Business Finance Glossary

The process of paying off a loan through regular scheduled payments over time. Each payment covers both interest and a portion of the principal (the amount borrowed). In a standard amortised loan, early payments are mostly interest; later payments are mostly principal.

Annual Percentage Rate. The total yearly cost of borrowing expressed as a percentage, including interest and any mandatory fees. Used by lenders as a standardised way to compare loan costs. The APR on a business term loan typically ranges from 6% to 30%+ depending on the lender, loan size, and your creditworthiness.

A one-off fee charged by a lender for setting up a loan, typically expressed as a percentage of the loan amount (commonly 1–3%). May be added to the loan balance or paid upfront. When calculating whether early repayment makes sense, arrangement fees on a new loan affect your break-even point.

A category of business finance used to purchase or lease physical assets — equipment, vehicles, machinery. The asset itself often serves as security for the finance. Common structures include hire purchase, finance lease, and operating lease.

A large lump-sum payment due at the end of a finance lease or hire purchase agreement. It represents the residual value of the asset. Making the balloon payment transfers full ownership of the asset to you. If you cannot fund the balloon, options include refinancing it or returning or selling the asset.

The interest rate set by the Bank of England's Monetary Policy Committee (MPC), currently 4.5% (February 2026). The base rate influences the interest rates lenders charge on variable-rate business loans. When the base rate rises, the cost of borrowing typically increases.

A government-backed emergency loan scheme launched in May 2020 for UK small businesses affected by COVID-19. Loans of £2,000–£50,000 (up to 25% of turnover) at 2.5% fixed interest, 100% government-guaranteed, with repayment terms of 6–10 years. The scheme is now closed to new applications.

The point at which the savings from switching to a cheaper loan outweigh the costs of switching (exit penalties, arrangement fees, and other switching costs). If your break-even point is 18 months and you have 24 months of loan term remaining, switching may be worthwhile.

The original sum borrowed, before interest is added. Also referred to as the principal. As you make repayments, your outstanding capital decreases. Only a portion of each monthly payment reduces the capital — the rest covers interest.

A government-backed loan scheme launched in March 2020, providing finance of up to £5 million for UK businesses affected by COVID-19. The government guaranteed 80% of the loan and covered interest for the first 12 months. The scheme is now closed to new applications.

An asset pledged by a borrower to a lender as security against a loan. If the borrower defaults, the lender can seize and sell the collateral to recover the debt. Common collateral includes property, equipment, and vehicles. Business loans secured against collateral typically carry lower interest rates than unsecured loans.

Interest calculated on both the original principal and any accumulated interest from previous periods. Most standard business term loans do not compound in the traditional sense — interest is recalculated monthly on the outstanding balance. However, some revolving credit facilities effectively compound costs when balances are carried forward.

A person or business authorised by the FCA to introduce borrowers to lenders. Credit brokers do not lend money themselves — they earn commission when a deal completes. Reputable brokers must disclose their fees and the fact they receive commission. Using an FCA-authorised broker gives you access to more lenders and some consumer protection rights.

A record maintained by credit reference agencies (Experian, Equifax, TransUnion) of a business's or individual's borrowing history, including repayments, defaults, County Court Judgements (CCJs), and current credit balances. Lenders review credit files when assessing loan applications.

A legal document registered at Companies House that gives a lender a charge (claim) over all the assets of a company. A debenture typically includes both a fixed charge (over specific assets) and a floating charge (over all other assets). Signing a debenture means the lender can appoint a receiver if you default.

When a borrower fails to meet the repayment terms of a loan agreement. Lenders typically define default as missing a set number of consecutive payments (often 2–3 months). Defaulting on a business loan can trigger immediate repayment demands, enforcement action, and a negative impact on your credit file.

The act of taking funds from an approved credit facility. In a revolving credit facility or invoice finance arrangement, you draw down as needed rather than receiving the full amount upfront. Lenders may charge a draw-down fee for each facility use.

A measure of a business's ability to service its debt from its operating income. Calculated as: Net Operating Income ÷ Total Debt Service (all loan repayments due in a year). A DSCR of 1.25 means you earn £1.25 for every £1 of debt repayments — most lenders want a minimum of 1.2×.

The true annualised cost of borrowing once all fees and the actual payment schedule are taken into account. Particularly relevant for merchant cash advances and short-term loans where the stated rate can be misleading. A 1.35 factor rate on a 6-month MCA typically equates to an Effective APR of 70%+ once annualised.

A fee charged by some lenders when you repay a loan before the end of its agreed term. Designed to compensate the lender for lost interest income. ERCs vary widely — from a fixed flat fee to several months of interest. Always check your loan agreement before making an early repayment decision.

A broader term for any cost incurred when leaving a finance agreement early. Includes early repayment charges (ERCs), deferred arrangement fees, and break costs on fixed-rate loans. Understanding your exit penalty is the first step in assessing whether refinancing is worthwhile.

A multiplier used by merchant cash advance (MCA) providers to express the total repayment amount. A factor rate of 1.30 means you repay £1.30 for every £1 borrowed — so a £20,000 advance becomes £26,000 to repay in total. Factor rates are not comparable to APR and are often used because they appear lower.

An arrangement where a lender purchases an asset and leases it to your business for most of its useful life. You make monthly payments and use the asset, but ownership usually stays with the lender. At the end of the lease, you may have options to extend, return, or sell the asset and receive a share of the proceeds.

A type of security interest attached to a specific identified asset (e.g., a building or a piece of machinery). A lender with a fixed charge on an asset must give permission before you can sell it. Fixed charges rank ahead of floating charges in insolvency proceedings.

An interest rate that stays the same for the duration of the loan, regardless of changes to the Bank of England base rate. Provides payment certainty and protects against rate rises. Most UK government-backed BBL and CBILS loans were issued at fixed rates.

A security interest over a class of assets that changes over time — for example, a company's stock or debtors. Unlike a fixed charge, you can deal with floating charge assets in the ordinary course of business. A floating charge "crystallises" (becomes fixed) if the company defaults or enters insolvency.

The successor to CBILS, launched in July 2024. Provides a partial government guarantee (up to 70%) on loans of £25,001–£2 million for UK businesses. Designed for growth finance rather than emergency support. Administered by the British Business Bank through accredited lenders.

A finance arrangement where you pay for an asset in instalments over an agreed term. Unlike a finance lease, hire purchase is designed so you own the asset outright at the end of the agreement (often after paying a nominal option-to-purchase fee). The asset appears on your balance sheet and you can claim capital allowances.

In a merchant cash advance, the percentage of your daily or weekly card takings withheld by the provider to repay the advance. A 15% holdback means the provider takes 15p from every £1 of card revenue until the total repayment is settled. A higher holdback means faster repayment but reduced daily cash flow.

A financial state where a business cannot meet its debt obligations as they fall due. UK insolvency procedures include administration, company voluntary arrangements (CVAs), and liquidation. Lenders will typically accelerate all debt repayment demands upon insolvency, and creditors are ranked in a legal order of priority.

The cost of borrowing money, typically expressed as an annual percentage of the outstanding balance. Interest accrues daily or monthly and is charged on top of the principal. The interest rate you pay depends on the type of loan, the lender, your credit profile, and prevailing market rates.

A repayment structure where monthly payments cover only the interest on the loan — the principal is not reduced during the interest-only period. Used in some bridging finance and commercial mortgages. At the end of the interest-only term, the full principal remains outstanding and must be repaid or refinanced.

A form of finance where a lender advances funds against your outstanding sales invoices — typically 70–90% of the invoice value upfront, with the remainder (minus fees) paid once your customer settles. Helps businesses manage cash flow without waiting for standard payment terms. Two main types: invoice factoring and invoice discounting.

A financial institution or individual that provides funds to borrowers with the expectation of repayment with interest. Business lenders in the UK include traditional banks, challenger banks, and alternative finance providers. Lenders that offer regulated products must be authorised by the Financial Conduct Authority (FCA).

The agreed length of time over which a loan is to be repaid, expressed in months or years. A longer loan term reduces monthly payments but increases the total interest paid. A shorter term increases monthly payments but reduces total cost. Common UK business loan terms range from 1 to 10 years.

The ratio of the loan amount to the value of the asset or property being used as security. A £150,000 loan against a £200,000 property has an LTV of 75%. Lenders typically cap LTV at 70–80% for commercial property. Lower LTV ratios generally attract lower interest rates because the lender has more security.

A form of business finance where a provider advances a lump sum in exchange for a percentage of your future card sales, plus a fee expressed as a factor rate. Not technically a loan — repayments fluctuate with your card turnover. Can be expensive when annualised; factor rates of 1.2–1.5 are common.

A lease where the lender or lessor retains ownership and the associated risks of the asset throughout the agreement. You make monthly payments for use of the asset. Typically used for assets that become obsolete quickly, such as IT equipment, where you want to upgrade at end of term rather than own.

The amount of principal you still owe on a loan at any given point in time. Also called the settlement figure before fees. Your outstanding balance decreases with each repayment, but not proportionally — earlier payments go mostly toward interest, so the balance reduces slowly at first and faster toward the end of the term.

A set of flexible repayment options available to Bounce Back Loan borrowers, introduced by the government in 2021. Options include: requesting an interest-only period (up to three times), pausing repayments entirely for up to six months (once), and extending the loan term from 6 to 10 years. Accessing PAYG options does not affect your credit score.

A commitment by a business owner or director to personally repay a business loan if the company cannot. Signing a personal guarantee means your personal assets (including your home) may be at risk if the business defaults. Most unsecured business loans require a personal guarantee from company directors.

An optional additional payment made against a loan balance above the scheduled monthly repayment. Making prepayments reduces the outstanding balance and can shorten the loan term and reduce total interest paid. Check your loan agreement — some lenders charge early repayment fees for overpayments above a set threshold.

Replacing an existing loan with a new one — typically to obtain a lower interest rate, better terms, or to release equity. The new loan pays off the old one. Refinancing costs (exit penalties, arrangement fees) must be weighed against potential savings.

The APR that at least 51% of customers who successfully apply for a product actually receive. Lenders are required to advertise their representative APR for consumer products. In practice, your actual APR may be higher if your credit profile is weaker than typical. Many business loans are exempt from representative APR requirements — always request a personalised quote.

A flexible credit facility where you can draw down, repay, and redraw funds up to a pre-approved limit — similar to a business credit card or overdraft. You pay interest only on the amount drawn. Common examples include business credit lines, overdrafts, and some invoice finance facilities.

A loan backed by collateral — an asset the lender can seize if you default. Business secured loans typically use property, equipment, or a debenture over company assets as security. Secured loans generally carry lower interest rates than unsecured loans, but your pledged assets are at risk if you cannot keep up repayments.

The exact amount you would need to pay to close out a loan in full on a specific date. Typically includes the outstanding principal, accrued interest to that date, and any early repayment charges. Request a settlement figure directly from your lender — it is more accurate than calculating from your statements.

A business structure where the individual and the business are legally the same entity. Sole traders are personally liable for all business debts. Lenders often treat sole trader applications similarly to personal loans, and some products are not available to sole traders (e.g., products that require a debenture over company assets).

Sterling Overnight Index Average. The UK's benchmark interest rate for sterling markets, replacing LIBOR from 2021. Some variable-rate business loans are priced as SONIA plus a fixed margin. When the Bank of England base rate changes, SONIA typically moves in the same direction, affecting these loan costs.

A loan for a fixed amount, repaid in regular instalments over a set period with a fixed or variable interest rate. The most common form of business lending. Repayment schedules are typically monthly. Term loans are either amortising (capital reduces with each payment) or interest-only (capital repaid as a lump sum at maturity).

The total amount you pay to a lender over the life of the loan, expressed as a monetary amount. Calculated as: total repayments minus the original loan amount. Useful for comparing two loans when APRs are similar but terms differ — a lower APR with a longer term can cost more overall than a higher APR with a shorter term.

A loan not backed by specific collateral. The lender takes on more risk, which typically means higher interest rates. Most unsecured business loans require a personal guarantee from company directors, which effectively shifts some risk back to individuals. Common for loans under £250,000 where business assets are limited.

An interest rate that can change during the loan term, usually linked to the Bank of England base rate or SONIA. If the base rate rises, your payments rise; if it falls, so do your payments. Provides less payment certainty than a fixed rate but may be cheaper over time if rates fall.

The cash available for day-to-day business operations, calculated as current assets minus current liabilities. A working capital loan provides short-term funds to cover operational costs such as payroll, stock, or supplier invoices. Common working capital finance products include overdrafts, revolving credit facilities, and invoice finance.