This Financing and Financial Glossary of Terms is designed to further acquaint the reader with the language used in the world of finance, especially dealing with business, commercial and real estate financing. An understanding of these terms could prove to be very useful in your business' practices and dealings.
A B C D E F G H I J L M N O P Q R S T U V W Y Z
AAA TENANT: A high-rated tenant whose net worth is
assumed to be at least one million dollars.
ABANDONMENT: Voluntarily relinquishing one's rights of
ownership.
ABSTRACT: The written capsule history of a property,
taken from the public records, which shows recorded
owners, claims against owners, restrictions on the
property and documents affecting the title.
ABSTRACT OF TITLE: A written summary showing evidence of
legal ownership of land or property. A compilation of
abstracts of deeds, trust deeds, and other data which
affect the title to a piece of real property, all bound
together in chronological order for the purpose of title
examination.
ACCELERATION CLAUSE: A clause in a promissory note or
loan agreement that allows the lender to declare the
entire outstanding balance of the debt due and owing upon
the occurrence of an event of default.
ACCOUNTS PAYABLE: Amounts due for purchases made on
credit.
ACCOUNTS RECEIVABLE: Represent the amounts owed to a
company arising from sales of products or services during
the normal course of operations. The sales transaction is
"on account", rather than COD (Cash On Delivery), and
requires the purchaser to make payment at a specified
future date, generally within 15 to 30 days of the
transaction.
ACCOUNTS RECEIVABLES LOAN: A working capital loan using a
company's accounts receivables as collateral. The loan
amount is usually 50-80% of the total amount of the
accounts receivables.
ACCRUAL ACCOUNTING: An accounting method that recognizes
sales when made and expenses when incurred, regardless of
when the associated cash transactions actually occur.
ACCRUED EXPENSE/INCOME: Expenses due but not yet paid.
Income earned but not yet collected.
ACQUISITION COST: Cost of leased equipment to the lessor
after any adjustments for factory incentives, discounts,
etc. but before any sales tax.
ADMINISTRATIVE EXPENSE: The general cost of actual
operation of a business exclusive of sales costs,
supplies, and manufacturing costs.
ADVANCE RATE: The percentage to be granted against
eligible accounts receivable (i.e., 60%, 80% and so
forth). Eligible receivables are generally those due
within 30 to 90 days.
ADVANCE RENTAL: Payments taken at the onset of a lease
contract in order to initiate the lease. Usually the
first and last 1 to 3 payments.
AFFIRMATIVE COVENANTS: Clauses in a loan agreement or
investment agreement that require the borrower to perform
specified actions while the debt is outstanding.
AGING SCHEDULE: A report showing how long accounts
receivable have been outstanding. It gives the percent of
receivables not past due and the percent past due, by for
example, 30 days, 60 days, or other periods. Also used
for accounts payable, showing which ones have been paid
and which haven't.
ANGEL: A slang term for an individual investor who is
willing to provide money and support to a start-up or an
expanding company, usually in exchange for an equity
interest.
AMORTIZATION SCHEDULE: A schedule that shows precisely
how a loan will be repaid. The schedule gives the
required payment on each specific date and a breakdown of
the payment showing how much of it constitutes interest
and how much constitutes repayment of principal.
AMORTIZATION: A gradual pay-off, by installments, of a
long term debt to a creditor or lender. It is generally
used in the liquidation of mortgages. The periodic
payments are usually made at equal intervals of time.
Also referred to as level payment.
ANCHOR TENANT: A key tenant in shopping centers and large
office buildings that serves to attract customers and
other tenants and thereby contributes to the success of
the project.
APPLICANT: A person or firm applying for a loan.
APPRAISAL: A valuation of real or personal property
estimated by a qualified person. Appraisal plays an
important party in the sale, purchase, or financing of
property. The value of which is derived from an infinite
number of considerations. Value does not necessarily
establish the selling price of property. The appraisal
expresses an appraiser's opinion of 1) the market value of
a real estate project, and 2) the project's feasibility
and marketability.
APR - ANNUAL PERCENTAGE RATE: A standard method used to
calculate and compare the actual finance charges on a
financing transaction which will include all fees, points,
and related costs as well as actual interest charges.
ARTICLES OF INCORPORATION: A document filed with the
state in which the corporation is registered outlining how
it will function and do business.
ASSESSED VALUE: The value of property as determined by
the county tax assessor.
ASSET BASED LENDING: This is credit financing that
advances funds secured by a firm's balance sheet assets
such as inventory, receivables, equipment or other
collateral other than real estate. The lender takes a
lien against the pledged collateral under Article 9 of the
UCC. This financing covers the broad range of secured
lending activities, and is used to support the credit
needs of firms that cannot obtain financing on an
unsecured basis.
ASSET BASED LOAN: Debt that is tied to a business's
accounts receivable, inventory, or other assets, according
to a formula. If the borrower is unable to pay the loan
with cash flow from the business, the lender can seize the
assets.
ASSET TURNOVER: The ratio of total sales to total assets;
a measure of the efficiency of asset utilization.
ASSETS: The book value of all the possessions and
resources owned by a person or by a company. Assets
consist of real or tangible properties, such as money,
real estate, etc. Fixed assets may be a factory or shop.
Current assets include cash or something easily turned
into cash within a short time. Intangible assets may be
patent rights or good will.
ASSIGN: To transfer or convey to another any right,
claim, or property.
ASSIGNMENT LETTER: A letter that notifies a company's
customers of its decision to factor its invoices and
advises the customers to submit payments directly to the
factoring firm.
ASSUMPTION: The basis for developing a sales forecast,
cost or expense budget, or cash flow projection. The
assumption should be a measurable factor or belief that
will accurately determine the budgeting result. For
example, a sales forecast is based on recruitment
assumptions; an expense budget is based on assumptions of
per-employee spending; and a cash flow projection is based
on assumptions concerning new loans and acquisition of
capital assets.
ASSUMPTION OF A LOAN: Taking over the responsibility for
making payments on a loan without changing the terms of
the loan in any way.
ATTACHMENT: Seizure of property by a court order. AUDIT: A formal evaluation, examination and verification
of all accounts and records by a certified public
accountant. It states whether or not financial statements
are presented fairly and in conformity with generally
accepted accounting principles (GAAP).
AUTOMATIC STAY: A comprehensive injunction that goes into
effect automatically upon the filing of any bankruptcy
proceeding. The stay precludes creditors from taking any
action against the debtor or the debtor's property. For
example, it precludes creditors from (1) filing or
continuing any lawsuit against the debtor, (2) seizing any
property of the debtor, (3) selling property previously
repossessed from the debtor, (4) setting off against the
debtor's bank accounts, or (5) creating or perfecting any
lien against the debtor's property.
BALANCE SHEET STATEMENT: A statement itemizing assets and
liabilities at a given date with the difference between
total assets and total liabilities being net worth.
BALLOON PAYMENT: A final loan payment that is
significantly larger than the preceding principal
payments. Balloon payments arise when debt is repaid at a
rate that is not sufficient to fully retire the obligation
over the term of the loan.
BANK CLEARING DAYS: The number of days between customer
remittance of an accounts receivable and the date the
finance company (or factor) credits the amount to the
borrower's loan balance.
BANKRUPTCY REORGANIZATION: A business, in a state of
insolvency, files for protection from its creditors under
Chapter 11 of the U.S. Bankruptcy Code. The business is
permitted to continue operations while restructuring debts
and working out a repayment schedule acceptable to a
committee of its creditors. Firms assist businesses with
the restructuring of its financial matters during this
phase. In a Chapter 7 bankruptcy petition, a trustee is
appointed to liquidate the debtor's estate. The proceeds
of the liquidation sale are paid out to the creditors.
Any debts remaining unpaid after application of the
liquidation proceeds are discharged, meaning the debtor is
relieved from future liability on those debts.
BASIS: Usually the property owner's original cost, plus
capital improvements, less depreciation, computed for
income tax purposes according to one of many possible
formulas. Also called book value.
BENCHMARK GOAL: A development stage the company must
meet, signifying the completion of a task specified in a
partnership or venture agreement as a financing stage;
i.e., financing is approved as benchmark goals are met.
BENEFICIARY: The one named in a will or insurance policy
to receive property. The lender on a note secured by a
deed of trust or mortgage. One entitled to benefit of a
trust.
BILL OF SALE: A written instrument that transfers title
or ownership of property other than real property.
BINDER: A preliminary agreement for sale of property
requiring a deposit and calling for a formal agreement at
some future date.
BLANKET MORTGAGE: A general loan or mortgage given to
cover single debt financing of all or a substantial part
of the real property or assets belonging to a corporation
or to an individual. (A single mortgage which may cover 1
or more pieces of property).
BLANKET PLEDGE: A pledge of all assets, including future
receivables, until a loan is paid.
BREAK-EVEN ANALYSIS: An analytic technique for studying
the relationship among fixed costs, variable costs, and
profits. A breakeven chart graphically depicts the nature
of breakeven analysis. The breakeven point represents the
volume of sales at which total costs equal total revenues
(that is, profits equal zero).
BREAK-EVEN POINT: The volume of sales in a business where
total costs equal total revenue.
BUSINESS PLAN: An operational and strategic document
outlining the goals of an organization for furture growth,
cost and expense controls, cash flow, budgeting, and
marketing expansion.
BUYOUT / ACQUISITION: This is a stage in the maturity of
a business, or a situation created by special
circumstances, where a product line, business segment, or
entire business is purchased by an outside company or
perhaps by the existing management of the business. The
process involves extensive valuations of the target
business, sophisticated structuring and extensive
negotiations of the terms of the transaction. A firm
may specialize in providing these services and may arrange
for the placement with other firms and institutions of all
the various components of financing which may be required
to complete the transaction.
BUYOUT FUND: A pool of money raised from investors to
supply the equity or subordinated debt needed to buy
companies.
CALL: To require payment of loaned money on demand.
CALL DATE: Future date at which a loan is due and payable
in full.
CAPITAL: Money, property, current, and fixed assets of a
company used in operating and transacting its business.
CAPITAL ASSETS: The major fixed assets of a company with
a life of more than one year. These assets are not bought
or sold in the ordinary course of business.
CAPITAL BUDGETING: The process of planning expenditures
on assets whose returns are expected to extend beyond one
year.
CAPITAL GAINS: Long term profits made from the sale of
any real asset, such as: real estate, stocks, bonds, etc..
CAPITAL IMPROVEMENT: Enhancements to a company's capital
assets that increase their value.
CAPITAL STRUCTURE: The percentage of each type of capital
used by the firm: debt, preferred and common stock,
convertible debt, stock warrants, and net worth.
CAPITALIZATION: The money used to finance operations and
investments of a company, consisting of debt capital
(borrowed money) and equity capital (net worth).
CAPITALIZATION RATE: A discount rate used to determine
the present value of a series of future cash receipts or
inflows. It is also referred to as the "reciprocal of the
price/earnings (P/E) ratio." For example, a 20 P/E ratio
is a capitalization rate of 5% - 1 divided by 20.
CAPITALIZE: To furnish with capital. To establish the
value of an asset.
CAPITALIZED COST: Equipment valuation determined for the
purpose of depreciating the equipment over time.
CARRYING COSTS: Financial costs incurred directly or
indirectly from holding a firm's investment in assets.
CASH BUDGET: A schedule showing cash flows (receipts,
disbursements, and net cash) for a firm over a specified
period.
CASH FLOW: Cash that is generated over a period through
normal business operations - primarily net income plus
noncash expenditures such as depreciation and
amortization.
CASH FLOW CYCLE: The natural flow of cash through the
operations in a business - cash to inventory to accounts
receivable to cash.
CASH FLOW STATEMENT: A statement showing the cash balance
in a company's bank account after all expenses have been
deducted during the course of any given month or
accounting period. An analysis of the sources (what is
taken in) and uses (what is spent) of a business' cash
account.
CASH FLOW TEST: A test applied to determine whether an
infusion of additional capital is advisable. In order for
the decision to make sense, the addition of capital should
improve long-term cash flow rather than place an
additional stain of working capital.
CASH METHOD: An accounting method in which no entry is
made in the books until cash changes hands. Sales are
reported when payment is received, and costs and expenses
are reported when paid.
CASH VALUE: The actual or estimated amount of money that
an asset will bring on the open market without a lengthy
delay. Also called market value.
CERTIFICATE OF TITLE: A statement furnished by a title
company which certifies that according to records a
certain ownership is properly vested in the present owner.
CHATTEL: Personal property. Any type of property,
movable or immovable, other than real estate.
CHATTEL MORTGAGE: When the collateral is personal
property, such as machinery, equipment, or any property
other than real estate, the debt instrument is referred to
as a chattel mortgage. The loan amount, as a rule,
depends on the condition of the property. Under the
Uniform Commercial Code, chattel mortgage has become an
obsolete term and is now called security agreement.
CLAIM OF LIEN: A legal claim for payment, made by an
individual or company who performed labor or services or
who furnished material. A mechanic's lien.
CLIENT: A person or firm receiving the professional
services of a consultant or the party applying for a loan.
CLOSED END LEASE: Also net lease. Lessor assumes
financial responsibility for any difference between
depreciated value and actual cash value at lease end.
CLOSING COSTS: Fees and expenses paid by the borrower at
closing including such charges as title insurance,
recording of documents, attorney's fees, real estate
transfer taxes and stamps, etc..
CLOUD ON TITLE: Any claim or condition which impairs the
title to property.
CO-BROKER: A name used in describing a person who finds
prospects for the broker, and is usually paid a finder's
fee for this information.
COLLATERAL: Assets, securities or other property pledged
by a borrower to secure the repayment of a loan. The
value of the assets or property in many cases, is
substantially higher than the amount borrowed. Upon the
default of payment from the borrower the lender is
entitled to liquidate the collateral and apply the
proceeds against the balance of the loan. Collateral may
be comprised of stocks and bonds, holdings of real estate,
real property, personal property, life insurance policies,
accounts receivables, etc. The secured lender's claim to
collateral (if properly created and perfected) is senior
to that of other creditors in the event of the borrower's
bankruptcy.
COLOR OF TITLE: Title to real estate that appears to be
good but is not legal title in fact.
COMMERCIAL BANK: A financial institution chartered as
either a national bank or as a state bank. Banks are
regulated at both the state and the federal level. Banks
provide a wide scope of services, but generally use
depositors' money to provide debt financing where the
funds are repaid at stated intervals at specified amounts
for a specified term. Banks charge some amount of
interest over the term of the loan depending on how the
loan document is written. Financing of this type is
usually secured by assets of the borrowing company and/or
the assets of the company's principals (i.e. they require
collateral). It may be difficult to secure financing from
a bank without collateral and/or a stable income. Banks
will typically avoid high risk situations, but often will
make loans under $50,000.
COMMERCIAL FINANCE COMPANY: An institution providing
many different forms of financing usually in the nature of
asset based credit financing. These institutions will
provide financing much in the same way as commercial
banks, but are not depository institutions such as
commercial banks.
COMMERCIAL INTERMEDIATE LOANS: A form of debt financing
where the term is generally between 5 years and 10 years.
It is an asset based lending arrangement where specific
assets of the borrower serve to collateralize the loan.
See "Asset Based Lending", "Debt".
COMMERCIAL LETTERS OF CREDIT WRITTEN: An instrument
issued by a bank guaranteeing the payment of a customer's
drafts up to a stated amount for a specified period. It
substitutes the bank's credit for that of the buyer's and
subsequently eliminates the seller's risk.
COMMERCIAL LOANS: Loans made to commercial businesses,
such as apartments, hotels, motels, shopping centers,
service stations, etc.. These loans are usually
collateralized by real estate.
COMMERCIAL PAPER: A negotiable instrument of a short term
nature. Such as: bills of exchange, promissory notes,
checks, etc.. They are used in commercial transactions
and inventory financing in accordance with conventional
bank procedures.
COMMODITY CONTROL LIST: A document that details various
goods and technologies and advises the classification.
COMMITMENT: A firm or conditional pledge or promise.
COMMITMENT FEE: A fee paid to a lender in exchange for
the promise or commitment to lend money over a specified
period or before a specified deadline. Commitment fees
are often associated with lines of credit and long-term
financing where the funds have not been "taken down." The
fees range from .5% to 1% depending on the uncertainty of
future interest rates and the overall demand for capital.
COMPARABLES: Properties similar to a property for which
financial projections are made. The comparables provide
data on which the assumptions of the financial projections
are based for a real estate project.
COMPENSATING BALANCE: A required minimum checking or
savings account balance that must be maintained by the
bank borrower. The required balance is generally computed
as a percentage of the outstanding debt and serves to
increase the lender's effective yield on the loan (it also
can serve as collateral). The compensating balance is
generally 10% to 20% of the loan amount.
COMPILATION: A financial statement issued by a certified
public accountant that presents information lacking
independent verification or analysis of its accuracy.
COMPLETION BOND: A bond posted by a contractor as a
guarantee that he will satisfactorily complete a project
and that it will be free of any liens.
COMPOUND INTEREST: Interest computed on both the original
principal and the accumulated interest of prior (accrued)
interest.
CONDITIONAL SALES CONTRACT: A sales contract which states
that delivery be made to the buyer, but that title to the
property is to remain vested in the seller until the
conditions of the contract have been fulfilled.
CONSIDERATION: Anything of value given to induce someone
to enter a contract.
CONSOLIDATION LOAN: A loan taken to pay off two or more
other debts, usually to reduce periodic payments.
CONTINGENT LIABILITY: Outstanding debts which have not
been confirmed,
CONTRACTOR: One who agrees to do or perform something for
another in exchange for consideration or money. In the
building industry, one who contracts to build homes or
other buildings, or portions of them. Those performing
specific duties, such as installing heating, electrical
systems, plumbing, etc. are also called contractors.
CONTRIBUTION MARGIN: Excess of sales price over variable
expenses; an important element in break-even analysis.
This is the amount of sales that covers the fixed
expenses.
CONVENTIONAL FIRST MORTGAGE: This is the basic form of
real estate financing. It consists of a first mortgage
loan on the land and/or building. Lenders will usually
lend 75% to 808 of the value of the property involved.
CONVEYANCE: Any document which transfers the title to or
interest in real property from one person to another.
COST OF GOODS SOLD: A category on the income statement
including direct costs and the net change in inventory
levels. When the cost of goods sold is subtracted from
sales, the remainder is the company's gross profit or
gross margin.
COUNTER OFFER: A new offer as to price, terms, and/or
conditions, made in reply to a prior one. The counter
offer cancels the original offer.
COUNTER-TRADE: A situation that occurs when a party
agrees to buy only if the seller agrees to purchase
something in exchange to offset the cash expenditure.
Often this includes a third-party transaction.
COVENANT: A clause in a loan agreement or deed requiring
the performance or nonperformance of certain acts, or
prohibiting certain use or non-use of the property, in the
case of a deed.
CREDIT: A form of financing where loans, bonds and other
obligations are executed between the borrower and the
lender and require the borrower to repay the funds over a
specified period of time and with interest.
CREDITS BELOW BAA: Financial institutions often
subscribe to outside services which assign a rating to a
business's credit worthiness. The rating of AAA is
considered the best rating and verifies that a business is
a minimal credit risk. Generally, a business with a
rating below a BAA reflects a less favorable credit status
and would be considered a higher risk borrower.
CURRENCY SWAPS: Exchange of two currencies according to
an agreement to re-exchange the currencies at the same
rate at a specified future date. During the term of the
agreement, exchanges of interest payments denominated in
the respective currencies also may occur.
CURRENT ASSETS: Items on the balance sheet that are cash-
related or can be quickly turned into cash, usually in
less than one year.
CURRENT LIABILITIES: The amount owed by a company or
individual either in cash, property or services. It is
usually broken down into two classes: (a) Current
liabilities which are due in less than one year, (b) Long
term liabilities, such as mortgages.
CURRENT RATIO: Current assets divided by current
liabilities. This is a common financial analysis tool
used to measure the liquidity of a business.
DEBIT: An increase in an asset or expense amount which
correlates with a decrease in a liability or income
amount.
DEBT: A form of financing where loans, bonds and other
obligations are executed between the borrower and the
lender and require the borrower to repay the funds over a
specified period of time and with interest. (Used
interchangeably with Credit.) See Credit".
DEBT CAPITIAL: Capital derived from borrowed money in the
form of loans, notes or bonds. When debt capital and
equity capital are combined, the two represent total
capitalization.
DEBT / EQUITY RATIO: A ratio that tests the relative debt
capital of a company. To compute, divide total
liabilities by tangible net worth (net worth less any
intangible assets). The resulting percentage is the
portion of tangible net worth represented by debt.
DEBT OFFERINGS: A means of raising funds by issuing
instruments bearing interest and obligating the issuer to
pay interest to the holder of the instrument at specified
intervals and repay the principal at maturity. The holder
does not have any ownership interest in the issuing
company. Can be either public market or private issue
instruments.
DEBT SERVICE: Total amount, usually monthly or annually,
which is paid regularly towards retirement of a loan
obligation. If loan is amortized, this includes principal
and interest. If loan is interest only, then this only is
the interest payment.
DEBT TO EQUITY RATIO: Total liabilities divided by total
stockholder's equity. This ratio is a common investment
analysis tool used to measure the degree of leverage a
company has.
DEED: A document under which an owner of real estate
transfers title to a buyer or to any other person.
DEED OF TRUST: A written document which transfers title
to a trustee as security for a loan.
DEFAULT: Breaking of the terms of a mortgage, note, or
loan agreement such as failing to make payments on the
loan.
DEFAULT JUDGMENT: A judgment given when a loan has
defaulted and the security pledged for the loan is
insufficient to satisfy the balance due.
DEFICIENCY: Amount of money a lessee is required to pay
on termination of an open end lease if cash value is less
than depreciated or termination value.
DEGREE OF OPERATING LEVERAGE (DOL): Percentage change in
operating profits divided by percentage change in sales.
DELIVERY AND ACCEPTANCE: Document indicating that
equipment has been received in an acceptable condition by
the lessee or borrower.
DEPRECIATION: An amount of a fixed asset that, under the
Internal Revenue regulations, is allowed to be written off
the accounting (expense) records of a firm over a period
of time. In effect, the asset is assigned a decrease or
loss of value because of age or wear and tear. This is
similar to the amortization of a fixed asset.
DEPRECIATION RESERVE: That portion of a monthly lease
payment accumulated to cover the equipment depreciation.
DERIVED DEMAND: The demand for industrial goods estimated
on the basis of the demand for consumer goods.
DILUTION: To become less valuable by dividing real worth
and distributing it to increasing numbers of individuals.
DIRECT COSTS: Expenditures that vary and are directly
influenced by the level of sales, including merchandise
purchased for sale, direct labor, raw material, and other
costs that are necessary to 1) create a finished product,
2) generate volume, or 3) support the existing level of
sales.
DISCOUNT: The sale of securities, such as a note, at an
amount less than its face value. The discount represents
an additional yield to the investor/lender. The term also
refers to the process of computing the present value of a
stream of cash receipts of payments.
DISCOUNTING: The process of finding the present value of
a series of future cash flows. Discounting is the reverse
of compounding.
DIVESTITURES: 1) The disposition of a company's assets
or business segments by sale, liquidation, or other
acquisition arrangement. 2) Also, a corporation's
orderly distribution of large blocks of another
corporation's stock held for investment.
DROP-DEAD AGREEMENT: An agreement between the lender and
the borrower wherein the borrower, in exchange for an
extension of time to make payments on a note, agrees not
to contest an action to collect the note or foreclose upon
the collateral in the event he or she is not able to
comply with the extended payment schedule.
DUE DILIGENCE: Investigation by underwriters,
accountants, attorneys of the financial statements, and
all other corporate documents to verify the information
and ensure that no material facts are omitted.
EFFECTIVE AGE: The age assigned to a building by an
appraiser, based on the physical condition of the property
rather than its chronological age.
EMINENT DOMAIN: The right of a government to take private
property for public use, usually with compensation to the
owner.
ENTERPRISE ZONE: A geographical area, administered by
state or local agencies, in which expansion and new
business are encouraged through incentive programs, such
as tax benefits or job training credits.
EQUIPMENT LEASING: Straight equipment leases ...
generally on a monthly pay basis for terms ranging from 2
to 10 years.
EQUITABLE OWNER: One who has pledged his property as
security for a debt but retains the right to use and enjoy
the property.
EQUITABLE TITLE: The title granted to a buyer under a
contract of sale.
EQUITY: 1. Ownership interest in a corporation usually
represented by the shares of stock which are held by
investors, without any guaranteed return or protection (in
contrast to debt). 2. Difference between the amount a
property could be sold for and the claims against it.
3. Excess of balance sheet assets over liabilities.
EQUITY KICKER: A convertible feature or stock warrant
that accompanies a debt or equity offering to provide
partial ownership in the company as an inducement to buy
the offering.
EQUITY OFFERINGS: A means of raising funds by offering
ownership in a corporation through the issuing of shares
of a corporation's common or preferred stock.
EQUITY PARTICIPATION: A means of financing without debt
by exchanging money for an ownership interest.
EQUITY & PARTICIPATION LOAN: Loans made to individuals or
companies whereby the lender provides financing on new
projects. The lender is compensated by not only
receiving the customary interest, but also by being
permitted to receive a percentage of the net income
derived from the project.
EQUITY RELATED LOANS: Usually refers to loans convertible
into equity ownership or loans collateralized with equity
positions.
EQUITY STAKE: A percentage ownership in the company paid
to venture capitalists, lenders, or investors in
compensation for financing, management advise or other
services.
ESCROW: A transaction in which a third party acts as
agent for both seller and buyer, or borrower and lender,
carrying out the instructions of both and handling and
disbursing documents and funds.
ESTOPPEL AFFIDAVIT: A document setting forth certain
facts and understandings, and which stops, or bars, the
person signing it from later making claims based on other
facts or understandings that may arise.
EVENT OF DEFAULT: An event described in a security or
loan agreement or promissory note that allows the lender
to declare the note due and payable, and to commence an
action to collect the note and to foreclose upon the
secured assets. Typical events of default include (1) the
borrower's failure to make payments required under the
terms of the promissory note, (2) dissolution or
termination of the borrower's business, (3) commencement
of a foreclosure action by another creditor, (4) the
borrower's breach of a warranty or other insolvency by the
borrower.
EXECUTIVE SUMMARY: The introductory section of a business
plan that summarizes the business or project and the
funding request.
EXPANSION LOANS: Loans made to businesses who want to
expand their operation or enlarge their working
facilities. The same collateral is used for Expansion
loans and Working Capital loans.
EXTRAORDINARY ITEM: Any unusual, nonrecurring amount on a
financial statement. The effect on equity and profits is
not expected to continue into the future.w
FACTOR: A lender that specializes in buying a company's
accounts receivable and then advancing cash to the
company. Instead of looking at the borrower's credit,
factors look at the credit of the borrower's customers
(and usually do their own collecting).
FACTORING: A financial service where a firm sells its
accounts receivables outright to a factoring company which
then acts as principal, not as an agent. The receivables
are generally sold without recourse where the factor
cannot turn to the seller on uncollectible accounts. The
accounts are usually sold at a discount from their fully
collected value. This is an expedient way for a company
to convert receivables into cash where other short term
financing arrangements such as a working capital loan or
revolving line of credit are not obtainable.
FARM & RANCH LOANS: Loans made available to farmers and
ranchers for land purchase. These loans may also be used
for any general agricultural and ranching purpose.
FEASIBILITY STUDY: A research document that evaluates the
likelihood of a proposed project's success of failure.
This analysis is conducted to determine how successful the
potential product, technology or corporate relationship
will be in terms of design, financing opportunities, R&D,
pricing, market, demand, competition, company strength,
break-even costs, revenue and profit projections.
FEE; FEE SIMPLE; FEE SIMPLE ABSOLUTE: Title to real
property without limitation or end; this is highest
possible interest one can have in real estate.
FIDUCIARY: Any person in a position of confidence or
trust. A person acting as fiduciary is expected to
transact business in the best interest or another.
FIELD WAREHOUSING: A method of collateral control used
with loans secured by inventory. The collateral is held
on the borrower's premises under the control of the lender
and released according to the terms of the financing
agreement.
FINANCE FINDING SERVICE: An individual or firm
specializing in locating financing. They have the ability
to market a business's concept and need for funding and
charge a fee for the service generally as a percentage of
the amount of financing obtained.
FINANCIAL FUTURES CONTRACTS: Exchange-traded contract for
future delivery of a standardized quantity of an item at a
specified future date and at a specified price. Changes in
the market value of futures contract are settled in cash
daily.
FINANCIAL GUARANTEES WRITTEN: Instruments that make the
guarantor responsible for the payment of debt, or
performance of some obligation, if the person primarily
liable fails to perform.
FINANCIAL PROJECTIONS: Data that estimate anticipated
cash flow at a future time. Also estimates expenses, net
profits, assets and liabilities.
FIRST MORTGAGE: A secured interest in real estate that
provides the lender with first claim on any proceeds
realized from the liquidation of the real estate on
foreclosure. The claim is limited to the loan balance,
accrued interest, and legal expenses.
FIRST STAGE: This is a stage in the maturity of a
business where the initial growth of the product or
service is realized. The initial capitalization funds
this growth phase. The management and operations are in
place and markets identified initially are being
penetrated using available resources.
FIXED ASSETS: Relatively permanent assets used in the
operation of a business.
FIXED COSTS: Operating costs that remain constant
regardless of the firm's sales volume; an important
element in break-even analysis.
FIXTURES: Fittings or furnishings attached to land or
property and which usually cannot be removed without
agreement.
FLOATING LIEN: A secured interest in a class of assets
(for example, inventory) that does not specifically
identify the individual items of collateral. A floating
lien covers both present assets and assets acquired while
the lien is outstanding (referred to as an after-acquired
property clause).
FLOOR PLANNING: A method of financing that uses a trust
receipt to finance the purchase of durable goods (such as
autos, boats, mobile homes) by dealers. Goods purchased
by a lender are placed in the hands of a dealer who is
responsible for return of the property or proceeds from
its sale.
F.N.M.A. or FANNIE MAE: The Federal National Mortgage
Association established by congress to produce a market
for V.A. and F.H.A. loans and mortgages.
FOOTNOTE: A note attached to a financial statement for
the purpose of explaining or clarifying what the numbers
reveal. Footnotes may include a disclosure of pending
litigation, contingent liabilities, changes in accouting
methods, or a summary of unreported assets.
FORECAST: An estimate of sales, expenses, profits, and
cash flows for the next 1 to 5 years, supported by a
series of detailed assumptions detailing those elements
that will affect the outcome. Assumptions may be based on
degrees of volume growth, production trends, sales
activity, recruitment, and other factors.
FORECLOSURE: Legal recourse taken by a lender in securing
property offered as collateral for a loan or lease if
agreed upon payments are not made as specified or other
default event occurs.
FORWARD CONTRACTS: Agreement between two parties to
exchange specific items at a specified future date and at
a specified future price.
GARNISHMENT: A legal action in which money, property, or
credits of a debtor that are in possession of another are
seized and applied to payment of the debt.
GENERAL PARTNER: The managing partner of a limited
partnership. The partner ultimately is liable for all
obligations of the partnership.
GOODWILL: The intangible value of a business, as to
custom, reputation or projected earning power.. as
distinguished from the tangible value of its stock or
property.
GRANT DEED: An instrument used to convey title to real
property. It carries two implied warranties: 1) the
title is free of encumbrances, and 2) the owner has the
right to sell.
GROSS PROFITS: Gross revenue minus cost of goods sold;
the amount of profit before deducting general, sales, and
administrative expenses and the provision for income
taxes.
GROSS REVENUE: The total income of a company before any
deductions are made for cost of goods sold or operating
expenses.
GUARANTEED LOAN: A loan backed by a guarantee from a
party other than the borrower.
GUARANTOR: A person or firm willing to pledge its assets
in order to guarantee a borrower's loan. This person or
firm has contracted to assume responsibility for payment
of the subject loan, if the borrower defaults.
HURDLE RATE: In capital budgeting, the minimum acceptable
rate of return on a project. If the expected rate of
return is less than the hurdle rate, the project is not
accepted. The hurdle rate should be equal to the marginal
cost of captital.
HYPOTHECATION: The pledging of securities or property to
secure a debt instrument without giving up possession of
the property.
INCOME STATEMENT: A financial statement that measures the
profitability of the firm over a period of time; all
expenses are subtracted from sales to arrive at net
income.
INDUSTRIAL LOANS: Loans made to various industries, such
as those involved in manufacturing and mining.
INDUSTRIAL REVENUE BONDS: A method of financing property,
plant, and equipment through the sponsorship of a local or
state government to stimulate the industrial growth of an
area. These bonds are granted tax-exempt status to
stimulate investment.
INSOLVENT: A person or company that is unable to pay its
debts.
INSTITUTIONAL LENDERS: Savings and loan companies,
insurance companies, or banks that provide real estate,
commercial and business loans, as distinguished from
governmental or private lenders.
INTANGIBLE VALUE: Goodwill, franchises, licenses,
patents, trademarks, and similar benefits of established
business.
INTEREST: The cost paid by a borrower for the use of
funds which are borrowed.
INTEREST-RATE CAPS/FLOORS WRITTEN: Upper/lower limits
placed on loans with floating or adjustable interest rates
beyond which the interest rate cannot climb/descend.
INTEREST-RATE SWAPS: Agreement between two parties to
exchange one interest stream (floating rate) for another
(fixed rate) based on a contractual or notional amount. No
principal changes hands.
INTERIM CONSTRUCTION LOANS: Funds made available to
responsible builders for construction loans on viable
projects. These loans are usually made for a specific
period of time until the builders can obtain permanent
financing.
INTERNAL RATE OF RETURN: A return analysis that computes
a yield percentage by determining the discount rate that
equates the net present value of all cash inflow and
outflow (including cost of the investment) to zero.
INVENTORY FINANCE: A form of asset based lending where a
company obtains a short term loan used for the
procurement of inventory (raw materials or finished goods)
which are then sold in the normal course of operations.
This is a form of a working capital loan specifically for
inventory buildup needs.
INVESTMENT: The transfer of capital to an enterprise in
order to secure a profit for the investor.
INVESTMENT BANKING FIRM: Acts as underwriter or agent
serving as intermediary between an issuer of securities
and the investing public. In addition to new securities
offerings, investment bankers handle the distribution of
blocks of previously issued securities, either through
secondary offerings or through negotiations, maintain
markets for securities already distributed, and act as
finders in private placements of securities. Many firms
support broker-dealer operations, serving both retail and
wholesale clients in brokerage and advisory capacities.
In addition to underwriting and brokerage operations,
investment banking firms are becoming more involved in
other financial services and financing transactions as
defined by each individual firm. Some firms become
involved in brokerage operations specializing in private
placement transactions and other investment strategies
similar to venture capital firms. In some instances, a
firms minimum investment figure will relate to private
placements rather than public offerings or secondary
public offerings. Firms specializing in "penny stocks"
will usually become involved in riskier high-growth
businesses and have a lower minimum financing
requirement. They will, however, expect high returns on
their investments and often require that a company become
publicly traded if it hasn't already. A 1990 shakeout
in the penny stock market has closed this avenue of
financing to many firms, and the future of the market is
in jeopardy. Firms specializing in NASDAQ and exchange
brokerage operations are usually interested in larger
financing arrangements rarely committing less than $1MM,
and usually more. Companies must meet the NASDAQ
listing requirements to be considered for public market
financing by these firms. See "NASDAQ." However, both
high-risk/ high-growth and low risk stable companies are
traded on NASDAQ.
IPO OR INITIAL PUBLIC OFFERING: This occurs when a
company registers its stock with the Securities and
Exchange Commission and can sell equity ownership in the
company to the public. Access is gained to a source of
capital which did not previously exist. There are
numerous reporting and compliance issues to deal with
which could involve a considerable expense. Stock that is
publicly traded on an exchange provides the owner of with
an established price and a market in which to buy or sell.
JOINT TENANCY: Ownership by two or more persons in equal
shares created by a single transfer. Upon the death of a
joint tenant, the surviving joint tenants take the entire
property and nothing passes to heirs of the deceased.
LAND & DEVELOPMENT LOANS: Loans made available to
landowners or developers for the purpose of making raw
land ready for a development project.
LAND CONTRACT: Installment type sales contract for real
property in which seller retains title until all terms of
the contract have been met by the buyer.
L.B.O. or LEVERAGED BUYOUT: Is the buyout of a company's
existing ownership using borrowed funds. The funds
borrowed by the investors purchasing the target company
are generally secured by the assets of the target company.
See "Buyout / Acquisition."
LEASEHOLD IMPROVEMENT: Improvements to a leased item that
cannot be taken by the lessee at the end of the lease
term. This often refers to construction or fixtures
within a real estate property, such as office space.
LEASING COMPANIES: Companies who will arrange for the
acquisition of real estate, equipment, or other fixed
assets and then execute a contract with the party who
will be using the equipment. The user of the property
(lessee) will make fixed payments to the owner of the
property (lessor) for a specified time. These
arrangements can be very flexible and creative and are an
alternative to a purchase of the property.
LEGAL DESCRIPTION OF REAL ESTATE: The exact location of
a piece of property stated in terms of lot, block and
tract, "metes and bounds", or government survey.
LESS THAN FIVE YEAR MATURITY: This is a type of credit
financing which is short term in nature. See "Debt" and
"Credit."
LESSEE: A person or company which leases something from
another person or company.
LESSOR: A person or company which grants a lease to a
person or to a company.
LESS-THAN-INTEREST NOTE: A promissory note which requires
the borrower to make periodic payments less than the
accumulated interest, with the principal plus the rest of
the interest due in lump sum at the end of the loan term.
LETTER OF INTENT: A letter acknowledging a commitment to
sign a contract when agreed upon terms and conditions are
met. This is sometimes used by commercial or business
lenders to signal a desire to proceed with arranging the
requested funding. A deposit is sometimes requested,
generally 1% of the loan.
LETTERS OF CREDIT: Documents made available to an
individual or company by a lender guaranteeing a line of
credit up to a specified amount of money,
LEVERAGE: 1. Is the use of borrowed funds to increase
purchasing power and, ultimately, to increase
profitability on amounts invested. 2. Debt in
relation to equity in a firm's capital structure. The
more debt, the greater the company's ability to generate
returns using borrowed funds and not the investors'
capital.
LIABILITIES: Debt or obligation items which have definite
or estimated values and which are to be paid or accounted
for at future dates.
LICENSING AGREEMENT: A document signed by the owner of a
technology or product in which the right to make, use, or
sell the product is granted to another party for a
specific time and under specific terms in exchange for
compensation in the form of fees, royalty payments or a
percentage of income.
LIEN: A general term describing a lender's security
interest in an asset. Also, a claim brought against a
specific parcel of real or personal property by a person
or firm claiming payment for debt. The claim remains
legally in effect until the debt has been repaid. Any
encumbrance, charge, or claim upon property, usually to
help ensure the payment of trust deeds, taxes, special
assessments, or other debts.
LIMITED PARTNERSHIP: A partnership arrangement whereby
the liability of a partner is limited to the amount of his
investment in the business. Usually a limited partner
has no active participation in the business. There are
two classes or partners. The general partners manage the
company on a day-to-day basis, whereas the limited
partners have no voice in management decisions.
LINE OF CREDIT: Under a line of credit agreement, a bank
or lender provides a business access to a certain maximum
short-term loan amount, available at the request of the
business. The business may draw on the line when
necessary and repay when the funds are no longer needed.
Lines of credit are designed to finance specific business
needs, such as seasonal buildups in inventories or
receivables.
LIQUID ASSETS: The current assets of a firm excluding
inventory.
LIQUIDATE: To convert property or other assets into
money.
LIQUIDITY: The ability of a business to pay its debt
obligations as they come due with little or no delay or
cost. It's generally measured by a company's net working
capital level, current ratio, net quick position, net
quick ratio, and cash ratio.
LOAN AGREEMENT: A formal and detailed document between
borrower and lender that sets forth the terms, conditions,
and provisions governing both parties for the duration of
the loan. The agreement will specify the interest rate,
the method of repayment, and the borrower's
representations regarding the business. Also included are
the events that trigger a default, an affirmative
covenants section, and a negative covenants section.
LOAN CLOSING: The final formal act of signing the loan
agreements and disbursing loan proceeds.
LOAN COMMITMENT LETTER: A letter issued by a lender
promising to loan a specified amount of money at a stated
interest rate to an approved borrower, providing that the
loan is closed on or before a specified date and that all
stipulations are met.
LOAN COVENANTS: A description of the requirements to
fulfill a loan obligation (affirmative covenants) and any
restrictions (negative covenants).
LOAN PARTICIPATIONS: An arrangement in which a lender
shares ownership of a loan jointly with one or more other
lenders, with income and expenses proportionally assigned
according to each lender's pro-rata participation.
LOAN-TO-VALUE RATIO: A formula that establishes how much
money will be loaned against the appraised value or net
worth of a business or real estate property. While
conservative financing sources loan only against a
percentage of "hard assets," other lenders may include an
estimate of future value in the formula. The value or net
worth of the assets in question are usually set by an
appraiser (for example, real estate or equipment
appraiser). This may not occur if the assets were
recently purchased in a "fair market" type of transaction.
LONG TERM ASSETS: Property or equipment which by its very
own nature has a long life expectancy.
LONG TERM DEBT: Debt owed by a company which is not due
for more than one year.
LONG TERM LOAN: A form of debt financing where the term
is generally greater than 10 years. It is an asset based
lending arrangement where specific assets of the
borrower serve to collateralize the loan. See "Asset
Based Lending," and "Debt." MARKET MAKER: An institution will maintain a bid and an
offer price for a given security by standing ready to buy
or sell "round lots" at a publicly quoted price. A dealer
is called a Market Maker in the over-the-counter market
and a Specialist on the exchanges. A dealer who makes a
market over a long period of time is said to maintain a
market. See "NASDAQ" and "Pink Sheet."
MARKETABLE TITLE: A good title to property, free and
clear of any objectionable encumbrances or liens.
MARKET VALUE: The price a willing buyer and a willing
seller would agree upon for the property when neither are
under abnormal pressure and are at "arm's length".
MARKETING PLAN: Part of a company's business plan
expressing the goals, action steps, deadlines, competitive
strategies, and financial aspects of future market
expansion.
MARRETING STRATEGY: The collective action steps a company
plans to take to expand its customer base, geographic
influence, product or service lines, or method of selling.
M.B.O. or MANAGEMENT BUYOUT: Is similar to an L.B.O.
where management of the target company desires to acquire
ownership of the company. See "L B O" and
"Buyout/Acquisition"
MERCHANT BANKING: A form of banking where the
institution arranges credit financing, but does not hold
the loans to maturity. A merchant bank invests its own
capital in leveraged buyouts, corporate acquisitions, and
other structured financing transactions. Merchant
banking is a fee based business where the bank assumes
market risk but no long-term credit risk. This form of
banking is common in Europe and is gaining acceptance in
the U.S.
MESBIC: An SBIC which caters specifically to minorities.
See "SBIC".
MEZZANINE: This type of financing is commonly referred
to as "bridge" financing and is used when the company has
exhausted its initial capitalization or venture financing
and will be accessing the public equity markets. This
type of financing would typically be needed in the first
stage or the second stage of a business's maturity. This
financing might be provided by institutional investors,
large corporations, or banks. In more general terms, this
type of financing could be used to support a company
through a short term transitional phase. This investment
is viewed as having less risk and a "quick in and out"
situation.
MEZZANINE LENDER: A lender often used in buyouts to give
banks an additional layer of protection (between equity
and bank debt) in the event of a business failure. in
exchange for taking more risk, mezzanine lenders earn
higher interest and, often, options to buy equity. MORATORIUM: A limited period of time set by legislation
during which time certain creditors are not permitted to
demand payment from their debtors.
MORTGAGE: A legal instrument allowing a lien to be placed
on property as security for a loan.
MORTGAGEE: The holder of a mortgage or firm or person
making a loan secured by a mortgage.
MORTGAGOR: The person or firm who mortgages the property.
MOVING AVERAGE: An average computed by using a field a
changing factors over an extended period of time. As each
new factor is added to the average field, the oldest
factor is dropped. The moving average smooths out current
variations and stabilizes trends.
NASDAQ: The National Association Of Securities Dealers
Automated Quotations. The NASD (National Association of
Securities Dealers), is an organization including
virtually every investment banking firm and dealer in the
over-the-counter market. The organization imposes
regulations on its members ensuring moral and ethical
standards are maintained. The organization maintains a
quotation system (NASDAQ) for publicly traded securities
which are traded over-the-counter (and not traded on
exchanges such as the New York or American). Companies
with smaller asset size not qualifying for listing on the
large exchanges would have their securities quoted on
NASDAQ. Market Makers supply bid and offer prices for the
securities quoted. To be listed on NASDAQ, a company
must be publicly traded, have a minimum net worth of $2MM
and minimum tangible assets of $4MM.
NEGATIVE COVENANT: Provisions in a loan agreement that
expressly prohibit certain actions by a borrower. A
default on a negative covenant may cause a loan to become
immediately due and payable, or may convey certain
additional rights to the lender in the event of default on
one of the covenants.
NEGATIVE PLEDGE: Some financial institutions may not take
collateral, but they still want to protect the integrity
of the balance sheet. They accomplish this by requiring
that the company (borrower) will not pledge, mortgage, or
incur liens on its assets, which would undermine their
unsecured position.
NET INTEREST EXPENSE: A calculation of the cost of debt
capital on an after-tax basis. Because interest payments
are tax-deductible, the true net cost to the company or
borrower is calculated by reducing interest expense by the
amount that income taxes were reduced due to interest paid
during the year.
NET LEASES: A lease that requires the tenant to pay all
costs of maintaining the building including taxes,
insurance, repairs and other expenses normally paid by the
owner. NET PRESENT VALUE METHOD: An analysis tool that permits
comparison of investment alternatives by computing the net
present values of their expected cash inflows and outflows
using a specified discount rate.
NET PROFIT MARGIN: Net profits divided by total sales.
Evaluates overall ability to generate profits form each
sales dollar.
NET WORTH: The difference between assets (goods and money
owned) and liabilities (amount owed). The owner's equity
(in a sole proprietorship or partnership) or sharholders'
equity (in a corporation). Net worth may be subdivided
into capital stock or paid-in capital, retained earnings,
and current profit or loss. The value of intangible
assets is usually excluded.
NON-DURABLE GOODS: Merchandise that has a very short
life.
NON-RECURRENT: Income or expenses of a one-time-only
nature.
NOTE: A written promise to pay unconditionally a certain
sum of money at a certain time - whether on a demand basis
or at some specified future time.
OBJECTIVE: A brief statement expressing a company's
purpose, standards, and priorities. On a broader basis,
also called a mission statement.
OBLIGATION TO REPURCHASE SECURITIES SOLD: Agreement
between a seller and a buyer, usually of U.S. securities,
whereby the seller agrees to repurchase the securities at
an agreed on price and, usually, at a stated time.
OBLIGATIONS FROM FINANCIAL INSTRUMENTS SOLD SHORT:
Obligation to pay for the difference, should an instrument
sold short actually appreciate.
OFFERING MEMORANDUM: A legal document that highlights the
terms, conditions and risks of investing in a corporation.
Offerings can be either private or public.
OPEN END LEASE: Lessee may be responsible for additional
payment at lease end based on value of leased item at that
time.
OPEN END MORTGAGE: A mortgage loan which gives the
borrower the option of using his paid-in equity achieved
through amortization to improve or expand his home without
having to refinance.
OPERATING PROFIT MARGIN: Gross profits minus operating
expenses. Operating expenses include all costs incurred
from normal operations, excluding interest charges and
income taxes. The best measure of a firm's ability to
make financial gains.
OPERATING INCOME STATEMENTS: A financial report showing
the income and the expenses of a firm over a given period
of time.
OPPORTUNITY COSTS: Earnings that might have been obtained
if a productive asset, service, or capacity had been
applied to some alternative use.
OPTION: A right given, in return for cash or other
valuable consideration, to buy, sell, or lease a property
or security at a future date for a specified price.
OPTIONS WRITTEN: Contract allowing, but not requiring,
its holder to buy (call) or sell (put) a specific or
standard item at a specified price during a specified time
period or on a specified date.
ORIGINATION FEE: A charge made for obtaining and
processing a new loan.
OVERADVANCE: A loan in advance of sales that allows
management to build inventory prior to peak sales periods.
OVERHEAD TEST: A test of management's control over
expenses applied to determine whether or not expansion is
occurring profitably. The test can be applied in two
ways. First, any increase in sales volume should exceed
the rate of increase in overhead expenses. Second, any
additions of capital should decrease or stabilize overhead
rather than leading to growth in the level of general
expenses.
OVER-THE-COUNTER - (OTC): 1. A security that is not
listed and traded on an organized exchange. 2. Market
in which securities transactions are conducted through a
telephone and computer network connecting dealers in
stocks and bonds, rather than on the floor of on exchange.
Securities traded in this manner do not meet the listing
requirements of the New York or the American Exchanges.
Rules for trading over-the-counter stocks are written and
enforced mainly by the NASD.
OVERHEAD: Everyday operating expenses.
OWNER'S EQUITY: The difference between assets and
liabilities is the owner's equity in a business.
P & L STATEMENT: A profit and loss statement itemizing
income and expense for a period of time with the
difference in total income and total expense being shown
as profit or loss. Also known as the Income Statement.
PARTNERSHIP: A form of organization in which two or more
individuals, other partnerships, or corporations owns
portions of the whole. Parnerships assign proportionate
income to each partner and file an information tax return
only.
PATENT: Protection of a proprietary claim to make, use or
sell a product, technology or idea.
PAYBACK METHOD: An investment analysis tool that computes
the amount of time required to recover an investment
through the net cash flow it generates. No allowance is
made for the present value of the cash inflows and
outflows.
PERCENTAGE LEASE: A property lease which states that the
rent is to be based on a percentage of gross business done
by the lessee, usually with a certain minimum.
PERFORMANCE BOND: A guarantee or surety bond that an
activity undertaken in accordance with a specific contract
is completed as promised or the individual holding the
bond is otherwise compensated.
PERSONAL PROPERTY: Property other than real property.
PRETAX PROFIT MARGIN: Total sales divided by earnings
before taxes (EBT). An excellent measure of actual
earnings.
PINK SHEETS: A daily publication (so named for their
color) of the bid and ask prices of thousands of over-the-
counter stocks. Companies whose stocks are quoted here
(NASDAQ and Penny Stocks) have smaller asset sizes and
securities prices and do not qualify for listing on the
large exchanges.
P I T I: Abbreviation for "principal, interest, taxes,
and insurance."
POINTS: A percent of some principle sum. Discounts and
loan origination charges are frequently expressed as
points or percentages of the amount of the borrowing.
This effectively increases the borrower's cost of capital.
There are 100 basis points in a point.
PREFERRED STOCK: A class of capital stock of a
corporation sometimes paying dividends at a specified rate
and receiving preference over subordinate classes of
capital stock, such as common stock, in the payment of
dividends or liquidation. Preferred stock ordinarily
does not carry voting rights and may have various other
features which either restrict its residual rights to
corporate profits or enhance the rights.
PREPAYMENT PENALTY: A clause in a loan agreement that
imposes a charge on the borrower for early repayment of a
loan. The prepayment penalty is used by long-term lending
institutions to discourage refinancing of outstanding
loans during future periods when interest rates have
declined.
PRIME RATE: The rate of interest that is established by
the banking system. Lenders charge this rate to very
strong and very solvent companies.
PRINCIPAL: Actual loan amount before adjustments are made
for interest or deductions. Amount of debt minus
interest.
PRIVATE INVESTOR: An individual or group of individuals
who invest in business ventures in various stages of
maturity. Generally, this definition signifies an
individual investing his personal funds and often
syndicating the remaining financing amount to other
financing firms.
PRIVATE LENDER: An institution or an individual who
provides funding in the form of debt. The term of the
debt will usually be intermediate - 5 yrs to 10 yrs. Many
of these sources indicate a preference to being contacted
by other financing sources and finance professionals
through syndication rather than contact by the actual
companies seeking financing.
PRIVATE PLACEMENT: The sale of securities to a small
group of investors (generally 35 or fewer) which is exempt
from SEC registration requirements. The investors execute
an investment letter stating that the securities are being
purchased for investment without a view towards
distribution.
PROCURING CAUSE: An action by a broker or salesman that
originates a series of events that eventually lead to a
sale.
PROFIT: The difference between Income and Expenses.
PROFITABILITY RATIOS: Formulas used to evaluate a firm's
financial condition by relating its return (net profit) to
its sales (profit margin on sales), its assets (return on
total assets), and its equity (return on equity).
PROFITABLE VOLUME: Increased levels of sales that are
accompanied by a corresponding increase in the level and
percentage of net profits; a growth in sales volume when
an acceptable level of net profits is maintained.
PRO FORMA STATEMENT: A statement predicting the financial
performance of a business for a given future period. A
pro forma financial statement is one that shows how an
actual statement would look if certain assumptions are
realized. The presentation of the Balance Sheet, Income
Statement or Forecasted Cash Flows where the amounts are
estimated and hypothetical. These are typically
presentations of future expected results based on
assumptions and actions to be taken.
PROMISSORY NOTE: A document signed by a borrower
promising to repay a loan over a specified period of time
or at a specified time in the future. This is a legal
agreement to repay a loan.
PROPERTY MANAGEMENT: The renting, supervising,
collecting, paying of expenses, and maintenance of real
estate.
PROPRIETARY: A product, service or process made and
marketed by a firm having the exclusive right to
manufacture and sell/trade secrets are often referred to
as proprietary information.
PROSPECTUS: The formal summary that is distributed to
prospective investors. It provides information that helps
them determine whether they will invest in the company.
PURCHASE OPTION: Dollar amount required to purchase
equipment at the end of a lease. Sometimes called
residual.
PUTS / CALLS: Because of the illiquid nature of holding
stock in a small business, many investors want the option
of selling (putting) their shares back to the company at
an agreed-upon price. A call gives the company the right
to purchase the common stock (or warrants) from an
investor or lender at a certain price for a certain
period.
QUITCLAIM DEED: A deed which transfers the grantor's
rights with no guarantees.
REAL ESTATE JOINT VENTURE: Joint Ventures involve
investors who team-up with land-owners/developers for the
purpose of providing funds for the initial stages of a
development. The investors participate in the profit of
the development depending on what amount of money they
have invested ... or depending on what agreement they
might have (if any) with the land-owner/developer.
REAL PROPERTY: Land and whatever is erected, growing, or
affixed to the land.
RECAPITALIZATION: An alteration of a business's capital
structure, such as exchange of bonds for stock. A
business may retire some form of debt or equity
instruments through the issuance of new instruments to
accomplish a specific structural or financial goal. The
business may be in a more favorable posture than
previously, and able to take advantage of alternative
financing. Also, bankruptcy may be a common reason for
recapitalization.
RECEIVABLES: Notes or bills due or becoming due from
others at an assignable date.
RECOGNIZED APPROACHES TO VALUE: Valuation methods used in
the appraisal process, including the sales comparison (or
market) approach, the income approach, and the cost
approach to value.
RECORDING: Entering a document into the public record.
RECOURSE LOAN: A loan which allows the lender to attach
the borrower's personal assets (over and above the
property that was put up as security) in the event of
default by the borrower.
RECOURSE OBLIGATIONS ON RECEIVABLES SOLD: Obligation
assigned to the seller for the difference between an
agreed on amount and the value received from the
receivables sold.
REFINANCE: The pay-off of one loan with the proceeds of
another.
REGISTRATION STATEMENT: A disclosure document that must
be filed with the Securities and Exchange Commission. It
contains two principle parts - the prospectus and a
supplemental information section.
REGRESSION ANALYSIS: A quantitative, statistical
technique used to forecast a series of quantities such as
sales or profits. It uses several independed variables,
such as advertising, consumer spending, competition
advertising, economic indicators, etc. and estimates or
forecasts what the dependent variable, such as sales, will
be in a future period of time. It can also be used to
forecast inventory levels.
RESIDENTIAL LOANS: Home loans.
RESIDUAL VALUE: Capitalized cost of leased equipment less
accrued depreciation at lease end as opposed to the actual
value. See purchase option.
RESTRICTED STOCK: Stock in a corporation that cannot be
sold or exchanged for two years. The holder of this stock
is forbidden to negotiate its transfer for this amount of
time. This usually occurs in a private placement stock
offering which is exempt from SEC and/or state
registration.
RETAINED EARNINGS: The cumulative earnings and losses of
the company less all dividends paid out.
RETURN ON INVESTMENT (ROI): Earnings divided by average
total assets; same as return on assets. A measure of the
firm's asset utilization efficiency.
RETURN ON EQUITY (ROE): The yield that earnings represent
relative to the accounting value of the equity investment,
or net profits divided by the equity investment, usually
at book value.
REVIEW: A report by a certified public accountant using
analytical procedures as a basis for assuring that no
material modifications need be made to make financial
statements conform with generally accepted accounting
principles.
REVOLVING LOAN: A loan, usually with no fixed maturity
date, that can be repaid in part or in full by the
borrower. This loan can be rewritten again and again as
the lender sees fit.
REVOLVING TERM LOANS: This is a type of credit financing
through contractual agreement which is good for a stated
period of time but does not have a stated repayment
schedule. The borrower may be advanced funds or repay in
full at any time without penalty. Interest is charged
on the outstanding balance. This arrangement is usually
short term in maturity. The borrower usually pays a
commitment fee to establish the agreement. RIGHT OF SURVIVORSHIP: The right of a surviving joint
owner to acquire the interest of deceased joint owner.
ROLL-OVERS: When short-term debt is constantly renewed,
it's referred to as rolling over the debt. The terms and
conditions can be the same or different. Constant roll-
over of short-term debt may signify a permanent growth or
a deterioration of liquidity due to adverse results.
ROYALTY PAYMENT: Compensation paid to the owner of a
product of technology for the right to make, use or sell
it. Royalties are established in advance as a percentage
of income earned when the product is sold.
SALE AND LEASEBACK: A transaction where a company will
sell an asset it owns to another party and then enter into
an arrangement to lease the property from the new owner.
It is a technique for freeing up capital that would
otherwise be tied up in holding an asset over a long
term. There are often tax benefits associated with such a
transaction.
SALVAGE VALUE: Asset value once retired from active use.
SBIC: Small Business Investment Companies are
privately owned but licensed, regulated and financed by
the SBA. They have the ability to leverage privately
raised capital with government funds and make capital
available to small businesses who meet standard
criteria. SBIC's may buy stock in a new venture, or
provide capital through debt or convertible debentures.
Since SBIC's must service the debt they borrow from the
SBA, investments are typically in the form of loans with
favored interest rates coupled with the right to buy
stock. This structure gives the SBIC immediate returns to
service their debt. This may not be a good source for
start-up ventures likely to loose money in their initial
years. The investment objectives are similar to those of
venture capitalists. See "Venture Capital." Small
businesses that qualify have net worth less than
$6,000,000, average net after tax profits for prior two
years of $2,000,000 or less, and cannot be investment
companies, lending institutions, or manufacturing
companies with over 500 employees (unless meeting the net
worth and net profits criteria). MESBIC's are Minority
Enterprise SBIC's that function similarly to SBIC's as
described above, but can only invest in 51% or more
minority/disadvantaged individual owned enterprises.
SECOND MORTGAGE: A mortgage loan secured by real estate
through which the lender's claim on the collateral is
second (subordinated) to that of the first-mortgage
lender.
SECONDARY PUBLIC OFFERING: This refers to a public
offering subsequent to an initial public offering. A
secondary public offering can be either an issuer offering
or an offering by a group that has purchased the issuer's
securities in the public markets.
SECOND STAGE: This is a stage in the maturity of a
business where the business seeks to expand its product
line, expand its facilities, identify and penetrate new
markets and continue the growth phase. Additional
capitalization and credit financing may be required to
fund this additional growth.
SECURITY: What the borrower puts up to guarantee payment
of the loan.
SEED CAPITAL: A source of funding for the early stages
of a start up venture where the product, process, or
service is in its conceptual or developmental phase.
Money needed at an early stage to get a business up and
running.
SEED MONEY: Usually, the earliest funding a business
needs to complete its research and development phase
before delivery of the product or service.
SELLER CARRYBACK: Any situation in which a seller acts as
lender, holding or "carrying back" a mortgage note from
the buyer.
SELLER'S NOTE: The portion of financing a company owner-
seller provides the buyer, often necessary to complete a
sale.
SELLING EXPENSES: Expenses that vary based on the level
of sales activity, but that are not directly connected to
the sale (a direct cost). Selling expenses include
advertising and promotion, salespersons; travel and
entertainment, and sales-related telephone expenses.
SENIOR DEBT: Typically refers to a business's loans from
a bank; in the event of a liquidation, the bank's
interests generally have seniority over all other
financial interests.
SENSITIVITY ANALYSIS: Simulation analysis in which key
variables are changed and the resulting change in the rate
of return is observed.
SEVERALTY OWNERSHIP: Sole ownership.
SHORT-TERM DEBT: Debts payable within one full year,
including the total value of 12 months' payments on long-
term notes.
SINKING FUND: Assets (and the income derived from them)
that are accumulated for long-term debt retirement.
Sinking funds are usually established by provisions of an
indenture.
SOLE PROPRIETORSHIP: An unincorporated form of
organization owned and operated by one person.
SOLVENT: Able to pay all one's debts and financial
obligations.
SPECIFIC OR SPECIAL LIEN: A lien which affects only one
specific asset, as opposed to a general lien which affects
a number of assets.
SPECS: Specifications for proposed construction,
including dimensions, materials and cost.
STANDARD INDUSTRIAL CLASSIFICATION (SIC): A coding system
for manufacturers, wholesalers, and retailers compiled by
the U.S. Office of Management and Budget based on sales by
product categories. Much data has been assembled for the
SIC system.
STANDBY COMMITMENT: An arrangement in which a lender
makes a commitment to fund a project upon completion of
its construction. The borrower is not obligated to accept
the loan, but if the borrower accepts the commitment, the
lender is obligated to fund the project. The lender
charges a fee for this written commitment. This fee will
vary depending on the amount of loan involved.
STANDBY LETTERS OF CREDIT WRITTEN: An agreement between
two parties, usually a lender and a borrower, whereby the
bank guarantees payment contingent on some event or
occurrence.
START UP: This is a stage in the maturity of a business.
It encompasses the point of initial concept upon which the
business is founded, and typically is considered to span
through the point the business has a product or service
in place and is beginning to generate revenue from
operations. The company is poised to launch into its
marketing plan and a capital infusion is required. This
phase may be considered to run even as far as the second
or third year of operations. Each individual or
institution attaches a slightly different ending point for
this stage.
STATUTE OF FRAUDS: A law which requires that certain
contracts (especially real estate contracts) must be in
writing in order to be enforceable by law.
STEP-VARIABLE COSTS: Those variable costs that change
abruptly at intervals because they involve large purchases
that cannot be spread out over time.
STRAIGHT-LINE DEPRECIATION: A method of depreciation that
takes the depreciable cost of an asset and divides it by
its useful life to determine the annual depreciation
expense. This creates a uniform expense every year an
asset is depreciated.
SUBORDINATION CLAUSE: A clause used in a senior, or first
mortgage of deed of trust permitting it to be subordinated
(placed in lessor rank) to a subsequent mortgage of deed
of trust.
SUBORDINATED DEBT: A loan which is secured by assets of
the borrower. However, the securing assets also serve as
collateral for other financing arrangements of the
borrower. The subordinated debt has a lesser claim to the
assets of the borrower than the non-subordinated debt. A
junior subordinated debt ranks below a senior
(unsubordinated) debt. To attract lenders, borrowers
often give subordinated lenders rights to convert their
debt to equity.
SUBROGATION: Replacing one person or entity with another
with respect to a legal right, interest, or obligation.
SUBSCRIPTION AGREEMENT: A legal document completed by an
investor when purchasing stock in a corporation, detailing
his or her investment knowledge and financial standing.
Usually contingent on the ability of the issuer to solicit
a minimum dollar amount from prospective purchasers of the
security.
SYNDICATE: Investors who form a group to carry out a
particular business transaction or project. SYNDICATION: A group of individuals or companies who have
formed a venture to undertake a project that would not be
feasible to pursue alone.
TAKEOUT COMMITMENT: The promise of a permanent loan from
a reputable lender to repay the construction lender's
short-term loan upon the timely completion of the project.
TENANCY IN COMMON: Separate undivided interest ownership
held by two or more persons but without right of
survivorship.
TERM LOANS: Under a term loan, a bank commits to lend a
borrower a certain amount of money for certain period,
normally three to five years. Repayment of the loan is
normally on a quarterly basis over the term of the loan.
TIME SERIES EXTRAPOLATION: A forecasting method in which
historical sales data form the basis for projections into
the future.
TITLE: The right of ownership to property.
TITLE INSURANCE POLICY: A policy which insures ownership
of real property - or the priority and validity of an
encumbrance on real property - against loss through
defects in the title, or against liens and encumbrances
that may affect the title at the time the policy is
issued.
TITLE SEARCH: The locating and investigating of all
documents affecting the ownership of a piece of property.
THIRD STAGE: This is the stage in the maturity of a
business where the business has established itself
strongly in all of its markets with its products and its
reputation.
TORRENS: A system under which the title to land is
registered with a registrar of land titles. After the
first registration, it is not necessary (at least in
theory) to go beyond the registry to investigate the
validity of a title.
TRADE FIXTURES: Articles necessary to the carrying on of
a business or trade, and which are considered personal
property that can be removed by the owners or sold for a
specific and separate sum to the purchasers.
TRUST DEED: Deed of trust used in some states, such as
California; instead of but similar to a mortgage.
TURNAROUND: The reversal of unfavorable circumstances of
a business where an investment opportunity may exist. A
firm may work with such a business to restructure the
management and the financial structure in order to place
the business into a posture to take the greatest
advantage of more favorable circumstances.
UCC-1 REGISTRATION FORM: The Uniform Commercial Code
credit form used to publicly record a debt when placing a
lien on the borrower's asset(s).
UNDERCAPITALIZED: A firm having insufficient funds to
continue its normal business operations.
UNDERWRITING: 1) The determination of an applicant's
eligibility for credit, the probable risk of extending the
credit, and the proper pricing of the credit. 2) An
investment banking firm acting as underwriter sells
securities from the issuing corporation or government
entity to the public. There are two types of underwriting
arrangements: best efforts and firm commitment. With
best efforts, the underwriters have the option to buy and
authority to sell securities, or if unsuccessful, may
cancel the issue and forgo any fees. This arrangement is
more common with speculative securities and with new
companies. With a firm commitment, the underwriters
purchase, outright, the securities being offered by the
issuer.
UNDIVIDED INTEREST: Interest in a property that has not
been divided (e.g. tenancy in common, joint tenancy).
USURY: Charging an interest rate higher than that
permitted by law.
V.A. GUARANTEED LOAN: A loan whereby the repayment is
guaranteed by the Veterans Administration. Note that
these loans are only made to Veterans. VARIABLE COST: A cost that is uniform per unit, but
fluctuates in total in direct proportion to changes in the
related total activity of volume; an important element in
break-even analysis.
VENTURE CAPITAL: The process by which investors fund
early stage, more risk oriented business endeavors. A
venture capital funding arrangement will typically entail
relinquishing some level of ownership and control of the
business. Offsetting the high risk the investor takes is
the promise of high return on the investment. The
investment is usually in the form of stock or an
instrument which can be converted into stock at some
future date. As the business matures, an initial public
offering may take place, or the business merged or sold,
or other sources of capital are found. Any of these would
occur with the intention of buying out the venture
capitalists. Venture capitalists typically expect a 20%
to 50% annual return on their investment at the time they
are bought out. Venture capitalists typically invest in
high growth companies with the potential to generate
revenues of $20MM or greater by the time the venture
capitalists liquidate their investments. Some will invest
as little as $50,000 and as much as $20MM in any one
company, but typical investments range from between
$500,000 and $5MM. Management experience is a major
consideration in evaluating financing prospects.
VENTURE CAPITAL LOANS: Capital made available by
investors for start-up situations or for young companies
with little or no track record. The investors (venture
capitalists) usually are compensated by receiving some
sort of equity (percent of profits) position in the
companies in which they invest.
VEST: To give title to or to transfer ownership of
property.
VESTED INTEREST: Unconditional, fixed interest in a
property, for both now and in the future; this includes
the right to transfer the property at a later date.
VOIDABLE: Able to be void, but not void without action.
WAIVE: To relinquish or forego a right. To abandon.
WARRANT: A right to purchase stock in a corporation at a
future date, for a set price and under specific
conditions.
WARRANTY: An assurance or promise that certain defects
(e.g. in an item of real property) do not exist or will be
corrected. To guarantee something.
WARRANTY DEED: A deed in which the grantor: 1) guarantees
that he/she is giving the grantee and his heirs good title
free of encumbrances, and 2) agrees to defend the title
and possession against all claims. Also called a full
covenant or general warranty deed.
WITHOUT RECOURSE: A phrase frequently found in
endorsements of negotiable instruments. It means that the
endorser does not assume responsibility of liability for
collection.
WORKING CAPITAL: The difference between the current
liabilities (short term liabilities) and the current
assets (cash and cash related items) of a company
determines its working capital.
WORKING CAPITAL LOANS: Loans made available to businesses
whose cash may be temporarily tied up. These businesses
will usually use either equipment, machinery, inventory,
accounts receivables or some form of property as
collateral.
WRAP-AROUND MORTGAGE: A refinancing technique in which a
lender assumes (continues) the payments on an existing
mortgage loan, and gives a new loan to the borrower,
usually at a higher interest rate. The new loan is said
to "wrap around" the old loan.
WRIT: A court order.
YIELD: Annual rate of return expressed as a percentage of
the amount originally invested.
ZONING: An act of county or city officials which
specifies the usage that property can have in different
zones - such as business, residential, recreational, light
or heavy industrial - and also regulating the type and
density of improvements allowed on property.
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