“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
There is a rather alarming paradox at play in many industries and professions the world over, and it’s this: rather than using their intelligence, the professional world is full of people who instead use jargon to sound clever. Whether or not they are indeed as smart as they try to sound is largely unknown, buried, as any confirmation of this is, beneath steaming piles of bombastic buzzwords, corporate doublespeak, spin and guff – collectively known as ‘bullshit’.
It is with regret that I am forced to confess that the financial services industry is one of the most potent proliferators of such shameless gobbledegook – both within and without the boardroom.
As nauseating – and deliberately confounding – as much of this language is, there is unfortunately no escape from it. And that’s why The Route – Finance is delivering our glossary of alternative finance terminology.
The following guide is set out as an A-Z for your convenience. It will reveal the true meanings behind the lingo used every day within the world of alternative finance and financial technology (FinTech), and I’ve thrown in some more generalised bullshit from the financial industry at large for good measure (and a bit of a laugh – though apologies if you’ve heard any of the old chestnuts before).
Alternative Finance Terminology – A-F
An accelerator refers to programmes or special centres where FinTech startups are offered a workspace, mentorship, educational components, and sometimes finance to help launch or grow their business. Level 39, FinTech Innovation Lab and Bright Bridge Ventures are examples of accelerators.
Acquisition financing refers to capital that is typically borrowed by one business for the purposes of buying assets or stocks in another business. Sometimes known as a ‘bootstrap’ or ‘buyout’ loan.
“You should always live within your income, even if you have to borrow to do so.” – Josh Billings.
Aggregators can be most easily thought of as consumer comparison sites specifically in the alternative finance space. They do not offer finance themselves, but rather information about the various AltFi options there are for borrowers and investors. The goal of the aggregator, ultimately, is to simplify the choices presented to the business or individual. Alternative Business Funding and CF4ALL are just two of the many aggregators available online today.
Alternative Finance (AltFi)
Alternative finance, sometimes contracted to AltFi, is a rather broad term that takes in the collective total of the finance industry that operates outside of the traditional finance sector (i.e. the banks and capital markets). Alternative finance providers usually run online platforms which offer businesses and consumers an alternative option to access finance, and an alternative avenue for investors to locate opportunities.
These platforms separate into categories – P2P lending, crowdfunding and invoice financing to name but three. We will explicate these and more below, but you are also recommended to take a look at our previous post, ‘Understanding The Alternatives: A Guide To Alternative Finance Platforms’.
Essentially another term for depreciation, amortisation describes the practice of reducing the value of assets as a reflection of their decreased worth over time.
An amortising loan is a type of loan that is subject to an amortisation schedule. That is to say that the loan is paid down, usually through equal payments, over the life of the loan.
“Money is something you have to make in case you don’t die.” – Max Asnas.
Angel investors are considered to fall under the ‘alternative finance’ umbrella. They are usually individuals who invest in startups and SMEs. Angel investors are most commonly found amongst friends and family. As such, this type of investor tends to be more concerned about securing the continued success of the business that he or she is investing in, rather than obtaining high returns for themselves.
An appraisal describes the valuation process of stock or property against which a loan is drawn.
- 1. An asset refers to any resource that an individual or business owns that holds economic value – be it a patent or piece of equipment. Companies buy assets with the expectation that they will provide future benefit and/or increase the value of the firm, and are reported on a company’s balance sheet.
- 2. The moon-shaped impression left on a belonging once the owner finally stands up – caused by being sat on it for too long.
Asset Based Lending (ABL)
ABL describes the practice of lending against the strength of the borrower’s assets – usually property and stock. Combined with factoring (see below), it is a popular form of financing in the manufacturing industry, as plants and machinery are commonly put forth as against which a person can borrow.
A bottomless pit in the ground used for disposing of unwanted profits and cash. It was also once an entity that created vast sums of imaginary credit which you couldn’t afford, but now is only capable of lending money when you can prove you don’t need it.
Invented by the pseudonymous Satoshi Nakamoto, Bitcoin is a cryptocurrency that has evolved gradually from being a somewhat ‘murky’ money used mainly in the digital underworld of the Dark Web in 2008, to arguably the world’s most mainstream digital currency today.
Bitcoin is neither controlled nor issued by a central bank or government. Users store their Bitcoin wealth in a digital wallet, and users can trade their coinage for goods and services, or transfer payments worldwide.
Blockchain is the name given to the technology that underlies all Bitcoin transactions. Put simply, it acts as a public ledger that creates a full history of Bitcoin transactions, though, unlike a bank, there is no central computer or single party in control of it. Indeed, the Blockchain is distributed across probably several thousands of computers all over the world.
A bond is a debt investment, whereby an investor loans money to a business or other entity, which borrows the funds for a fixed period of time at a fixed or variable rate of interest.
The process of starting up a business with no external investment.
- 1. An individual you trust with thousands of your hard-earned cash.
- 2. What your broker made you after you trusted him with thousands of your hard-earned cash.
A mathematical confirmation of your suspicions that you cannot afford all of the things you want.
The speed at which a borrower is spending cash.
Caps and Collars
These are terms used to describe the agreed range of an interest rate. A cap is the upper limit, a collar is the lower limit (i.e. maximum and minimum rates that will apply respectively).
An abbreviation for ‘capital expenditure’, and sometimes ‘capital expense’. Capex refers to money that is invested in assets, such as equipment, buildings or a new business. There are in fact two kinds of capex. That which is invested to maintain existing operation levels, and that which is invested in something new for the purposes of future growth.
Descriptive term used to depict the cascading movement your money makes as it is flushed down the toilet.
A challenger bank is basically any new bank that has been granted a banking licence since 2010. They are called ‘challengers’, as they are typically set up to challenge for business with the traditional high-street banks (i.e. the Big Four). They are the latest innovators in the banking space, and make extensive use of technology to give their customers the benefits that traditional banks can’t offer – for example actually lending money. Metro Bank and Mondo are two examples of challenger banks.
A convertible loan is a type of business loan that can be converted at any point into equity (i.e. stock or shares) in the borrowing company under pre-agreed terms.
In financial terms, correlation is the measure of the relationship between the changes of two (or more) variables over time. For example, if two investments move up or down in synchronisation, they are said to have a ‘correlation of 1’, meaning that they are perfectly correlated. If the two investments move independently and have no relation to each other, they have a ‘correlation of 0’, and said to be uncorrelated. If two investments move in opposite directions at the same time and to the same degree, they have a ‘correlation of -1’ and are said to have a perfect negative correlation.
“The safest way to double your money is to fold it over and put it in your pocket.” – Kin Hubbard.
A coupon is the annual interest rate payable on a loan.
Crowdfunding is one of the most popular forms of alternative finance. Crowdfunding platforms use the power of the internet to raise small amounts of funds from large amounts of people. Entrepreneurs pith their business ideas to the crowd, the members of which then have the option to give a small portion of the total money the borrower needs to reach his/her target.
There are different types of crowdfunding: donation-based, reward-based, equity-based and debt-based. We cover these in detail in our previous post ‘Understanding The Alternatives: A Guide To Alternative Finance Platforms’.
A debenture is a type of medium-long term debt instrument that companies use to borrow money at a fixed rate of interest. Debentures are not secured by collateral or physical assets, rather by the creditworthiness of the issuer.
A deck is the term used to describe a brief presentation of a business plan when pitching for investment, new business, or to demonstrate a business plan to existing or potential partners.
Debt finance is the process of raising money by selling bills, bonds or notes to investors. In other words, borrowing money that will be paid back later with interest.
Debt securities are debts that are issued that may subsequently be traded. To explain, the original buyer of a debt security effectively lends the issuer money, and will then retain the right to receive interest payments and the principal at maturity. But this security may be sold at the holder’s discretion to someone else, who will then gain the right to receive interest and the principal from the issuer.
Default is failure to meet the legal obligations for a loan.
“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” – JP Getty
- 1. The peak-to-trough decline during the period of an investment, usually expressed as a percentage.
- 2. In debt finance, the term drawdown is used to denote the time when funds are made available to a borrower, which can either be all at once or as a series of separate drawdowns.
Due Diligence (DD)
Looking back over the financial crisis of 2008, it’s very easy to see where things began to unfold – and it can all boil down to banks and credit agencies approving enormous amounts of loans without conducting proper due diligence (DD).
DD is the practice of conducting a thorough and meticulous investigation of an investment opportunity before any money changes hands. It involves, amongst many things, confirming the identity of the borrower, assessing the credibility of the project, the exit, the security of the loan, and the legal structure of the agreement should it go ahead.
DD is essential in alternative finance for the security of both borrower and investor(s), and if it is to avoid making the same mistakes that the banking sector did.
Earnings before interest and taxes. EBIT refers to a company’s profit after all expenses except those from interest and income tax.
- 1. Earnings before interest, taxes, depreciation and amortisation. EBITDA is used as an indicator of a company’s financial performance and earning potential.
- 2. Earnings before I tricked the dumb auditor.
Enterprise Investment Scheme. This is a tax scheme in the UK whereby private investors who invest in eligible businesses are offered capital gains tax and income tax relief.
- 1. A stock or other security that represents an ownership interest.
- 2. Shareholder’s equity is represented by the amount of funds contributed by shareholders plus the retained earnings or losses.
- 3. In margin trading, equity represents the value of securities in a margin account, less what has been borrowed from the brokerage.
- 4. In real estate, equity is the difference between what the owner of a property still owes on a mortgage and the property’s current fair market value. In other words, if the owner were to sell the property, the equity is the amount the owner would receive after paying off the mortgage.
- 5. Ownership equity is the amount of money left (if any) after a business goes bankrupt, has to liquidate and repay its creditors.
“People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30-year mortgage.” – Doug Larson.
Equity financing is the process of raising working capital by the selling of stock to investors, who in return receive ownership interests in the company.
An equity kicker forms part of a loan agreement, whereby the lender agrees to charge lower rates of interest in return for a share of ownership in the business or property for which the loan is provided.
The means by which the directors of a business intend to reach an exit and deliver a return to investors or repay a loan.
Factoring describes the process whereby a business sells its accounts receivable to a third party at a discounted rate in order to raise immediate funds. Typically, the factor will pay 70% to 80% of the invoiced amount immediately, forwarding the remainder (minus the discount) when the client pays.
Financial Conduct Authority (FCA)
The Financial Conduct Authority (FCA) is the UK’s financial regulatory body that operates independently from government. Members of the financial services industry fund the FCA via membership fees, and in turn the FCA regulates these firms to protect their integrity and consumer integrity in the UK financial market.
FinTech (Financial Technology)
Quickly becoming synonymous with ‘disruptive technology’ in the financial space, , is the term used to describe whole swathes of new financial services that use new technology to facilitate things like money transfers, loans and mobile payments.
Rather than just being a branch of traditional institutions, however, FinTech forms its very own sector in the financial industry. Many companies use data-intelligence to inform decisions, making them more agile than traditional banks, many of which are still hampered by legacy systems. It is for this reason that FinTech is seen as a disruptive force in the finance industry, as it has the power to completely revolutionise the way that finances are conducted on grand scales.
To be continued in Part 2….
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