Glossary of finance terms meaning and definition

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Glossary of finance terms meaning and definition

return of capital employed (roce)

Words	Definitions
account	An account receivable or an open account. In the commercial finance industry, "account" refers to an indebtedness; the person or company owning the indebtedness is an "account debtor."
account debtor	A customer billed by a client for a product shipped or service rendered.
accounts receivable credits	Returns, allowances, discounts, or other offsets to accounts receivable.
accounts receivable debit	An increase to accounts receivable. A debit may be the result of sales, interest charges, freight charges, or collection costs.
acquisition financing	A loan to a business, entrepreneur, or equity sponsor group to assist in acquiring the stock or assets of a business. Sometimes referred to as a "bootstrap" loan or a "buyout" loan.
advance	an amount that is wired to a borrower
advance rate	The percentage of funds extended to a client against eligible collateral as stated in a lending contract. Example: A client with a contractual advance rate of 80% assigns as collateral invoices totaling $100,000. The client receives a loan of $80,000 at once, and upon collection of the invoices, receives the balance of $20,000, on a day-to-day basis as collections are received, less any dilution.
aging	A schedule of accounts broken down according to the month of an invoice's original billing date.
airball	The portion of an asset based loan which is not covered by collateral.
appraisal	The valuation for collateral purposes of property, such as equipment or inventory, against which a loan is to be made.
assignment jacket	A pouch containing all bills and receipts that a borrower assigns to a secured lender.
assignment of accounts receivable	An instrument wherein a client assigns, reports or pledges receivables to the lender to secure a loan.
availability	The amount of money a client has available to borrow, determined by the sum of collateral values less all ineligibles, multiplied by the agreed advance rate.
average collection period	The average number of days in which cash receipts will liquidate receivables.
bill and hold	Merchandise billed to an account debtor but not shipped. The merchandise may be marked as property of the debtor and is held pending shipping instructions.
blind endorsement	Endorsement of checks collected by clients in favor of the lender by means of a number or symbol, so that the lender's name does not appear.
bol	Bill of Lading; a document used to transfer title to a shipper
borrower's fatigue	A strained lending relationship that occurs when the borrower tires of a lender, typically for refusing to modify its loan agreement to reflect the borrower's improved financial condition.
borrowing base certificate	A form prepared by the borrower that reflects the current status of the collateral. Borrowing base certificates may be due on a daily, weekly, or monthly basis.
bulk handling	Managing information obtained from reporting, accounting records, or aging prepared by client, but with no detail of account debtors.
cash application	applying a customers payment to their open invoices, the act of removing paid invoices from the AR
cash flow	type of deal or the amount of cash generated by the business
circled	A transaction is said to be hard circledï¿½ when all issues are resolved and participants are committed. Verbal agreement may constitute a soft circle.
clearance	Average number of days necessary for deposited checks to pass through a clearing house (decided by contract, usually 3 to 5 days).
client	The borrower.
collateral	assets pledged to obtain a loan
collateral	Security offered by a client to obtain a loan. Collateral may include inventory, accounts receivable, equipment, securities, real estate, or certain other assets.
collection report	Form used by client to itemize collections sent to the lender each day.
collection report	Forms used by client to itemize collections sent to the lender each day.
commensurate balances	Funds that a borrower is required to keep on deposit with a bank extending a loan.
commercial financing	Various types of asset based financial services in which money is loaned by a secured party to a debtor, pursuant to a loan and security agreement which gives the lender a security interest in specified types or items of collateral. Note that commercial financing is different from factoring. In commercial financing, the secured party is entitled in all events to be repaid the money loaned. In accounts receivable factoring, the secured party (the factor) takes a loss if a factored invoice is not collected due to insolvency. If the account debtor becomes insolvent, the factor assumes the credit risk on that particular account debtor or invoice.
commitment fee	A fee from a lending institution as consideration for its undertaking to make a loan to a prospective borrower, charged when the borrower meets the preconditions specified in the commitment. Depending on the terms of the deal, a commitment fee may be non-refundable or it may be credited upon closing the loan.
compensating balances	Funds that a borrower is required to keep on deposit with a bank extending a loan.
concentration	A debtor having a balance in excess of 5% of a company's total receivables.
concentration ratio	The percentage of total receivables billed to single debtor.
consignment sale	A sale of merchandise to a buyer by a middleman in which title passes directly from the owner to the buyer. The owner expects payment only on completed sales, and unsold items may be returned by the middleman to the owner.
contra	potential offset to the collateral, this typically occurs when a company buys from and sells to the same entity
contra	An account created when a company both buys from and sells to the same client and, therefore, has payables and receivables which offset.
conversion	A client's unauthorized deposit of collections of accounts assigned to a lender.
credit	document used to reverse a sale or a portion of a sale
credit insurance	A policy held by a client which protects the client against losses due to bad debts.
credit memo lag	the number of days between the CM date and the original invoice date (or in some instances the "liability" date)
credit memo test	an audit procedure used to analyze credits by reason, identify credit memo lag, double financing and refreshening of the aging
critical	in terms of AR, this refers to balances that are one bucket away from being past due
cross aging	When past due receivables exceed a given percentage of a debtor's total accounts receivable, the current portion of receivables is also classified as ineligible.
datings	Terms of sale which extend the period within which the debtor is to make payment. Example: Normal terms are Net 30 Days. On a bill for merchandise shipped September 15, a bill is dated "as of November 15" making payment due December 15.
debtor	A customer billed by a client for a product shipped or service rendered.
debtor in possession	A business entity which is the subject of a reorganization proceeding under Chapter 11 of the Bankruptcy Code. Unless and until a trustee is appointed, the Debtor-In-Possession operates its business and has all the powers of a trustee to manage the affairs of the business and administer the case.
demand loan	A demand loan is repayable on demand rather than on a specified date. In practice, demand for repayment is not generally made unless the borrower's condition deteriorates so much that the lender concludes its risk has become too great to continue the existing account.
detail	detailed listing at the transaction level
detailing	The posting of all transactions of a client's pledged accounts receivable to the records maintained by the lender. Detailing should agree with client's subsidiary ledger at each periodic examination.
dilution	Non cash reductions to the accounts receivable
dilution	Returns, allowances, discounts, or other offsets to accounts receivable.
dip	A business entity which is the subject of a reorganization proceeding under Chapter 11 of the Bankruptcy Code. Unless and until a trustee is appointed, the Debtor-In-Possession operates its business and has all the powers of a trustee to manage the affairs of the business and administer the case.
dip financing	Financing extended to a Debtor-In-Possession under Chapter 11 of the Bankruptcy Code. In most cases, DIP financing is considered attractive because it is done only under order of the Bankruptcy Court, which is empowered by the Bankruptcy Code to afford the lender a lien on property of the bankruptcy estate and/or a priority position.
discount	a reduction to the invoiced amount in exchange for prompt payment
double assignment	The assignment of receivables by a subsidiary, parent, or other affiliated company to the borrower, which in turn assigns the receivables to the lender.
eligible	Invoices assigned to the lender, against which advances are made.
eligible accounts	Sometimes called "acceptable accounts" or "prime accounts." These are receivables which satisfy the criteria specified in the security agreement so that they are acceptable to the secured party and included in the borrowing base as eligible collateral and entitle the debtor to an advance. Receivables which do not meet the criteria are called "ineligible."
equity	The percentage due from lender to client upon collection of bill, calculated as the amount collected less the contracted advance.
excess availability	Total availability less the aggregate advances made on the outstanding revolving loan.
field audit	An examination and inspection of a client's books, records, property, and operations, with particular attention being paid to the condition of the collateral. In revolving financing on receivables or inventory, regular field audits are an essential feature of the secured party's monitoring.
fifo	first in first out method of valuing inventory
filing	In the UCC context, filing is the act of depositing in a public office a document, usually a financing statement, which gives legal notice of the secured financing transaction. In most secured transactions, filing is an essential step in the process of perfecting the security interest.
financing statement	Generally known as "Form UCC-1." This form is filed in the prescribed public offices for the purpose of perfecting the security interest of a secured party.
foreign	transactions made to companies not domiciled in the US or Canada
grid loan	A secured but not heavily monitored loan. As long as the borrower's company performs according to the loan agreement, collateral monitoring is minimal.
gross profit	net sales less the cost of items sold/services performed
guaranteed sales	Sales of merchandise for which payment is made in normal course, but with the understanding that unsold merchandise may be returned for a full refund. Title passes to the debtor.
guaranty	A document by which a person or corporation (a "guarantor" or "surety") promises payment of a debtor's obligations to a secured party. It is quite customary to require guaranties from the principals of a debtor and from the debtor's parent, subsidiary, or affiliates.
haircut	When a lender wants to end a transaction in advance, it often will accept a reduction in principal or interest accrued (i.e., a haircut) in order to be paid out in cash.
high debtor	A debtor whose balance represents 5% or more of a company's total receivables (see Concentration).
holdback	The balance of an invoice in excess of the advance. The holdback becomes equity when the invoice is paid.
ineligible	an amount excluded from availability
ineligible	Invoices assigned to the lender, against which no advance is made. Ineligible invoices may be past due according to contractual terms (90 to120 days from invoice date), contra, employees, affiliates, consignments, memo guaranteed sales, or in excess of limit allowed to the debtor.
ineligible	Invoices assigned to the lender, against which no advance is made. Ineligible invoices may be past due according to contractual terms (90 to 120 days from invoice date), contra, employees, affiliates, consignments, memo guaranteed sales, or in excess of limit allowed to the debtor.
initial assignment	Instrument used to convey an interest in accounts receivable to the lender in order to secure the initial advance.
insolvency	Technically, the financial condition of an enterprise whose liabilities exceed its assets, or which is unable to pay its debts as they mature. Financing an insolvent client requires specialized lending expertise, particularly if insolvency leads to bankruptcy. Bankruptcy tends to be the path followed by insolvent companies, but it may actually open up alternative financing opportunities.
intercompany	transactions made to affiliates or other related companies
inventory	items held for the manufacture of other items or sale
inventory financing	Sometimes called "inventory loans." Advances made to enable a client to acquire, manufacture, or carry inventory. They are collateralized by a security interest in the inventory and usually in the accounts receivable or other proceeds of sale.
invoice	document used to record a sales transaction
involuntary bankruptcy filing	An involuntary bankruptcy filing occurs when a creditor or group of creditors forces a company into bankruptcy. This may severely restrict the ability of the bankrupt company to control its own situation.
landlord lien	The privilege given by some state statutes to a landlord when a tenant has not paid rent due which allows the landlord to impose a lien for the rent against the tenant's property located in the leased premises. Since the landlord's lien is a potential rival to the UCC security interest, secured lenders often try to obtain a landlord's waiver in advance, before taking on a prospect in a state which recognizes the landlord's lien.
ledgering	The posting of all transactions of a client's pledged accounts receivable to the records maintained by the lender. Detailing should agree with client's subsidiary ledger at each periodic examination.
lender fatigue	Occurs when a borrower continually disappoints the lender by missing financial targets or failing to live up to terms of the contract. In such circumstances, the lender may, depending upon its rights under the contract, ask or require the borrower to refinance.
letter of credit	An undertaking by a bank that pays a specified amount to the presenter of specified documents. Letters of credit are used traditionally in international transactions to assure that a shipper of goods will be paid for them.
lifo	last in first out method of valuing inventory
line of credit	A commitment to lend money to a borrower up to a maximum amount during a stated period.
lockbox	a post office box used to receive customer payments, which are then deposited directly to a specific bank account
markup	price less cost
negative pledge	A promise not to secure certain assets of a company, such as inventory or receivables.
non-prime	Invoices assigned to the lender, against which no advance is made. Ineligible invoices may be past due according to contractual terms (90 to120 days from invoice date), contra, employees, affiliates, consignments, memo guaranteed sales, or in excess of limit allowed to the debtor.
non-prime	Invoices assigned to the lender, against which no advance is made. Ineligible invoices may be past due according to contractual terms (90 to 120 days from invoice date), contra, employees, affiliates, consignments, memo guaranteed sales, or in excess of limit allowed to the debtor.
on account payments	Partial payments by a debtor which does not pay a bill or bills in full.
over advance	A lender's unsecured position that occurs when funds are advanced in excess of contracted terms. Example: Where a stipulated advance is 80% and client is extended 85%, the extra 5% is considered an over advance.
pack and hold	Merchandise that is packed and held in inventory against orders. Billing does not occur until merchandise is shipped.
participation	Occurs when portions of a loan, usually up to 50%, are shared by different lenders.
past due ar	the portion of AR considered ineligible due to its age.
pay statement	A statement that accompanies a debtor's check and which indicates an item or items being paid as well as any existing dilution.
plan of reorganization	The document which outlines the Chapter 11 exit strategy of the Debtor-In-Possession. It sets forth the new capital structure of the DIP and the treatment of the various classes of creditors and equity holders. The POR must be confirmed by the bankruptcy court before it can become effective. The DIP has the exclusive right to propose a plan within the first 120 days of the Chapter 11 case, subject to extension by the court. Specialized financing is often an integral part of a POR and may be critical to a company's successful emergence from bankruptcy.
post dated check	A check drawn in payment of bills, but with the date on the check being some time in the future.
pre billing	Billing by a client in advance of shipping.
prebill	invoicing for an item or service prematurely (i.e. prior to delivery or performance)
prime	Invoices assigned to the lender, against which advances are made.
primed	A lender is primed when it has lost its collateral position and moves down in the capital structure.
progress billing	Billing made on certain milestones being met and generally found in service, construction, and other industries.
purchase money security interest
re assignment	The assignment of receivables by a subsidiary or affiliate to a parent company, which in turn assigns the receivables to the lender.
reconciliation	the process of accounting for differences between two items
remittance report	Form used by client to itemize collections sent to the lender each day.
remittance report	Forms used by client to itemize collections sent to the lender each day.
report of assigned accounts	An instrument wherein a client assigns, reports or pledges receivables to the lender to secure a loan.
report of assigned accounts	Instrument used to convey an interest in accounts receivable to the lender in order to secure the initial advance.
repurchase period	The period of time, generally 90 to 120 days beyond invoice date, beyond which a sale becomes ineligible for assignment in accordance with contract terms.
reserve	The balance of an invoice in excess of the advance. The holdback becomes equity when the invoice is paid.
retail sales	purchaser is usually an individual buying the product for personal use
retainage	The percentage held back by a debtor on a service contract to ensure adequate performance.
retention	The percentage held back by a debtor on a service contract to ensure adequate performance.
sales	the transfer of goods to a third party in exchange for something of value, usually money or the promise of money.
shipping test	an audit procedure used to verify sales invoices
standard cost	the expected cost of producing inventory, usually based on prior years production
summary	document that summarizes information
turnover	Metric used to measure how long it takes for something to be used or replenished
turnover	The average number of days in which cash receipts will liquidate receivables.
variance	the difference between two numbers
verification	the act of confirming an amount owed, typically done via a phone call
wholesale	selling in bulk, usually to another business

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