Business Finance Glossary: Key Terms Every UK Business Owner Should Know
Kyrelos Khir
Manager · Jun 3, 2025 · 15 min read
Business finance comes with its own vocabulary, and lenders are not always good at explaining what their terms actually mean. This glossary covers every key term you are likely to encounter when applying for a business loan, invoice finance, asset finance, or any other form of UK business lending. Use it as a reference guide when reviewing offers and loan agreements.
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A to F
APR (Annual Percentage Rate): The total cost of borrowing expressed as a yearly percentage, including interest and all mandatory fees. APR is the best way to compare the true cost of different loan offers on a like-for-like basis. Always ask for the APR, not just the monthly rate or flat rate. Arrangement fee: A one-off charge levied by the lender to set up the facility, typically 1% to 3% of the loan amount. Sometimes called a facility fee or origination fee. Ask whether this is added to the loan or paid upfront.
Bad debt protection: An optional feature of invoice finance facilities that covers you if a debtor becomes insolvent. Also called non-recourse factoring. The finance company takes on the credit risk; you do not have to repay advances against invoices where the debtor has failed. CCJ (County Court Judgement): A court order issued against a business or individual who has failed to repay a debt. CCJs appear on credit files and can restrict access to finance. Satisfied CCJs (paid in full) are treated more favourably. Debenture: A charge over the assets of a company, used by lenders as security for a business loan. A fixed charge covers specific assets (e.g. property); a floating charge covers all assets generally. Registered at Companies House.
Default: Formal notification that a borrower has failed to meet their repayment obligations. Defaults are recorded on credit files and remain for six years. Discount charge: The interest element of an invoice finance facility, calculated on the funds you have drawn down. Charged daily, typically at a margin over the Bank of England base rate. Drawdown: The act of taking funds from an approved facility. Some facilities require a single drawdown; others (revolving credit, invoice finance) allow multiple drawdowns over the life of the facility.
G to P
Factor rate: Used in merchant cash advances rather than traditional loans. A factor rate of 1.3 means you repay 1.3 times the amount advanced. Factor rates are not the same as APR, and MCAs are typically much more expensive than their factor rate implies. Always convert to an equivalent APR when comparing. Finance lease: An asset finance arrangement where the lender owns the asset throughout the term and you make rental payments. At the end of the term you can extend, buy at market value, or return the asset. Finance leases appear on your balance sheet under IFRS 16.
Hard search: A full credit check that leaves a record on your credit file and is visible to other lenders. Multiple hard searches in a short period can lower your credit score. A broker can often obtain indicative terms via a soft search before triggering a hard search. Hire purchase (HP): An asset finance structure where you own the asset at the end of the term. You pay a deposit and monthly instalments; the lender retains legal ownership until the final payment. HP qualifies for capital allowances. IVA (Individual Voluntary Arrangement): A formal insolvency arrangement where an individual agrees to repay creditors over a fixed period, usually five years. An IVA significantly restricts access to credit during and after the arrangement. LTV (Loan to Value): The loan amount expressed as a percentage of the value of the security (usually property). A lower LTV means more equity in the property, which typically results in better rates. Lenders usually cap LTV at 65% to 75% for commercial property.
Operating lease: A short-term asset rental arrangement where the lender takes on residual value risk. Operating leases have lower monthly payments than finance leases and may be off-balance-sheet. Best suited to assets that become obsolete quickly. PG (Personal Guarantee): A commitment by a director to be personally liable for a business loan if the company defaults. Many unsecured lenders require a PG. A broker can identify lenders whose products do not require a PG where alternatives exist.
"Understanding your loan agreement is not just about protecting yourself legally. It is about knowing what flexibility you have, what triggers a default, and what your real options are if your circumstances change."
- Kyrelos Khir, Manager
R to Z
Revolving credit facility (RCF): A flexible loan where you can draw, repay, and redraw up to an agreed limit. Interest is charged only on what you have drawn. RCFs are reviewed annually and function similarly to a business overdraft. Sale and leaseback: An arrangement where you sell an asset you own to a finance company and immediately lease it back. Releases equity from the asset as cash while retaining use of it. Also called asset refinance. Secured loan: A loan backed by collateral, typically property or assets. Secured loans carry lower rates than unsecured equivalents but risk the loss of the collateral if you default.
Soft search: A credit check that gives an indication of your creditworthiness without leaving a mark on your credit file. Used at the eligibility stage. Not visible to other lenders. Spark Finance uses a soft search for initial eligibility assessments. Service charge: In invoice finance, the fee covering the administration of the facility (credit control, ledger management, bad debt protection if included). Charged as a percentage of annual turnover, billed monthly. Term loan: A loan of a fixed amount, repaid over a fixed term in equal monthly instalments. The most common form of business loan. Can be secured or unsecured.
Total amount repayable: The sum of all capital repayments plus all interest and fees over the full loan term. The best single metric for comparing loan offers. Always compare total amount repayable, not just monthly payment or headline rate. Underwriting: The process by which a lender assesses the risk of an application and decides whether to approve it. Manual underwriting involves a human reviewer; automated underwriting uses algorithmic scoring. Working capital: The difference between a business's current assets and current liabilities. Positive working capital means the business can meet its short-term obligations. Working capital finance (overdrafts, RCFs, invoice finance) exists to maintain positive working capital through cash flow cycles.
The bottom line
If you encounter a term not covered here, the Spark Finance team is always happy to explain it in plain English. Our goal is for every business we work with to fully understand the finance they are taking on. Start your application at apply.sparkfinance.co.uk.
Check your eligibilityAbout the author
Kyrelos Khir
Manager
Kyrelos is a finance manager at Spark Finance with a focus on invoice finance and working capital solutions for UK businesses. He helps businesses in professional services, recruitment, and manufacturing unlock cash tied up in their debtor books through factoring and discounting facilities.
