score is separate from your consumer one so you need to monitor both. Most credit scores take the following factors into account: the amount your business owes; your payment history; information from public records, such as late payments and County Court Judgments (CCJs); and the length of your credit history.

Credit reference agency

These organisations collect information on adult individuals and businesses and use it to give lenders information about potential borrowers in the form of a credit score or rating. The three main credit agencies in the UK are Equifax, Experian and Callcredit.

Debenture

A company or corporate borrower makes an agreement with a lender that gives the lender a charge over the assets of the borrower to secure the loan. The debenture is registered at Companies House for all to see and lays down the rights of the lender and obligations of the borrower. The borrower is not permitted to dispose of the asset without the lender's consent.

Early repayment charge (ERC)

It may seem like you're being charged for good behaviour, but if you want to pay off your loan before the agreed term is up, you'll often have to pay an early repayment charge to the lender. This is also known as an exit fee. It could amount to a month's interest, or more, and is usually higher the earlier you want to repay.

Headline rate

The headline rate is the APR (annual percentage rate) at which a loan is advertised. This may not be the rate the lender will give you when you apply - you may end up paying more, or in some cases less. Lenders must offer the headline rate to 50% of successful applicants, but you may not be one of them.

Interest rate (fixed vs variable rate)

If you agree to pay a fixed interest rate on your loan, the interest rate will not go up or down over the borrowing period. You'll pay the same rate for the whole term. If you choose to pay a variable interest rate, the interest you pay will go up and down in accordance with market rates.

Invoice Finance

Invoice financing is where a third party agrees to buy your unpaid invoices for a fee. Invoice financiers can be independent, or part of a bank or financial institution. There are 2 types of invoice financing in the UK - factoring and invoice discounting.

Lending criteria

You'll need to be able to meet certain requirements, such as being over a certain age or having a certain income level, before you can apply for a loan.

Management accounts

Management accounts provide a historical perspective of a business. They help plan and control the activities of a business over a specific period, often referred to as a trading period. While there is no legal requirement to prepare management accounts, lenders will usually ask to see them as part of the application process for business finance.

Non-utilisation fee

This fee is charged on the undrawn balance of a committed lending facility. It's the minimum amount in fees you will pay irrespective of the amount you borrow.

Personal guarantee

A personal guarantee is an agreement whereby an individual, usually a director, is responsible for the debt if the borrower fails to repay it. This means that personal assets such as the family home are in jeopardy if the creditors call in the loans on a business.

Security

You can offer something you own as security or collateral on a loan, making it a secured loan. This could be property or stocks and shares, or something else of value. The lender 'holds' this to protect their investment when they lend you money. In return, the debtor often gets a lower interest rate, but people can risk losing their home if they can't keep up the loan repayments.

Unsecured loan

This involves borrowing money over a fixed term with no security. Many small businesses use this type of finance where they don't have secured assets to borrow against. Examples include credit cards and personal loans. However, it can be an expensive way to borrow money and is dependent on your credit rating.