“I made my money the old-fashioned way. I was very nice to a wealthy relative right before he died.” – Malcolm Forbes
In Part 1 and Part 2 of this series, we’ve been doing our little bit to demystify the world of obscure phrases, weird juxtapositions, and otherwise meaningless acronyms that make up the vocabulary of the Alternative Finance (or AltFi) sector.
Continuing through the alphabet, we’re pleased to present another selection of business and money-related terminology, packaged to make the usually dry verbiage a bit more palatable.
Events or situations that affect the broader economy on a regional or national level with the impact felt across a large population. Macroeconomic factors include things like inflation, unemployment and savings and are monitored closely by governments and businesses.
The fee an investment manager or company takes for the management of an investment fund. Management fees are intended to compensate money managers for their expertise and time selecting stocks and other assets for an investment fund’s portfolio, and subsequently managing it in accordance with the fund’s investment objective.
1. The allocation of funds to an investment manager, who is given authority to handle them for a specific purpose, or in a particular style.
2. The written authorisation given by an individual, group, or corporate body (known as the mandator) to another party (known as the mandatary), to pursue a certain course of action.
3. A formal appointment given to advise on or arrange the financing for a particular project.
4. Your dad and Uncle Bob’s weekly spin at the bowling alley.
Method of buying shares whereby part of the sum needed to do so is borrowed from the broker actually executing the share purchase transaction. Securities or cash resident in the investor’s account (the margin) usually form collateral for the loan.
The date on which the term of a financial instrument ends and all outstanding principal and interest payments are due to be repaid to the investor. The maturity date is also the date on which interest payments stop.
Mezzanine debt is the so-called middle layer of capital which sits between secured senior debt and equity. It’s not usually secured by assets, and is lent out on the basis that a company must be able to repay the debt from its free cash flow. Less expensive than equity but more costly than senior debt, it’s ideal for letting emerging businesses make up the difference between what they could get from a conventional bank loan, and the total value of a project or acquisition.
The total value of a company’s assets minus the total of its liabilities. This value is the same as a company’s net worth.
Net Present Value (NPV)
The difference between an investment and that investment’s predicted future cash flows over a set period of time. The catch is that the values of the investment and its potential cash flows are analysed according to what each is worth in the present.
This idea of value in the present is important. Future money is considered less valuable than money you have in your hand now. This is because present money can be used to make more money through potential earnings, inflation, or interest (to name a few).
Open Market Value (OMV)
The best possible price for an interest in an asset on its date of valuation, controlled by the laws of supply and demand rather than cartels or government policies.
Peer-to-peer (P2P) Business Lending
Peer-to-peer – or P2P – lending cuts out the middleman when it comes to borrowing money. It allows individuals to borrow money from lenders directly (and vice versa) without having to use a bank or other financial institution. The lending generally occurs via an online P2P lending platform. Using P2P platforms, lenders can often achieve higher interest rates than if they had gone through a bank, and borrowers, in turn, can gain greater access to funds.
Some well-established P2P lending platforms have developed a supply of funds to compensate lenders should the borrower default; however, the risks are still considered to be higher for lenders as loans are generally unsecured.
A bond by which an individual agrees to take personal responsibility for the financial burden owed by a borrower or debtor in the event that they fail to meet their repayment terms with the lender. A limited business prevents business owners from being personally liable for debts; the personal guarantee legally extends liability to the owner or another person, and provides extra security to the lender.
Small business owners are especially subject to personal guarantees, as the state of their own finances and that of their businesses are often intrinsically connected.
Particularly with new, small businesses that have little or no credit history, the owners are typically required to personally guarantee the settlement of accounts on any business credit cards or loans they apply for – and their only out clause from footing the bill for personally guaranteed business debts may be to file for personal bankruptcy.
See Also: The cheque is in the mail.
The amount borrowed or the amount still owed on loan, separate from the interest.
The debt burden of private entities, such as individuals or private businesses in the form of personal loans, mortgages, credit card bills, business loans, corporate bonds, etc.
Private debts may incur high levels of interest, additional charges for defaulting on scheduled payments, and/or demands for security or collateral to support a loan application – demands which may put the personal property or assets of the borrower at risk. Creditors risk the loss of their own assets and the expense of legal action in the event that borrowers fail to repay their loans.
Professional Indemnity Insurance (PII)
Also known as professional liability insurance (PLI) or errors & omissions (E&O) in the United States, professional indemnity insurance protects professional individuals and companies that provide advice, consultancy, or services. It protects against claims of negligence or breach of duty/contract by any act, error, or omission.
With professional indemnity insurance, businesses are also assured of the backing of a legal team should they wish to take action to defend their professional reputation.
Synonyms: Hush Money
Profit and Loss Statement (P&L)
Also known as an “income statement”, “statement of financial results”, “statement of profit and loss”, or “income expense statement”, a profit and loss statement is a financial statement that reports a company’s revenues, costs and expenses incurred over a period of time – normally a fiscal quarter or year. The P&L is used to determine the net income of a business during that time.
Funds a company sets aside as assets to pay for anticipated future losses. In the Alternative Finance sector, money in a provision fund is used to cover investor losses when a loan goes into default.
When an individual or business revises the schedule for repaying a loan, typically by taking out a new loan to pay off an existing one. Essentially, the old loan is paid off with a new loan that offers different terms, often from a different lender,. Refinancing often occurs to extend the maturity date or to improve certain aspects of the loan from the borrower’s perspective, such as lower interest rate.
Return on Investment (ROI)
The gain or loss generated on an investment relative to the original cost of the investment. The ROI is usually expressed as a percentage.
Right of First Refusal (RFR)
A right of first refusal (ROFR or RFR) is a contractually guaranteed right which gives an individual or organisation the exclusive option to enter into a business transaction with another entity (typically the holder of a business asset, or an intellectual property owner), before that option may be offered to any third party. If the holder of the first refusal rights passes up on the offer, it may then be thrown open to the wider market.
For the rights holder, a first refusal guarantee allows them to keep their interest and options open on an asset that they may wish to acquire in the future. The owner of the valued asset remains tied to the RFR holder for the duration of their interest, without the option of selling their property elsewhere throughout that time.
Assets are said to be ring-fenced when they are separated and distinct from other assets in a company. This deliberate distinction between particular parts of a company’s assets may be helpful when complying with government regulation, dealing with company taxes, or differentially protecting assets from specific sources.
More to come in Part 4…