The first major round of business financing by private equity investors or venture capitalists. In private equity investing, an “A” round, or Series A financing, is usually in the form of convertible preferred stock. An “A” round by external investors generally takes place after the founders have used their seed money to provide a “proof of concept” demonstrating that their business concept is a viable and profitable.
Articles of association agreement
Sets out how the company is run, governed and owned. The agreement puts restrictions on the company’s powers which is useful as the shareholders approval will be needed before directors can pursue independent courses of action.
Provides expert advice, mentoring, practical and technical support to groups of new ventures over several months, worth thousands of pounds, in return for a small percentage of the equity. Some accelerators invest equity capital, convertible loans or do not at all. Others buy an equity stake in the future.
Assets Anything owned by the company having a monetary value; e.g, ‘fixed’ assets like buildings, plant and machinery, vehicles and often including intangibles like trade marks and brand names, and ‘current’ assets, such as stock, debtors and cash.
Asset finance Finance secured on assets includes debt instruments such as asset finance (leasing or hire purchase) and asset-based finance (invoice discounting, factoring, asset based lending (ABL) and supply chain finance). These are provided by most banks and specialist asset finance and asset-based finance companies, including some online platforms.
Asset-based lending (ABL) In an instance where an individual borrows money to buy, for example, a home or even a car, the house or the vehicle serves as collateral for the loan. If the loan is not then repaid in the specified time period, it falls into default, and the lender may then seize the car or the house in order to pay off the amount of the loan.
Asset-based finance (ABF) Typically used by businesses, which tend to borrow against assets they currently own. Accounts receivable, inventory, machinery, and even buildings and warehouses may be offered as collateral on a loan. These loans are almost always used for short-term funding needs, such as cash to pay employee wages or to purchase the raw materials that are needed to produce the goods that are sold. If other assets are used in order to help the individual qualify for the loan, they are generally not considered direct collateral on the amount of the loan.
‘B’ round Second round of financing for a business through any type of investment including private equity investors and venture capitalists, generally taking place when the company has accomplished certain milestones in developing it’s business.
Common form of finance for business as it provides medium or long-term finance. The bank sets the fixed period over which the loan is provided (e.g. 10 or 5 years), the rate of interest and the timing and amount of repayments.
Bonds and mini-bonds Bonds – retail bonds or corporate bonds – are a way for companies to borrow money from investors in return for regular interest payments. They are debt securities, bought and sold on a market. Large companies might be able to borrow money by issuing bonds to investors.
Business angels Private investors who support early stage businesses make equity investments in businesses with growth potential, businesses in the early stages of development, or in established businesses looking for expansion capital, in return for an equity stake. Angels back high-risk opportunities, with the potential for high returns.
Cash advance Unsecured advances of cash based upon future credit and debit card sales, often used as an alternative source of debt financing to bank loans. Your business is advanced money, and you repay it from a portion of your future sales. You pay a fee for the advance, however the application process can be extremely quick and you can get up to a few hundred-thousand pounds. In general, there are no fixed monthly payments, APR or hidden fees. Just one single cost needs to be agreed upfront and can be paid back as a small percentage from your future customer card transactions.
Corporate venture capital (CVC)
Equity investment – also known as corporate venture finance – is undertaken by a corporation, or its investment entity, into a high-growth and high-potential, privately-held business. The financial investment is made in return for an equity stake in the business, offering debt finance to fund growth activities for an agreed return. Non-financial support may be offered for an agreed return, such as providing access to established marketing or distribution channels, or a knowledge transfer.
Crowd of people donate or raise a defined amount of money for a specific cause or project in exchange for various rewards. Online networks, social media and crowdfunding websites make this an effective way to bring investors and entrepreneurs together. Crowdfunding falls under three broad categories: debt, equity or donation. Equity-based crowdfunding is asking a crowd to donate to your business or project in exchange for equity, whereas donation or rewards-based crowdfunding is asking a crowd to donate to your project in exchange for tangible, non-monetary rewards such as a t-shirt, pre-released CD, or the finished product. Debt-based crowdfunding is asking a crowd to donate to your business or business project in exchange for financial return and/or interest at a future date.
Debt finance Debt is an arrangement between a borrower and a lender. A capital sum is borrowed from the lender on the condition that the amount borrowed is paid back in full either at a later date, multiple dates, or over a period of time. Interest is accrued on the debt and the businesses repayment usually has an element of capital repayment and interest. It can include lending for working capital, for business growth, or for longer term investment. Unlike equity, debt does not involve relinquishing any share in ownership or control of a business. However, a lender is far less likely to help a business hone its strategy than a business angel or venture capital investor. There are three broad streams of debt; loans and overdrafts; finance secured on assets; and fixed-income debt securities.
Deed of Adherence
Short document for use where an individual becomes a shareholder in a company. It is used when a party is investing in a company where the original shareholders have signed a Shareholders’ Agreement or Joint Venture Agreement, which requires any new shareholder to become a party to the original agreement.
Reduction in the ownership percentage of a share of stock caused by the issuance of new shares. Dilution can also occur when holders of stock options, such as company employees, or holders of other securities, exercise their options. When the number of shares outstanding increases, each existing stockholder owns a smaller, or diluted percentage of the company making each share less valuable.
The discretionary share of annual profits not retained by the company.
Drag-along right The majority shareholder of a company has the right to force a minority shareholder to join in the sale of a company. This right protects the majority shareholder as it prevents any future situation in which a minority shareholder has the ability to block the sale of a company which has already been approved by the majority shareholder, or a collective majority of existing shareholders.
Due diligence Checks performed by lenders and investors before deciding whether to invest in any company. It helps funders and lenders to understand the risks and potential of the business, and to negotiate with the organisation regarding anything that causes them particular concern. Founders also need to carry out due diligence on private investors.
Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme is designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares in those companies that qualify. It is also a tax efficient way to invest in small companies – up to £1,000,000 per person per year in qualifying companies. People can invest up to £1,000,000 in any tax year and receive 30% tax relief but they are locked into the scheme for a minimum of three years.
Equity crowdfunding Unlike rewards-based crowdfunding which is usually based on donations and goodwill support, equity crowdfunding involves networks of small investors backing early-stage businesses via online networks, whose primary motivation is a financial return. It allows startup companies to raise money without giving up control to venture capital investors, and it offers investors the opportunity to earn an equity position in the venture. The Securities and Exchange Commission (SEC) regulates investments in equity-based crowdfunding ventures.
Equity finance Equity is the raising of capital through the sale of shares in a business or equity can be sold to third-party investors with no existing stake in the business. Equity financing can be raised solely from existing shareholders, through a rights issue. In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation, to plan a desired risk and return profile for an investor’s portfolio. These variants of equity all share the common thread that equity is the value of an asset after deducting the value of liabilities. The equity of a business can be determined by it’s value (factoring in any owned land, buildings, capital goods, inventory and earnings) and deducting liabilities (including debts and overhead). Equity is represents the real value of one’s stake in an investment, thus investors who hold stock in a company are usually interested in their own personal equity in the company, represented by their shares.
Their ordinary shares do not have a right to interest payments or to have their capital repaid by a particular date. Instead, if the business has been successful, their return comes from dividends paid out of profits or from a capital gain on the sale of the shares to other parties.
Exit Strategy Contingency plan executed by an investor, trader, venture capitalist or business owner to liquidate a position in financial assets or to dispose of tangible business assets once certain predetermined criteria for either has been met or exceeded. An exit strategy may be executed to close a business that is not generating profits, thus the purpose of the exit strategy is to limit losses.
Export finance Export finance helps mitigate risks such as default or delayed payment. Businesses need to be sure they can afford to produce the goods and be sure that they will be paid. The UK Export Finance Agency helps exporters by providing insurance to exporters and guarantees to banks to share the risks of providing export finance. They can make loans to overseas buyers of goods and services from the UK.
Non-repayable funds or products disbursed by a grant maker, often a government department, corporation, foundation or trust, to a recipient, often a nonprofit entity, educational institution, business or an individual. Most grants are made to fund a specific project and require some level of compliance and reporting.
Company’s use of debt, equity and hybrid financing techniques achieve business expansion in a cost-effective manner. The focus is on identifying the optimal financing solution for a company. This occurs when the cost and flexibility of the financing structure is linked to the company’s cash-flow based value and growth potential.
Initial public offering/IPO
First time the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be carried out by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.
Contract establishing the terms of an investment. The contract typically specifies such things as the amount of the investment and the rights of the investor.
Investor protection: Commercial law is enforced to protect investors from expropriation (to take away money or property from the owner for public use and without paying the owner) from company insiders.
Invoice finance Part of the steam of asset finance whereby businesses borrow money based on amounts due from customers. Invoice financing helps improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid them. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money. Invoice financing can solve problems associated with customers taking a long time to pay and difficulties obtaining other types of business credit.
Key person insurance
Life insurance on the key person in a business. In small or medium enterprises (SMEs), this is usually the owner, the founders or perhaps a key employee or two. These are the people who are crucial to a business.
Lease financing/hire purchase
Both the options of financing assets. To possess and control an asset during an agreed term, individuals lease or hire and pay rent or instalments covering depreciation of the asset and interest to cover capital lost. With lease financing, ownership lies with the lessor; the lessee has the right to use the equipment and does not have the option to purchase. On the other hand, hire purchasing gives the hirer the option to purchase, and the hirer becomes the owner of the asset after the last instalment is paid. Leasing and hire purchase are types of finance used by businesses to obtain a wide range of assets – everything from office equipment to vehicles – and is effective if equipment is needed which would otherwise be unaffordable because of cash-flow constraints.
Degree to which an asset or security can be quickly bought or sold in the market without affecting the assets price. Market liquidity refers to the extent to which the assets can be bought and sold at stable prices on the stock market.
Debt financing includes both secured and unsecured loans. Security involves a form of collateral as an assurance the loan will be repaid. If the debtor defaults on the loan, that collateral is forfeited to satisfy payment of the debt. Most lenders will ask for some sort of security on a loan as most will not lend money based on a name or idea alone.
Allows you to borrow money through your current account. It should only be used for emergencies or short term borrowing as unarranged overdrafts can have costly interest rates. An arranged overdraft is a type of loan that can be pre-approved, and you can borrow up to that limit. The fees and any interest-free threshold will differ depending on the type of account you have with your bank.
Short-term solution mixing both debt and equity finance where a company replaces the capital that equity investors would otherwise have to provide. Owners can sacrifice control and upside potential due to the loss of equity. Owners also pay more in interest the longer mezzanine financing is in effect. It represents a claim on a company’s assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or as preferred stock.
Investment institutions back growth-capital deals or buyouts of businesses, usually with the goal of rapid expansion. Institutions make medium to long-term investments in, or offer growth capital to, companies with high-growth potential. Private equity investors usually improve the profitability of the business through operational improvements and aim to grow revenue through investment in product lines or new services, or expansion into new territories. They will also typically introduce corporate disciplines and a management structure to the business, to give it a platform on which it can grow further.
Peer to peer lending
Form of debt funding where internet-based platforms are used to match lenders with borrowers, without the use of an official financial institution as an intermediary (also known as crowdlending). You place your lending needs online and potential lenders bid on your loan by agreeing to provide the requested loan at a given interest rate and at a fixed repayment schedule. Funds can be provided by investors around the globe and this is an effective form of alternative debt funding as it is a new way for businesses to have access to flexible finance.
Preemptive rights Securing preemptive rights at the time of initial stock purchase can prevent the shareholder from diluting his ownership percentage at a later date. A preemptive right is a privilege that may be extended to certain shareholders, granting them the right to purchase additional shares in the company, prior to shares being made available for purchase by the general public. The right is written into the contract between the stock purchaser and the company.
Rewards-based crowdfunding Effectively a donation towards the development of a new project, technology or performance. Funders will not receive a financial return, but will instead be rewarded with, for example, taking part in a first run, seeing a first show, receiving a first product or even beta testing a game or trying out a prototype.
Secondary market Investors buy and sell securities they already own. It is what most people typically think of as the “stock market,” though stocks are also sold on the primary market when they are first issued.
Seed capital Initial capital used when starting a business, often coming from the founders’ personal assets, friends or family, for covering initial operating expenses and attracting venture capitalists. This type of funding is often obtained in exchange for an equity stake in the enterprise, with less formal contractual overhead than standard equity financing. It is typically used to finance early product development and to test a business plan.
Seed stage Initial or setup stage of a new business or venture where the entrepreneur approaches investors including friends, family and angel investors seeking financial support for their idea, concept, or product. These investors typically initiate a high level investigation of the technical, market and economic feasibility of the idea in consideration of the opportunity.
Seed Enterprise Investment Scheme (SEIS)
Incredibly generous derivative of the Enterprise Investment Scheme (EIS) and was introduced in April 2012. Its aim is to encourage seed investment in early stage companies. Investors, including directors, can receive initial tax relief of 50% on investments up to £100,000 and Capital Gains Tax (CGT) exemption for any gains on the SEIS shares.
Shareholder agreement Well drafted agreement between the shareholders which acts as a safeguard and gives protection against both the business enterprise and their investment in the company. It establishes a fair relationship between the shareholders and governs how the company is run.
Start up loans
Unsecured personal loans for entrepreneurs who are looking to start a business. Most start up loans are structured on a monthly repayment schedule, based on a loan repayment term of between one and five years. There is mentoring and support given to start ups to help the start of your business venture. Nevertheless, remember that it will be your personal responsibility to make loan repayments if you business does not succeed. Due to limited revenue or high costs, most start-up businesses are not successful in the long term without additional funding from venture capitalists.
Application by an investor to join a limited partnership – when two or more partners unite to jointly conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested – and it is also used to sell stock shares in a private company. All limited partners must be approved by the general partner.
Contractual obligation used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell his minority stake in the company, also giving a minority shareholder the ability to capitalise on a deal where larger financial institution has more power.
Tax reliefs These reliefs allow companies to claim substantial deductions in (or tax credits against) corporation tax for some of their investment in new production.
Term sheet A non-binding agreement setting forth the basic terms and conditions under which an investment will be made. A term sheet serves as a template to develop more detailed legal documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.
Can help to settle the opposing needs of the exporter and the importer. The function of trade finance is to act as a third-party to remove both the payment risk and supply risk, whilst providing the exporter with accelerated receivables and the importer with extended credit. Banks and financial institutions can facilitate these transactions by financing the trade, assisting businesses in purchasing goods, whether from international or domestic sellers.
The process whereby the current worth of an asset or a company is determined. When a security trades on an exchange, buyers and sellers determine the market value of a stock or bond.
Venture capital (VC)
This is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both). Venture capital firms or funds invest in these early-stage companies in exchange for equity – an ownership stake – in the companies they invest in.
Venture capitalists (private)
They invest in businesses with the potential for high returns – those with products or services with a unique selling point, or competitive advantage. They invest in a portfolio where a significant number of businesses may fail, so those that succeed have to compensate for those losses. They also want proven track records, and so rarely invest at the start-up stage.
Venture capitalists (VCs)
Professional investors in early-stage, unlisted ventures – mainly in knowledge-based, high-tech or digital/online sectors – who manage formal investment funds that they have raised from financial institutions, companies and wealthy individuals.