If finance is something new to your business, or you have been at it for a while, it can often seem like we are speaking a foreign language! It can be quite overwhelming when the words are complex and the consequences of not understanding are severe. We have made a little cheat sheet to explain a few of the confusing but important terms you may come across in your borrowing journey.
Arrears
If you are behind or running late on a payment, your loan or account is deemed ‘in arrears’. Being in arrears can negatively affect your credit score and your ability to access more borrowing. It can also result in fees and interest being charged on the arrears balance. If you anticipate you are at risk of falling behind, it is a good idea to contact your broker or lender as soon as possible. Often, they have a process to assist in your circumstances.
Asset
An ‘asset’ is an item of property owned by a person or company, regarded as having value. It includes property such as your house, business machinery or vehicles. Often referred to as collateral, this property can be pledged as security for repayment of a loan, to be forfeited in the event of a default.
Authority
In the context of finance, authority refers to giving permission to attend to an activity. A great example of this in practice is signing a document; a Privacy Disclosure Statement, when you commence a relationship with your broker. This document provides the broker the authority to negotiate with the lenders on your behalf.
Balloon Payment
A balloon payment is a one-off lump sum that you agree to pay your lender at the end of your loan’s term (usually based on guidelines from the Australian Taxation Office). Because balloon payments will typically account for a large proportion of your loan’s balance, it can reduce your loan repayments.
Credit score
Credit scores are like garages, we all have one, but some are in better order than others! A credit score is a ranking between 1 and 1200, with the higher the ranking the better chances of having your request for credit approved. The ranking is impacted by the conduct of past and present debt, credit enquiries, credit and store cards, current credit limits and accounts you have opened. They will also consider if you have a court writ or default judgement against you and look out for a history of bankruptcy. This ranking gives lenders an idea of what your previous financial history was like, your habits for paying bills and the level of risk they may take. Learn more or talk to us.
Default
If a borrower fails to make timely payments, the loan could go into default and the asset used to secure it would then be in jeopardy, with the lender entitled to repossess the asset. The default can be reported to credit agencies after two written notices being issued to the borrowers last known address.
Deposit
A deposit is a sum payable as the first instalment on the purchase of something or as a pledge for a contract, with the balance being payable later. Often vendors will request a deposit to be paid to hold an asset for the buyer.
Direct Debit
Direct debits are handy for paying regular bills, such as your monthly phone bill or rent. Automatic payment means you don’t have to remember to pay the bill, and you don’t risk any late fees. To set up a direct debit, you will need to complete a direct debit authority. This allows a lender to withdraw money from your account. Lenders generally specify direct debit payments as a condition of signing up for a product or service.
Dishonour
When there are not enough funds in an account for the direct debit to clear, the automatic payment will not occur. This is referred to as a dishonour. Some lenders charge a dishonour fee for every instance.
Equity
Equity is equal to total assets minus total liabilities. In finance, this drills down to the difference between the value and the associated debt on a particular asset. Negative equity usually occurs at the start of a loan, when the debt associated with new equipment is larger than the asset value (as new assets often lose value very quickly compared to second hand equipment). Positive equity is when the value of the asset is higher than the debt associated to that asset. To illustrate, a truck with a market value of $100,000 and its debt of $70,000 would provide a positive equity of $30,000.
A situation of positive equity may enable the trading up of equipment. By selling the old equipment and replacing with a newer one and using the equity from the sale of the old asset as a deposit on the new purchase.
Full Doc Loan
A full doc loan refers to loan types whereby the lender requires the full picture of the financial situation of the business. Examples of information the lender may require include a couple of years of recent financial statements, personal tax returns, ATO tax portals and management reports. Full doc loans can often provide best interest rates, particularly if servicing is strong and will provide access to maximum funds available. Enquire now.
Guarantor
If you guarantee a loan, you’re known as a guarantor. You are responsible for paying back the entire loan if the borrower can’t. If a lender doesn’t want to lend money to someone on their own, the lender can ask for a guarantee of someone connected to the business.
Interest
Interest is the monetary charge for the privilege of borrowing money. Both the amount borrowed, and interest will need to be paid to the lender.
No Doc Loan
The no doc loan is a great product for a business with limited financial information available. With a cap on funds available under this facility and a specific lending criterion, minimal financial information is required. Interest rates are high due to the risk the lender carries from minimal financial analysis on the borrower. Ask us how.
Low Doc Loan
The low doc loan is an attractive product if you are running behind in your paperwork. Although the funds available under this facility are capped, the documentation the lender requires is significantly reduced and quicker with their assessments. The criteria for approvals under this loan type are specific and vary between lenders. Interest rates are higher due to the risk the lender carries from not obtaining a full financial analysis of the borrower. Call us to find out more.
PPSR
The Personal Property Securities Register, known as the PPSR, is an official government register. Registering on the PPSR is a way to let people know property such as cars, goods, or business assets have an ownership or secured interest registered over them. Registering your security interest correctly on the PPSR can protect you and give you extra rights in the property its registered over. Lenders can search to determine if an asset is already providing security to an existing loan and therefore not viable to register an interest over that asset.
Principal
The principal is the original sum of money borrowed, excluding interest and up-front fees.
Refinance
When you refinance a loan, you are replacing one loan with another, either with your current lender or a new one. It can give you more flexibility with your money and let you adapt your loan to your changing business circumstances or because you could get a better deal. Refinancing is most common when a balloon becomes due and the business prefers to finance the lump sum amount to preserve cash flow.
Sale/Buyback
This terminology refers to a loan for an asset that has either been purchased with cash to secure the sale, or is an asset already owned unencumbered by the business. It is a means to reimburse for the quick purchase of an asset or capital raise for injecting funds into a business.
Term
At the beginning of a loan the time allocated to repay the funds borrowed is called the term. This timeframe is documented in the loan agreement and is legally binding.
DISCLAIMER: The above content is to provide general information and does not constitute financial, legal or other advice. This means that duties and requirements imposed on people who give financial advice do not apply to this content. For advice contact your accountant or legal advisor.