Business finance glossary: lending terms explained

Plain-English definitions of the terms lenders, brokers and accountants use when a business borrows. Each entry gives a one-line meaning and links to the page that explains the product or the term in full. Terms with a page of their own carry a worked UK example. For live rate ranges by product, see our UK business finance rate index.

01A to B

Administration

A formal insolvency process in which an administrator takes control of a company to rescue it or sell its business. Buyers can sometimes acquire a business out of administration quickly. See buying a business from administration.

Amortisation

Repaying a loan's capital in instalments over its term, so the balance falls to nothing. In accounts it also means writing down an intangible asset such as goodwill. See business loan calculator.

APR

Annual percentage rate: the yearly cost of borrowing including interest and compulsory fees, so offers can be compared. Business lenders often quote a simple yearly interest rate instead, so check what a quoted rate includes. See how business loan interest is quoted.

Arrangement fee

A fee for setting up a loan, usually a percentage of the amount, paid upfront or added to the loan. It adds to the true cost, so compare offers on total repayable. See business finance rate index.

Asset based lending

A facility secured on several business assets at once (invoices, stock, plant and sometimes property), which grows with the assets. See asset based lending.

Bad debt protection

Cover, usually added to factoring, that protects you if an approved customer becomes insolvent and cannot pay. See also recourse. See invoice factoring.

Balloon payment

A larger final payment that lowers the regular instalments on hire purchase or a loan. Read the full definition, with a worked example.

Bank Rate

The Bank of England's policy interest rate, often called the base rate. Variable-rate business loans are commonly priced as a margin above it. Bank of England: Bank Rate

Bridging loan

A short-term loan secured on property, repaid by a sale or refinance, used where speed matters. See business bridging loans.

Business credit score

A rating credit reference agencies give a business from its filed accounts, payment record, judgments and age. Lenders use it with the directors' personal credit. See the five Cs of credit.

02C to D

CCJ

A County Court Judgment: a court order to repay a debt, recorded for six years unless paid within a month. Read the full definition, with a worked example.

Collateral

An asset pledged as security for a loan, which the lender can sell if the loan is not repaid. Read the full definition, with a worked example.

Cross guarantee

A guarantee given by each company in a group for the borrowing of the others, so lenders can look to the whole group. Common where a group borrows through one company. See personal and company guarantees.

Current ratio and quick ratio

Liquidity tests: current assets divided by current liabilities (current ratio), and the same without stock (quick ratio). Lenders use them to check a business can meet short-term bills. See working capital loans.

CVA

A company voluntary arrangement: a formal deal with creditors to repay debts over time while the company keeps trading. See finance for a company in a CVA.

Debenture

A security document giving a lender fixed and floating charges over a company's assets. See what is a debenture.

Default

Failing to meet the terms of a loan, most often by missing payments. A recorded default stays on a credit file for six years and affects future borrowing. See bad credit business loans.

Deferred consideration and earn-out

Parts of a business purchase price paid after completion: fixed sums (deferred consideration) or amounts linked to future performance (earn-out). See deferred consideration explained.

DSCR

Debt service coverage ratio: cash available for debt payments divided by the year's interest and capital repayments. Lenders use it to test affordability. See DSCR calculator.

Due diligence

The buyer's and lender's checks on a business before a purchase: accounts, tax, contracts, property and legal matters. See acquisition finance.

03E to H

Early repayment charge

A fee a lender can charge if you repay a loan before the end of its term. Read the full definition, with a worked example.

EBITDA

Earnings before interest, tax, depreciation and amortisation: the profit figure lenders use to size acquisition and cash flow loans. Read the full definition, with a worked example.

Exit strategy

How a short-term loan such as a bridging loan will be repaid: usually a sale or a refinance onto longer-term finance. See bridging loan exit strategies.

Factor rate

The multiple used to price a merchant cash advance: a factor of 1.2 on £50,000 means £60,000 is repaid. It is not an annual interest rate. See merchant cash advance.

Factoring

Invoice finance where the lender advances money against your invoices and runs your sales ledger, collecting payment from customers. See invoice factoring.

Finance lease

A lease where you have use of the asset for most of its life and carry the risks of ownership, while the lender keeps legal title. See finance lease.

First and second charge

A first charge is the main security over a property and is repaid first on a sale; a second charge sits behind it. A second charge lender usually needs the first lender's consent or a deed of priority. See second charge business loans.

Fixed and floating charge

A fixed charge attaches to specific assets; a floating charge covers changing assets such as stock and lets the company trade with them until it crystallises. See fixed and floating charges.

Flat rate

Interest worked out on the original amount for the whole term, even as the balance falls. A flat rate looks lower than an equivalent annual rate on a reducing balance. See why a flat rate looks cheaper.

GDV and LTGDV

Gross development value is what a finished development is expected to be worth; loan to GDV (LTGDV) is the loan as a percentage of it. See property development finance.

Gearing ratio

How much of a business is funded by debt compared with the owners' money. Read the full definition, with a worked example.

Goodwill

The value of a business above its identifiable net assets, from reputation, clients and earning power. Read the full definition, with a worked example.

Heads of terms

The non-binding outline of a deal agreed before contracts are drafted. Read the full definition, with a worked example.

Hire purchase

Asset finance where you pay for an asset in instalments and own it once the final payment (and any option fee) is made. See business hire purchase.

04I to M

Interest cover

How many times profit (or rent) covers interest payments. Read the full definition, with a worked example.

Interest only

A loan where the regular payments cover interest only and the capital is repaid at the end, from a sale, refinance or cash. See interest only business loans.

Invoice discounting

Invoice finance where you keep control of collecting from customers, usually confidentially, and the lender advances against your sales ledger. See invoice discounting.

IVA

An individual voluntary arrangement: a formal agreement for a person to repay creditors over time. A director with an IVA narrows the lenders open to a business. See business finance with a director IVA.

Loan covenant

A promise in a loan agreement, such as keeping interest cover above a level or sending accounts on time. Breaching one can let the lender change terms or demand repayment. See covenants and conditions.

Loan to value (LTV)

The loan as a percentage of the value of the property or asset securing it. Read the full definition, with a worked example.

Management accounts

Up-to-date figures a business prepares for itself, monthly or quarterly. Lenders ask for them when the last filed accounts are out of date. See documents for a business loan.

Mezzanine finance

Borrowing that ranks behind the senior lender but ahead of the owners, used to bridge a gap between senior debt and equity, at a higher cost. See mezzanine finance.

05N to R

Negative pledge

A clause in which a borrower agrees not to give security to another lender without the existing lender's consent. See clauses to read before you sign.

Operating lease

A lease where the lender keeps the asset's residual value and you hand the asset back at the end, paying only for its use. See operating lease.

Overdraft

A flexible limit on a business current account, repayable on demand and charged on the amount used. See overdraft vs business loan.

Personal guarantee

A director's or owner's promise to repay a business loan personally if the business cannot. See personal guarantees explained.

Recourse

The lender's right to come back to you if the asset or customer it relied on does not pay. Read the full definition, with a worked example.

Redemption statement

The lender's figure to repay a loan in full on a set date. Read the full definition, with a worked example.

Residual value

What an asset is expected to be worth at the end of a lease or finance term. Read the full definition, with a worked example.

Revolving credit facility

A limit you can draw, repay and redraw, paying interest only on what you use. See revolving credit facility.

Rolled-up and retained interest

On bridging and development loans, interest added to the balance and paid at the end (rolled up) or deducted from the loan at the start (retained), so there are no monthly payments. See business bridging loans.

06S to Z

Sale and leaseback

Selling equipment or property you own to a finance company and leasing it back, to release cash. See sale and leaseback finance.

Satisfaction of charge (MR04)

The Companies House filing that records a charge has been repaid or released, so it no longer shows as outstanding. GOV.UK: form MR04

Selective invoice finance

Funding single invoices or chosen customers rather than the whole sales ledger, sometimes called single invoice discounting. See selective invoice finance.

Senior and subordinated debt

Senior debt is repaid first; subordinated debt ranks behind it and costs more. See senior vs subordinated debt.

SONIA

The Sterling Overnight Index Average, a benchmark interest rate some lenders use to price larger variable-rate loans. Bank of England: Bank Rate

Standard security

The Scottish form of mortgage or legal charge over land and buildings. Read the full definition, with a worked example.

Vendor finance

Part of a business purchase price lent by the seller and repaid from future profits. See vendor finance.

Working capital

Current assets minus current liabilities: the cash cushion that funds day-to-day trading. See calculating working capital.

07Can't find a term?

Our business finance FAQs answer the questions we are asked most, and the Knowledge Hub has a guide to every product. If a term in an offer you have received is unclear, ask us: we explain what lenders' terms mean before you commit. Any broker fee depends on the lender, with nothing to pay upfront.