Ten Terms – Debt (2 August 2017)

Debt Term

How many of these Debt terms do you know? 

Basic Debt Terms

Business credit score – Many if not most sources of debt financing will look at your Business Credit Score as part of the process of figuring out whether to offer you financing and at what terms. There are at least four corporations that measure the credit worthiness of businesses and provide a Business Credit Score: Dun & Bradstreet, Equifax, Experian and FICO. More…

Guarantee or guarantee – In the context of debt, a guarantee is a legal promise made by an individual or an organization to repay a debt if the original recipient of the debt (the borrower) does not pay. See Limited Guarantee, Unlimited Guarantee, Personal Guarantee, and SBA for more about specific types of guarantees. Usage: “I wish I could get a bank loan for my business without having to give them a personal guarantee.”

Prime (rate) – There are two related meanings of prime rate, which influences the interest rates on many business and personal loans. Generally the prime rate is the interest rate charged by commercial banks for short-term loans to major businesses that have the highest credit ratings. Second, there is an index of the prime rate that is published every business day in the Wall Street Journal, which surveys the 30 largest commercial banks daily. The prime rate index does not generally vary daily, but changes when 75% of those 30 banks have changed their rates. More…

SBA – The SBA is a standalone US federal government agency created in 1953 to help American small businesses through financing, training and advocacy. Most of its financing assistance comes in the form of loan guarantees; banks lend money to the business and the SBA guarantees payment on most (but not all) of the loan if the small business defaults on the loan. More…

Trade Credit – When businesses selling products or services to other businesses allow those business customers to pay after delivery, that is called trade credit. More…

Intermediate Debt Terms

Alternative finance – If regulated banks and capital markets (“Wall Street”) provide mainstream financing to businesses and individuals, everything else is “alternative finance.” Historically this has included such things as factoring, equipment leasing, equity private placements, and payday loans. More…

Asset based financing – When a business uses some of their assets as collateral for debt it is called asset based financing. This broad category includes specialized financings that cover just a particular type of asset:

  • accounts receivable for factoring,
  • real estate loans,
  • equipment financing,
  • inventory financing.

Factor/factoring – Factoring is a specialized type of asset based financing in which a business will sell select accounts receivable to a third party – a factor – at a discount to the face value of the receivable. The business receives initial funding which is usually less than the face value minus the discount, which can be 20% to 30% of the face value. The business receives the balance due from the factor when the receivable is paid. More…

Fintech – Fintech is short for Financial Technology (technically it’s a portmanteau). It is a catch-all phrase that includes many technology based companies and products that aspire to disrupt conventional financial services: banks, insurance, Wall Street. Business financing is likely to be changed dramatically because of Fintech in the next decade. Some of those big changes have already started. Much more…

Line of credit – A line of credit is a common type of business loan that functions like a credit card but with some important differences. Like a credit card it is an agreement that the business can borrow what is needed at a convenient time, up to a maximum.

Also like a credit card, a line of credit is paid off regularly in small chunks, but more can be borrowed before it is all paid off. This makes a line of credit “revolving.” The repayments are often on a schedule based on the total amount borrowed, like a credit card. More…

Don Gooding

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