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800fund Terms Glossary
A third-party payee is a person/organization who has been appointed to oversee payments for those unable to do this for themselves. Typically, this term you will meet in medical community. It is entity (other than the patient or the health care provider) that reimburses and manages health care expenses. Third-party payers include insurance companies, governmental agencies, and employers.
When a bank starts to tighten lending to small business, it looks to reduce the risk of issuing a small business loan. A provider making a loan approval will review a small business loan in the context of the five C`s that are:
- Character – refers to a borrower`s reputation to evaluate how trustworthy he/she is to repay.
- Capacity – is monthly and annual revenues.
- Capital – business owner investment into his/her own company. It shows confidence in the business and the ability to repay a debt.
- Collateral – anything, such as property or large assets, that secures and guarantees a loan.
- Credit Score – is go-no-go measure for most lenders.
An Account Debtor is any person or company that owes a balance of an account to another party.
Accounts Payable or payables are debt money that must be paid off within a given period of time in order to avoid default.
Accounts Payable Aging is a periodic report that categorizes a company’s payable according to the length of time an unpaid invoice has been outstanding. It is a critical management tool that helps determine the financial health of a company by its ability pay its bills on time.
Accounts Payable Financing, also known as Vendor Financing, is a relatively new form of credit. It is based on the creditworthiness of the large credit worthy buyer. AP Financing a source of working capital as the business owner doesn’t have to use their own cash flow or any of their own company resources. This form of financing builds up a great relationship between the business owner and various vendors.
Accounts Receivable is money owed to Business Company by their customers (another small business owners or individuals) for products or services provided on terms. Accounts receivable is listed as a current asset on the business owner’s balance sheet. The total amount of accounts receivable is typically limited by a credit limit, based on the finances of the customer and its past payment history with the company.
Accounts Receivable Aging is a periodic report displaying all not yet paid receivable balances broken down by customer and month due.
Accounts Receivable Financing is when a company sells its accounts receivables, at a discount, to a factor company, that assumes the risk of the debtors account and receives cash as the debtors settle their accounts.
Asset Based Lending is a secured business loan in which borrower pledges any asset as a collateral. The assets that are usually provided as collateral for the unsecured loan include physical assets like real estate (land, physical properties, company inventory, equipment, or goods on hand). If the borrower fails to repay the loan, the lender can sell the assets in order to refund its loan amount.
Assignee is an individual or a company to whom payments, proceeds, property, title or rights are transferred by another under a legal agreement.
Automated Clearing House is an electronic payment system established to transfer funds between accounts.
Business to Business (B2B) Sales transaction that occurs between two companies, as opposed to a transaction involving a consumer (called B2C) Business to Consumer (B2C) Sales transaction that occurs between a company and a consumer, as opposed to a transaction between two companies (called B2B). Business to Government (B2G) Sales transaction that occurs between a business and government.
Balance Sheet is a statement that shows the financial position of a business company on a specified date (usually the last day of an accounting period). The first part of a balance sheet shows the productive assets of a comapny, and the second part shows the financing methods (such as liabilities and shareholders’ equity).
Bill & Hold is when a vendor enters into purchase agreement with a customer, but does not ship the goods to the buyer after a certain date. To transfer the goods the buyer must make payment for the goods or services, that the goods be segregated from all other similar goods by the seller, and that the goods be finished and ready for use.
Bill of Landing is a legal document in the shipping process of any goods. It is issued to a shipper by a carrier describing the goods to be shipped, acknowledging their receipt, and stating the terms of the contract for their carriage. It is also called consignment note or waybill.
Borrowing Base is the amount of money a lender will loan to a company, based on the value of the collateral pledged be the company. As collateral a company can use inventory, company equipment or accounts receivable.
Break-Even Point is when a company’s revenues equal all the invested costs. There is no loss or profit.
Burn Rate is a negative cash flow. It is a measure for how fast a company will run out of its shareholder capital or require additional funding.
Cash against documents is a transaction in which the buyer assumes the title for the goods being purchased upon paying the sale price in cash.
Chargeback is the return of funds to a consumer, forcibly initiated by the issuing bank of the instrument used by a consumer to settle a debt.
Client Concentration is over-reliance on one or a few big customers that account for 8 percent or more of a company’s total sales. Customers that have similar characteristics or common ownership may also be considered a concentration. Client concentration has serious drawbacks for small companies.
Collateral is specific asset (land, building, inventory, etc.) pledged by a borrower to secure a loan or other credit.
Consignment Sale is trading arrangement in which a seller sends goods to a buyer or reseller who pays the seller only as and when the goods are sold. The seller remains the owner of the goods until they are paid for in full and, after a certain period, takes back the unsold goods.
Contra Account is account considered to be an offset to another account. Generally established to reduce the other account to amounts that can be realized or collected.
Contract Financing is working capital specifically designed to aid small businesses that need an advance on their contracted work before a service is completed, but not necessarily before work on a product is complete.
Credit Insurance protects the loan on the chance that you can’t make your payments.
Credit Memo is a form or letter sent by a seller to a buyer, stating that a certain amount has been credited to the buyer’s account. A credit note is issued in various situations to correct a mistake, such as when (1) an invoice amount is overstated, (2) correct discount rate is not applied, (3) goods spoil within guaranty period, or (4) they do not meet the buyer’s specifications and are returned.
Current Assets are assets that can be converted into cash within the next 12 months or operating cycle, such as inventory and accounts receivable. The value of current assets is used to calculate the working capital ratio.
Current Liabilities are company’s financial obligations that are due over the next 12 months or operating cycle, such as short-term debt and accounts payable. The value of current liabilities is used to calculate the working capital ratio.
Current Portion of Long-Term Debt is a value on a company’s balance sheet which indicates how much long-term debt must be repaid within the upcoming fiscal year. This includes any debt which has its final payment due in the upcoming year; any other debt is simply recorded in the long-term debt field. This value can be important because if the current portion is very high, a concern would be that the company might not have enough cash on hand to cover that debt.
Days Sales Outstanding is the amount of time a company will have before a payment can be considered income received.
Debt Service Coverage Ratio is a measurement of a property’s ability to generate enough revenue to cover the cost of its mortgage payments. It is calculated by dividing the net operating income by the total debt service.
Debtor-in-Possession is a company that continues to operate while going through Chapter 11 (the part of the U.S. Bankruptcy Code describing how a company or debtor can file for court protection).
Deductions are expenses subtracted from adjusted gross income when calculating taxable income, such as for state and local taxes paid, charitable gifts, and certain types of interest payments
Dilution is when the percentage of a business owned by current investors, founders and employees is reduced by the issuance of new shares to new investors. Dilution can also occur when holders of stock options or other similar securities exercise their options.
Discount is the reduction in the price of a security; the difference between its selling price and its face value at maturity. A security may sell below face value in return for such things as prompt payment and quantity purchase. “At a discount” refers to a security selling at less than the face value, as opposed to “at a premium,” when it sells for more than the face value.
Earnings before Interest, Taxes Depreciation and Amortization are fairly standard indicator of a company’s general financial performance.
Factoring is a selling a receivable at a discounted value to a third party for cash
The Federal Acquisition Regulation is the principal set of rules in the Federal Acquisition Regulations System. The FAR System governs the “acquisition process” by which executive agencies of the United States federal government acquire goods and services by contract with appropriated funds.
Financial statement is a formal record of the financial situation of a company including the income statement, balance sheet, statements of retained earnings and cash flow.
Fraud is willful misrepresentation by one person of a fact inflicting damage on another person.
Generally Accepted Accounting Principles conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. The highest level of such principles are set by the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).
Gross Margin, also known as gross profit, is the difference between a company’s revenues and the cost of goods sold (the costs that are a direct result of producing the product or providing a service, such as materials, direct labour, utilities, etc.). It does NOT include fixed costs (overhead costs that generally do not change.
Guaranteed Sale is an arrangement under which a supplier takes back the goods that remain unsold after a specified period.
Indemnification is compensation for (or provided protection against) damage, loss, incurred penalties or from contingent liability
Inspection Certificate is document required usually for import of industrial equipment, meat products, and perishable merchandise, it certifies that the item meets the required specifications and was in good condition and correct quantity when it left the port of departure.
Inventory is the supply or stock of goods and products that a company has for sale. A manufacturer may have three kinds of inventory: raw materials waiting to be converted into goods, work in process, and finished goods ready for sale.
Invoice is A bill issued by one who has provided products and/or services to a customer. In asset-based lending, invoice means account receivable.
Invoice Factoring is the selling of invoices to a third party company to improve cash flow and reduce bad debt. When a business uses invoice factoring, they benefit through an immediate boost to cash flow, while at the same time eliminating the need to process invoices. An additional benefit of invoice factoring is the reduction in bad debt as the third party buyer assumes all risk if the invoice is not paid.
Letter of Comfort or Financial Capability Certification Program is a letter supporting someone who is trying to get a loan
Letter of credit, also known as letter of guarantee, is a document issued by a financial institution guaranteeing payment to a seller if certain conditions are met. The letter of credit serves as a payment guarantee for the seller regardless of whether the buyer ultimately pays or not.
LIBOR Rate is the interest rate charged to short-term international interbank loans. This interest rate is applied to large loans ranging from one day up to five years. LIBOR rates are applied to loans between banks. The most common case resulting from one bank’s need for immediate liquidity borrowing from another bank with a surplus.
Lock Box is a service offered by banks to companies in which the company receives payments by mail to a post office box and the bank picks up the payments several times a day, deposits them into the company’s account, and notifies the company of the deposit. This enables the company to put the money to work as soon as it’s received, but the amounts must be large in order for the value obtained to exceed the cost of the service.
Long-Term Debt is an amount owed for a period exceeding 12 months from the date of the balance sheet. It could be in the form of a bank loan, mortgage bonds, debenture, or other obligations not due for one year.
Merchant cash advance is a quick, easy way to get a business cash advance with no need for collateral, even if you have bad credit.
Notice of Assignment is when one party is holding a right to property, claims, bills, lease, etc., of another party and wishes to pass it along (or sell it) to a third party.
In Non-Recourse factoring, a company sells their accounts receivable to a factor, which then supplies the cash needed to cover the invoices. The difference with non-recourse as opposed to recourse factoring is that the company has no liability with any uncollected invoices. The factor absorbs all the risk. Because non-recourse cold is a higher risk for lenders, the transaction fee sometimes could be higher.
Notification is authoritative or urgent, formal or legal notice.
Paid in Capital is Capital contributed by the shareholders as distinct from the capital reserves generated by the firm as profits.
Personal guarantee is a promise made by an entrepreneur which obligates him/her to personally repay debts his/her corporation defaults on.
Pre-Billing is the issuance of an invoice before the product or service has been provided.
A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to amortization of the principal balance.
Property, plant and equipment (PP&E) is a company asset that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the asset, because even the longest-term assets become obsolete or useless after a period of time.
Prime Rate is the best rate of interest at which a lender provides a loan to the borrower.
Proof of delivery is a receipt signed by a consignee or recipient, confirming delivery of a shipment in good order and condition.
Purchase Order is a buyer-generated document that authorizes a purchase transaction. When accepted by the seller, it becomes a contract binding on both parties.
Purchase Order Funding is a funding option for resellers or distributors of hard goods that lack the funds to pay the manufacturers thereof. Moreover, the sorts of firms that utilize purchase order financing are those that are not considered sufficiently creditworthy by the manufacturers, otherwise they would be allowed to pay their invoices sometime after receiving shipment (and perhaps after receiving payment from their own customers).
Quick Ratio or Acid Test is a measure of a company’s liquidity and ability to meet its obligations. It is viewed as a sign of company’s financial strength or weakness (higher number means stronger, lower number means weaker).
Recourse is legal right of a lender to seek repayment of the loan from the borrower’s unpledged personal property, in addition to the property pledged to the lender as collateral.
Retention is the percentage of payments for a job in process that is held back to ensure adequate performance.
Reverse Factoring or Supply Chain Financing is a financing solution initiated by the ordering party in order to help his suppliers to finance their receivables more easily and at a lower interest rate than what they would normally be offered.
Small Business Administration is a Federal agency which makes loans to small businesses. In most cases, the agency itself does not grant the loans, but rather guarantees the loans from other lenders. The majority of loans provided by the Small Business Agency are to allow the small business to take out loans with longer repayment periods, or with less strict requirements than traditional loans. Along with providing loans, the agency also engages in other activities, such as helping businesses affected by natural disasters, running a venture capital program, and educating businesses on various issues.
SME financing is the funding of small and medium-sized enterprises, and represents a major function of the general business finance market in which capital for different types of firms are supplied, acquired, and costed or priced. Capital is supplied through the business finance market in the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/corporate bond issues; venture capital or private equity; and asset-based finance such as factoring and invoice discounting.
Statement of Work is detailed description of the specific services or tasks a contractor is required to perform under a contract. SOW is usually incorporated in a contract, indirectly by reference or directly as an attachment.
Subordination Agreement is Formal document acknowledging that one party’s claim or interest is inferior (junior) to that of the other party or parties.
Terms of the Sale are delivery and payment terms agreed between a buyer and a seller.
Trade Financing is a loan supplied for manufacturing, processing, distribution, and other commerce related activities.
Turnaround is a sharp, positive reversal in the performance of a company or the overall market.
Uniform Commercial Code is standardized state laws governing commercial transactions, including real estate deals and insurance contract.
Upfront Fee is a fee paid before a good is produced or a service is performed. The upfront fee is generally a portion of the total fee that the buyer must pay. For example, one may commission an artist to paint a portrait and pay a 20% upfront fee, paying the remainder when the portrait is finished. It is also called an advance fee.
Vendor Agreement is a legal agreement that clearly states the provisions and conditions of the work to be performed by a contractor. The key points to be included in a vendor agreement include date, time and location where the services must be provided. A vendor agreement must always be accompanied with a Statement of Work (SOW). A vendor will not start work without an acceptable form of SOW. A vendor agreement becomes valid and enforceable when the customer and vendor signs the agreement in original.
Vendor Guarantee is an agreement between your company, your supplier, and the factoring company, in which the factoring company agrees to pay your supplier directly out of the proceeds of factored invoices.
Vendor Managed Inventory is Inventory replenishment arrangement whereby the supplier either monitors the customer’s inventory with own employees or receives stock information from the customer. The vendor then refills the stock automatically, without the customer initiating purchase orders.
Vendor Portal is a secure, proprietary system for managing and communicating with third-party suppliers of goods and services. A vendor portal is typically Internet-based and allows for initial vendor registration as well as account management.
Z-Score is an indicator used in data analysis which measures how far a given data point is from the mean of the data. Z-scores are often used to analyze credit, and will give an estimation of the probability of going bankrupt.