CandidCapital

Asset finance

Finance for the acquisition of fixed assets (as oppposed to current asets) - more usually available for the plant and machinary type of assets and linked to a fixed charge over the equipment.

Assets

Those items of value which are employed in the business. They may be physical (land & buildings, plant, machinery, materials etc) less tangible (cash, bank balances, debtors etc) or completely intangible (goodwill or value ascribed to R&D, intellectual property rights etc).

They are normally refered to as "current" ie those which continually turn over as the business operates and "fixed" which remain and are used long term in the business.

Bad debt provision

Reserve fund created in the books of the business to cover the eventuality that all the business' debtors may not honour their debts. The provision may be specific ie related to one or more identified debts or general in terms of a prudent allowance for the fact that bad debts cannot be totally prevented.

Base rate

An interest rate taken as a base from which other (lending) rates will be calculated by the addition of a margin eg 2% over base rate.

There are in fact many base rates, for example each of the major banks has its own but in practice in a competitive market the numerical level is the same for most of the time. The Finance Houses have a base rate (FHBR) and so on.

Capital allowances

Cashflow

Certain financial transactions eg provision for depreciation only involve book-keeping entries whereas others involve the payment or receipt of money in the form of cash (or cheques which can be turned into cash through the bank acccount).

The cashflow of the business looks at the impact of the inflows and outflows of cash upon the level of cash or liquid funds avaliable to the business - which is a crucial aspect of the business' ability to pay its debts as they fall due.

Cashflow forecast

Estimated projections of how the level of liquid funds in the business will fluctuate in light of presumptions regarding operating factors. They can be produced as a series for different factor values eg best case, expected and worse case forcasts which will indicate the sensitivity of the business to changes in the operating factors.

Charge

A legal term for the contractual granting by the "owner" (chargor) of certain rights over property/assets to someone else (chargee) for the purpose of creating security (ie probability that the chargee's position will be protected eg borrowing will be repaid).

Documents creating a charge are inevitably complex and couched in legal language but essentially the rights allow the chargee to have regard to the value of the property and may be in two forms - legal and equitable, the former being the more powerful rights in that the chargee can take action without need to resort to the courts.

It is also possible if one charge exists for a second or subsequent charge to be given over the same asset(s) but the holders of "prior" charges will have "prior" call on the value of the asset(s) for their protection. Whether this is done inevitably depends on the actual value of the asset(s) and the amounts required for protection by each holder.

Development Capital

The term relates esentially to an existing business which has reached the limit, in terms of the size/scale of operations which can be sustained by its curent capital base, where development capital is the additional capital required to enable it to grow and continue to increase the scale of its activities.

Envy ratio

Equipment Leasing Association

Trade association for those businesses which specialise in the leasing of equipment.

Equity

In legal terms this is a shortened form of "Equity Share Capital" which is defined by s744 of the 1985 Companies Act as meaning "in relation to a company, its issued share capital excluding any part of that capital which, neither as respects dividends nor as respects capital, carries any right to participate beyond a specified amount in a distribution".

Colloquially it tends to be taken to mean the shareholders' stake in the business in its widest sense, including all forms of share capital, accumulated reserves and even some forms of loans provided by the shareholders.

FHBR

Finance Houses Base Rate (see Glossary - Base Rate)

Finance House

Originally a business which provided finance for the acquistion of items by means of the hire purchase contract method (see Glossary - Hire Purchase). In recent years the range of services offered has expanded into areas such as asset finance, leasing, lease purchase, personal loans etc.

Finance Houses Association

Trade association for the businesses which originally provided hire purchase finance, but which have in recent years broadened their range of services into asset finance, leasing, lease purchase, personal loans etc.

"fire sale"

A situation in which circumstances dictate that in order to obtain funds, assets have not only to be sold, but sold immediately or within a very short timescale. This situation almost inevitably means that a sale has to be contracted at a very poor price.

Fixed charge

A form of charge (see Glossary) which "attaches" to the asset(s) immediately it is entered into as opposed to a floating charge (see Glossary).

The terms of the charge will inevitably preclude the giver of the charge from dealing with the asset(s) without the prior consent of the holder.

Floating charge

A type of charge given by way of security over some or all of its assets by a company. Note - the concept is peculiar to companies - sole traders and partnerships are not able in law to give this form of charge.

As its name implies it "floats" ie hovers over the assets specified in the charge and while it is still floating the company is free to deal with the assets "in the normal course of its business". Thus it is ideal as a means of enabling a company to utilise its current assets (ie those continually turning over) as security for borrowing without creating a vast problem of continually obtaining permission to deal with those assets.The protection offered to a lender by such a charge is less than would be provided by a fixed charge over the same asset(s) but it has the necessary flexibility.

The document setting out the terms of the charge will specify certains circumstances in which the floating charge will "crystalise" which means that the charge will cease to hover over the assets but will descend and attach to the assets and in so doing will become a fixed charge from that point on.

Hire purchase

A form of contract whereby the hirer agrees to make regular payments to enable him to take possession of and use somthing subject to the proviso that after he has paid hire charges for a predetermined period of time he will have the right to purchase the item outright - for a purely nominal sum. Ownership of the item remains with the other party until the right to purchase has been exercised.

The hire charges are normally calculated as a fixed sum payable at regular intervals of an amount sufficient to ensure that over the period of the contract the total amount paid will cover the capital cost of the item together with interest thereon at an appropriate rate.

Usually employed as a means of financing the acquisition of items such as plant, machinary, equipment, motor vehicles etc.

Interest rate margin

The margin ie difference between two interest rates. The most common being a margin over base rate at which banks will lend.

Junk Bond

A form of loan stock carrying an interest rate significantly higher than the norm and esentially used in lieu of equity if necessary in situations such as MBO's MBI's etc.

Normally a financing structure would seek to achieve a position where share capital investment plus normal (bank etc) borrowing secured against assets of the company were sufficient for the business needs. Where however there is insufficient asset backing for this to be achieved the gap may be bridged with Junk Bond borrowing which, since it is unsecured and quasi equity has a high risk attached to it and thus a very high interest rate has to be offered to persuade investors to subscribe.

If the business runs in to difficulties the bond holders have no protection - hence their bonds will be "junk".

Lease purchase

(see also Glossary - Leasing)
The essence of leasing is that the ownership of the asset remains with the lessor while the lessee has the use. Lease Purchase adds on the right for the lessee to purchase the item leased upon certain terms which willl vary with the length of time for which it has already been leased.

This achieves the same result as asset finance (see Glossary - Asset Finance) but without the complication of needing to take a fixed charge over the asset since ownership remains with the lessor until full payment is received.

In law there is no difference between Lease Purchase and Hire Purchase (see Glossary - Hire Purchase)

Leasing

Contractual arrangement under which "possession and use" of something is enjoyed while it remains owned by someone else. The lease is invariably a long and complex document placing many obligations on both parties but the core feature is the provision of an asset by one party and the payment of "rent" by another.

Originally restricted to land the practice has grown in recent years whereby other forms of property are leased, mainly of the plant, machinary and equipment variety. It is essentially a means of making expensive items available to a business without the need for major injections of capital.

Liabilities

The obligations which the business has to make payments to others (creditors) or its owners (who provided the business capital).

Normally classified into "current" (creditors, bank overdraft and such items as tax, VAT, hire purchase etc due within the next 12 months), "long term" (term loans, debentures, borrowings etc due for repayment after 12 months) and capital (being the permanent funds invested in the business).

LIBOR

London Inter-Bank Offer Rate, ie the rate at which the banks will offer to lend money to each other in the specialised market in London. It fluctuates continually during the day and is thus not strictly a base rate although it is used as a kind of base rate in that lending rates can be linked to it, eg LIBOR + 2%. In this type of lending contract the LIBOR rate will be fixed for a period (say 3 mths) and will be the rate available in the market for that period at the time the lending contract was struck.

Loan

Any finance where there is a contractual obligation to repay the principal and, usually, to pay interest at a pre-determined rate ('fixed rate') or a margin above a base rate, such as LIBOR. In Islamic banking, to comply with Sharia law, interest is replaced by a profit share that is a pre-determined amount charged for providing the loan facility. A loan may or may not be secured.

Mortgage

To all intents and purposes this is the same as a charge (see Glossary) which was a legal device created by the Law of Property Act 1925 to be a more convenient way of achieving the same object as the mortgae. There are however differences of a technical legal nature which your legal advisor could explain (if you were desperately interested!).

Off balance sheet

A term used to describe activities, particularly involving significant borrowing or other liabilities, by a company which were not accounted for in the company's own balance sheet - hence it was "off balance sheet".

This was achieved by undertaking the activities through the vehicle of another company whose capital was structured in such a way that it did not fall within the statutory definitions of subsidiaries or associates thereby avoiding a need to produce a consolidated balance sheet which accounted for those activities.

The changes introduced by the Companies Act 1989 have (if not elliminated it entirely) considerably reduced the scope for this kind of "creative accounting".

Overdraft

A type of borrowing facility which has been available for very many years and is essentially of a revolving nature although contractually repayable on demand.

It is not subject to a pre-determined structured repayment programme and is primarily provided by banks in association with a normal current account. Cheques can be drawn on the account creating a debit balance so long as the agreed figure which limits the extent to which the account can become "overdrawn" is not exceeded. The account holder is free to pay funds into the account and draw further cheques on the account on a continually revolving basis (for the period of the agreement) so long as the limit is not exceeded

Par

A company with share capital must, in its Memorandum of Association, state the amount of share capital with which it is to be registered and the division of that capital into shares of a fixed amount each. The fixed amount is known as the nominal value of the share which cannot be issued at a discount from that value, but it can be issued as partly paid, carrying the obligation to pay the balance at some future date.

To issue the shares at "Par" is to obtain for each share value equal to the nominal value at the time of issue.

Principal

In relation to the borrowing of money the principal sum (or just principal) is the amount which was originally borrowed.

For example loans may be repaid by (say) monthly installments which will be partly repayment of principal and partly payment of interest or by periodic payments of interest and repayments of capital by separate and distinct payments.

Quoted

In relation to shares (and loan stock, debentures etc) means that they are quoted on a recognised Stock Exchange in the UK or abroad as appropriate. This requires that at least one of the market makers on such an exchange must undertake that he is prepared on a continuous basis to deal in the shares and quote a price at which he will buy or sell if called upon to do so.

With the development in recent years of subsidiary markets such as the USM (Unlisted Securities Market) and OTC (Over the Counter market) the position is not quite so clear cut as it once was.

Security

In layman's terms it is some form of "hold" on the property/asset(s) of another which will make one's position more secure ie markedly increase the probability that whatever you wish to happen will happen. More significantly however is the fact that if "it" does not happen you will have recourse to the value of the property as compensation.

There are a number of ways in law in which this can be achieved, not all being appropriate in any given circumstances and each having their strenghts and weaknesses. The most frequently encountered way of achieving this hold or appropriate rights over the property is by way of a charge (see Glossary).

Service

Solvency

There is no precise definition. However the Insolvency Act 1986 (s 89) refers to a "Statutory declaration of solvency" being a declaration to the effect that .... will be able to pay its debts in full within a specified timescale (not to exceed 12 months).

Solvency is thus a relationship between ability to pay debts and time. ss 122 covers the powers of the court to wind up a company of which the main reason is inability to pay debts and s 123 defines inability to pay debts, the main definition being if it is proven that debts cannot be paid as they fall due.

This latter point is crucial since although inability to pay debts will be presumed if the assets are less than liabilities (including contingent liabilities) a court may still order a winding up if the assets exceed liabilities but the debts still cannot be paid as they fall due.

Stock

what variety ? stock -vs- shares, materials etc or both ?

Term loan

Loan granted for a predetermined period of time to which the lender is commited provided that the borrower does not breach any of the provisions of the agreement which covers the loan.

Tranche

A block of shares, loan stock etc.

For example a company may be formed with an authorised capital of (say) £400,000 but initially only require £100,000 with a further £200,000 needed in a years time. The company will thus issue a first tranche of £100,000 followed by a second tranche of £200,000 a year later.

Unquoted

In relation to shares etc means shares which are not quoted on a recognised Stock Exchange (see Glossary - Quoted).

Venture Capital

Venture capital comprises the funds which are to be invested in the long term capital base of a company. Although an investor of venture capital may invest partially by way of loans, which may or may not be secured against assets, the essential feature is that part at least will be invested in the higher risk equity share capital of the company.