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Business and Finance Terms to Know
From accounting, to business loans, to general business financial operations, here’s the ultimate list to all the business finance terms and definitions you need to know:
- Accounts Payable – Accounts payable is a business finance 101 term. This represents your small business’s obligations to pay debts owed to lenders, suppliers, and creditors. Sometimes referred to as A/P or AP for short, accounts payablecan be short or long-term depending upon the type of credit provided to the business by the lender.
- Accounts Receivable – Also known as A/R (or AR, good guess), accounts receivables is another business finance 101 term that means the money owed to your small business by others for goods or services rendered. These accounts are labelled as assets because they represent a legal obligation for the customer to pay you cash for their short-term debt.
- Accrual Basis – The accrual basis of accountingis an accounting method of recording income when it’s actually earned and expenses when they actually occur. Accrual basis accounting is the most common approach used by larger businesses to record and maintain financial transactions.
- Accruals – A business finance term and definition referring to expenses that have been incurred but haven’t yet been recorded in the business books. Wages and payroll taxes are common examples.
- Asset – This business finance key term is anything that has value—whether tangible or intangible—and is owned by the business is considered an asset. Typical items listed as business assets are cash on hand, accounts receivable, buildings, equipment, inventory, and anything else that can be turned into cash.
- Balance Sheet – Along with three other reports relating to the financial health of your small business, the balance sheetis essential information that gives a “snapshot” of the company’s net worth at any given time. The report is a summary of the business assets and liabilities.
- Bookkeeping – A method of accounting that involves the timely recording of all financial transactions for the business.
- Capital – Refers to the overall wealth of a business as demonstrated by its cash accounts, assets, and investments. Often called “fixed capital,” it refers to the long-term worth of the business. Capital can be tangible, like durable goods, buildings, and equipment, or intangible such as intellectual property.
- Working Capital – Not to be confused with fixed capital, working capital is another business finance 101 term. It consists of the financial resources necessary for maintaining the day-to-day operation of the business. Working capital, by definition, is the business’s cash on hand or instruments that you can convert to cash quickly.
- Cash Flow – Every business needs cash to operate. The business finance term and definition cash flow refer to the amount of operating cash that “flows” through the business and affects the business’s liquidity. Cash flow reports reflect activity for a specified period of time, usually one accounting period or one month. Maintaining tight control of cash flowis especially important if your small business is new, since ready cash can be limited until the business begins to grow and produce more working capital.
- Cash Flow Projections – Future business decisions will depend on your educated cash flow projections. To plan ahead for upcoming expenditures and working capital, you need to depend on previous cash flow patterns. These patterns will give you a comprehensive look at how and when you receive and spend your cash. This info is the key to unlock informed, accurate cash flow projections.
- Depreciation – The value of any asset can be said to depreciate when it loses some of that value in increments over time. Depreciation occurs due to wear and tear. Various methods of depreciationare used by businesses to decrease the recorded value of assets.
- Fixed Asset – A tangible, long-term asset used for the business and not expected to be sold or otherwise converted into cash during the current or upcoming fiscal year is called a fixed asset. Fixed assets are items like furniture, computer equipment, equipment, and real estate.
- Gross Profit – This business finance term and definition can be calculated as total sales (income) less the costs (expenses) directly related to those sales. Raw materials, manufacturing expenses, labour costs, marketing, and transportation of goods are all included in expenses.
- Income Statement – Here is one of the four most important reports lenders and investors want to see when evaluating the viability of your small business. It is also called a profit and loss statement, and it addresses the business’s bottom line, reporting how much the business has earned and spent over a given period of time. The result will be either a net gain or a net loss.
- Intangible Asset – A business asset that is non-physical is considered intangible. These assets can be items like patents, goodwill, and intellectual property.
- Liability – This business finance key term is a legal obligation to repay or otherwise settle a debt. Liabilities are considered either current (payable within one year or less) or long-term (payable after one year) and are listed on a business’s balance sheet. A business’s accounts payable, wages, taxes, and accrued expenses are all considered liabilities.
- Liquidity – Liquidityis an indicator of how quickly an asset can be turned into cash for full market value. The more liquid your assets, the more financial flexibility you have.
- Profit & Loss Statement – The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.
- Statement of Cash Flow – One of the important documents required by lenders and investors that shows a summary of the actual collection of revenue and payment of expenses for your business. The statement of cash flow should reflect activity in the areas of operating, investing, and financing and should be an integral part of your financial statement package.
- Statement of Shareholders’ Equity – If you have chosen to fund your small business with equity financingand you have established shares and shareholders as part of the controlling interests, you are obligated to provide a financial report that shows changes in the equity section of your balance sheet.
- Annual Percentage Rate – The business finance term and definition APRrepresents the yearly real cost of a loan including all interest and fees. The total amount of interest to be paid is based on the original amount loaned, or the principal, and is represented in percentage form. When shopping for the right loan for your small business, you should know the APR for the loan in question. This figure can be very helpful in comparing one financial tool with another since it represents the actual cost of borrowing.
- Appraisal – Just like your real estate appraisal when buying a house, an appraisal is a professional opinion of market value. When closing a loan for your small business, you will probably need one or more of the three types of appraisals: real estate, equipment, and business value.
- Balloon Loan – A loan that is structured so that the small business owner makes regular repayments on a predetermined schedule and one much larger payment, or balloon payment, at the end. These can be attractive to new businesses because the payments are smaller at the outset when the business is more likely to be facing strict financial constraints. However, be sure that your business will be capable of making that last balloon payment since it will be a large one.
- Bankruptcy – This federal law is used as a tool for businesses or individuals who are having severe financial challenges. It provides a plan for reduction and repayment of debts over time or an opportunity to completely eliminate the majority of the outstanding debts. Turning to bankruptcy should be given careful thought because it will have a negative effect on the business credit score.
- Bootstrapping – Using your own money to finance the start-up and growth of your small business. Think of it as being your own investor. Once the business is up and running successfully, the business finance term and definition bootstrappingrefers to the use of profits earned to reinvest in the business.
- Business Credit Report – Just like you have a personal credit report that lenders look at to determine risk factors for making personal loans, businesses also generate credit reports. These are maintained by credit bureaus that record information about a business’s financial history. Items like how large the company is, how long has it been in business, amount and type of credit issued to the business, how credit has been managed, and any legal filings (i.e., bankruptcy) are all questions addressed by the business credit report. Lenders, investors, and insurance companies use these reports to evaluate risk exposure and financial health of a business.
- Business Credit Score – A business credit score is calculated based on the information found in the business credit report. Using a specialized algorithm, business credit scoring companies take into account all the information found on your credit report and give your small business a credit score. Also called a commercial credit score, this number is used by various lenders and suppliers to evaluate your creditworthiness.
- Collateral – Any asset that you pledge as security for a loan instrument is called collateral. Lenders often require collateralas a way to make sure they won’t lose money if your business defaults on the loan. When you pledge an asset for collateral, it becomes subject to seizure by the lender if you fail to meet the requirements of the loan documents.
- Credit Limit – When a lender offers a business line of credit it usually comes with a credit limit, or a maximum amount that you can use at any given time. It is said that you reach your credit limit or “max out” your credit when you borrow up to or exceed that number. A business line of credit can be especially useful if your business is seasonal or if the income is extremely unpredictable. It is one of the fastest ways to access cash for emergencies.
- Debt Consolidation – If your small business has several loans with various payments, you might want to consider a business debt consolidation loan. It is a process that lets you combine multiple loans into a single loan. The advantages are possibly reducing the interest rates on the borrowed funds as well as lowering the total amount you repay each month. Businesses use this tool to help improve cash flow.
- Debt Service Coverage Ratio – The business finance term and definition debt service coverage ratio(DSCR) is the ratio of cash your small business has available for paying or servicing its debt. Debt payments include making principal and interest payments on the loan you are requesting. Generally speaking, if your DSCR is above 1, your business has enough income to meet its debt requirements.
- Debt Financing – When you borrow money from a lender and agree to repay the principal with interest in regular payments for a specified period of time, you’re using debt financing. Traditionally, it has been the most common form of funding for small businesses. Debt financing can include borrowing from banks, business credit cards, lines of credit, personal loans, merchant cash advances, and invoice financing. This method creates a debt that must be repaid but lets you maintain sole control of your business.
- Equity Financing – The act of using investor funds in exchange for a piece or ”share” of your business is another way to raise capital. These funds can come from friends, family, angel investors, or venture capitalists. Before deciding to use equity financing to raise the cash necessary for your business, decide how much control you are willing to share when it comes to decision-making and philosophy. Some investors will also want voting rights.
- FICO Score – A FICO scoreis another type of credit score used by potential lenders for evaluating the wisdom of entering a contract with you and your business. FICO scores comprise a substantial part of the credit report that lenders use to assess credit risk. It was created by the Fair Isaac Corporation, hence the name FICO.
- Financial Statements – An integral part of the loan application process is furnishing information that shows your business is a good credit risk. The standard financial statementpacket includes four main reports: the income statement, the balance sheet, the statement of cash flow, and the statement of shareholders’ equity, if you have shareholders. Lenders and investors want to see that your business is well-balanced with assets and liabilities, has positive cash flow, and will have capital to make expected repayments.
- Fixed Interest Rate – The interest rate on a loan that is established in the beginning and does not change for the lifetime of the loan is said to be fixed. Loans with fixed interest rates are appealing to small business owners because the repayment amounts are consistent and easier to budget for in the future.
- Floating Interest Rate – In contrast to the business finance term and definition fixed rate, the floating interest ratewill change with market fluctuations. Also referred to as variable rates or adjustable rates, these amounts may often start out lower than the fixed rate percentages. This makes them more appealing in the short term if the market is trending down.
- Guarantor – When starting a new small business, lenders might want you to provide a guarantor. This is an individual who guarantees to cover the balance owed on a debt if you or your business cannot meet the repayment obligation.
- Interest Rate – All loans and other lending instruments are assigned the business finance key term interest rates. This is a percentage of the principal amount charged by the lender for the use of its money. Interest rates represent the current cost of borrowing.
- Invoice Factoring or Financing – If your business has a significant amount of open invoices outstanding, you may contact a factoring company and have them purchase the invoices at a discount. By raising capital this way, there is no debt, and the factoring company assumes the financial responsibility for collecting the invoice debts.
- Lien – This business finance term and definition is a creditor’s legal claim to the collateral pledged as security for a loan is called a lien.
- Line of Credit – A lender may offer you an unsecured amount of funds available for your business to draw on when capital is needed. This line of creditis considered a short-term funding option, with a maximum amount available. This pre-approved pool of money is appealing because it gives you quick access to the cash.
- Loan-to-Value – The LTV comparison is a ratio of the fair-market value of an asset compared to the amount of the loan that will fund it. This is another important number for lenders who need to know if the value of the asset will cover the loan repayment if your business defaults and fails to pay.
- Long-Term Debt – Any loan product with a total repayment schedule lasting longer than one year is considered a long-term debt.
- Merchant Cash Advance – A merchant may offer a funding method through a loan based on the business’s monthly sales volume. Repayment is made with a percentage of the daily or weekly sales. These tend to be short-term loans and are one of the costliest ways to fund your small business.
- Microloan – Microloans are loans made through non-profit, community-based organizations and they are most often for amounts under $50,000.
- Personal Guarantee – If you’re seeking financing for a very new business and don’t have a high value asset to offer as collateral, you may be asked by the lender to sign a statement of personal guarantee. In effect, this statement affirms that you as an individual will act as guarantor for the business’s debt, making you personally liable for the balance of the loan even in the event that your business fails.
- Principal – Any loan instrument is made of three parts—the principal, the interest, and the fees. The principal is a business finance key term and is the original amount that is borrowed or the outstanding balance to be repaid less interest. It is used to calculate the total interest and fees charged.
- Revolving Line of Credit – This business finance term and definition is a funding option is similar to a standard line of credit. However, the agreement is to lend a specific amount of money, and once that sum is repaid, it can be borrowed again.
- Secured Loan – Many lenders will require some form of security when loaning money. When this happens, this business finance term and definition is a secured loan. The asset being used as collateral for the loan is said to be “securing” the loan. In the event that your small business defaults on the loan, the lender can then claim the collateral and use its fair-market value to offset the unpaid balance.
- Term Loan – These are debt financing tools used to raise needed funds for your small business. Term loans provide the business with a lump sum of cash up front in exchange for a promise to repay the principal and interest at specified intervals over a set period of time. These are typically longer term, one-time loans for start-up expenses or costs for established business expansion.
- Unsecured Loans – Loans that are not backed by collateral are called unsecured loans. These types of loans represent a higher risk for the lender, so you can expect to pay higher interest rates and have shorter repayment time frames. Credit cards are an excellent example of unsecured loans that are a good option for small business funding when combined with other financing options.
- Articles of Incorporation – This is legal documentation of the business’s creation, including name, type of business, and type of business structure or incorporation. This paperwork is one of the first tasks you will complete when you officially start your business. Once submitted, your articles of incorporationare kept on file with the appropriate governmental agencies.
- Business Plan – Here is your tool for demonstrating how you want to establish your small business and how you plan to grow it into good financial health. When writing a business plan, it should include financial, operational, and marketing goals as well as how you plan to get there. The more specific you are with your business plan, the better prepared you will be in the long run.
- Employer Identification Number (EIN) Certificate – In order to be more easily identified by the Internal Revenue Service, every business entity is assigned a unique number called an EIN. When you start your small business, an EIN will be assigned and mailed to the business address. This number never changes, and you will be asked to furnish it for many reasons.
- Franchise Agreement – For a small business entrepreneur, entering into a franchise agreement with a larger company can be a way to enter the marketplace. The agreement made between you and the larger company gives you the right to operate as a satellite of the larger company in a certain territory for a given period of time. This lets you, the business owner, take advantage of a brand name that’s already familiar in the marketplace and a process or operation that has already been tested.
- Net Worth – This business finance term and definition is an expression of your business’s total value, as determined by your total current assets less the total liabilities currently owed by the business. With your business’s most recent balance sheet in hand, you can calculate the net worth using a simple formula: Assets – Liabilities = Net Worth.
- Retained Earnings – Just like it sounds, this term represents any profits earned that are retained in the business. This can also be referred to as bootstrapping.
- Tax Lien – If your business fails to pay taxes owed to the designated government entity, namely the IRS, you may find your assets seized by the claim of a tax lien. The government can not only seize your assets for liquidation to resolve the tax debt, but they can also charge you penalties on the amount you owe.
Money Terms A to Z
On this page, we explain some of the terms that you might come across when you are dealing with credit, debt, mortgages, banking and other financial matters. Some of the terms will be used in legal documents.
AER: – This stand for Annual Equivalent Rate. It’s a way of working out the interest you will get on your savings. It’s worked out in a standard way, over a year, so you can compare interest rates directly with each other. The higher the AER, the more money you will get on your savings.
APR: – This stand for Annual Percentage Rate. This tells you the cost of a loan, taking into account the interest you pay, any other charges, and when the payments are due. You can use the APR to compare the cost of one loan with another. For example, a loan with an APR of 15% is more expensive that one with an APR of 11%.
ATM: – This stand for Automated Teller Machine. This is a machine that pays out cash, or a cash machine. To use an ATM, you need a cash card and a personal identification number, which is called a PIN.
Account: – An account is a record in an accounting system that tracks the financial activities of a specific asset, liability, equity, revenue, or expense. These records increase and decrease as the business events occur throughout the accounting period. Each individual account is stored in the general ledger and used to prepare the financial statements at the end of an accounting period.
Accountant in Bankruptcy: – This is the person who has responsibility for administering the process of personal bankruptcy and corporate insolvencies in Scotland.
Administration order: – This is not used in Scotland. It is a process in court in England and Wales.
Advocate: – An advocate in Scotland provides specialist legal representation and opinions on civil and criminal matters.
Arrears: – This is the term used for money that you owe. You may come across it if you owe rent or council tax.
Arrestment: – This is the term used to describe the legal position if your money or goods are in the control of a ‘third’ party, for example, a bank and the creditor that you owe money to puts a warrant in place to stop you being able to get access to the funds or goods.
Assets: – These are things you own, like your home or a car. If you’re in debt, you might have to sell assets.
Attachment: – This is the term used to describe the legal position when a creditor can ‘freeze’ the goods of someone that owes money. The creditor can then sell the goods at an auction and keep the money owed.
Bailiffs: – These are court officials in England and Wales not Scotland. See Sheriff officers.
Balance: – This is the amount of money you have in your account at any particular time or which you owe on your credit or store card. It’s shown on your statement.
Bank charges: – Banks and building societies charge for some services. You must be given details of the charges before you open an account with the bank or building society.
Bankruptcy: – called Sequestration in Scotland this is a court order that you or your creditors (only if a certain amount is owed) can apply for. It has serious consequences. When you are declared bankrupt, you have to hand over a lot of your possessions that can be sold, including your home, if owned wholly or jointly, to a trustee. It is likely that it will be sold but the court does have to take a number of issues into consideration. A company can also be made bankrupt and will be declared insolvent.
Barrister: – This is a name for a lawyer in the higher courts in England and Wales not Scotland. In Scotland the higher courts have advocates and solicitor Advocates.
Benefits: – Some social security benefits depend on how much income and savings you have. These are called means-tested benefits. Other benefits don’t depend on your income and savings. These are called non-means-tested benefits.
Benefit overpayments: – When you have been paid too much benefit this is called an overpayment. It should be treated as a non-priority debt.
Binding: – This is a term normally used about an agreement because it cannot be legally avoided or stopped.
Budget: – If you’ve got debts, you’ll need to work out if you’ve got enough money to pay what you owe. To do this, you will need to work out how much money you’ve got coming into your household and how much you need to spend. This is called your budget.
Capitalising mortgage arrears: – You might be able to clear your mortgage arrears by adding the money you owe to your capital (the amount you borrowed) and paying it back over the remaining period of the mortgage. This is known as capitalising the arrears.
Charge cards: – When you have a charge card, you have to pay off the amount you borrow in full at the end of the agreed period, usually each month. Interest is not charged on the amount you borrow but you may have to pay an annual fee for the card. An example is American Express.
Cheques: – A cheque is a written instruction from you to your bank or building society. It authorises payment from your account to whoever is named on the cheque (called the payee).
Cheque cashers: – These are companies where you can take a cheque and exchange it for money. You will be charged a fee for this service.
Conditional sale: – This is a way of borrowing, similar to hire purchase. You buy goods on credit and pay for them in instalments. Usually, you won’t actually own the goods until you’ve made the last payment. If you fall behind with the payments, the credit lender may be able to take the goods back (repossess them).
Consolidation loan: – A consolidation loan is a single loan which can be used to pay off all your debts and leave you with one monthly payment to this loan.
County Court Judgement (CCJ): – This is a judgement from the court that operates only in England and Wales. In Scotland see Sheriff Court.
Credit: – If your account is in credit, it means that you have money available to spend. If you buy goods or services on credit, it means that someone like a bank or other lender has given you the money to buy something.
Credit broker: – This is someone who arranges loans and charges you for this service.
Credit card: – This is a plastic card issued by a bank or building society which allows you to buy things and pay for them later. You can also use the credit card to draw money out from a cash machine. With some purchases using your credit card gives you extra insurance protection. An example of this is Visa.
Credit licensing: – It is against the law for someone to offer credit without having a credit license but many people do it. These people are known as loan sharks.
Credit rating or scoring: – Your credit rating or scoring is your ability to get credit.
Credit reference agency: – A credit reference agency holds credit account information so that it can be shared with other lenders when a credit reference check is made on you. It can only be accessed by those lenders who provide the information and who are members of the credit reference agency’s credit account sharing scheme.
Credit sale agreement: – Under a credit sale agreement, you buy the goods at the cash price. You usually have to pay interest. Repayment is made by instalments until you have paid the whole amount. You’re the legal owner of the goods as soon as the contract is made and the goods can’t be returned if you change your mind.
Credit union: – This is a self-help co-operative whose members pool their savings to let each other borrow money at a low rate of interest.
Creditor: – This is someone you owe money to.
Current account: – A current account is an account held at a bank or building society which allows money to be paid in or taken out. You can use a current account for things like paying your bills and getting money such as your salary or benefits.
DAS approved money advisor: – A DAS approved money advisor has received specialist training and has been approved to work with someone in debt to negotiate a Debt Payment Plan (DPP).
Debit: – This is the term used when money is taken out of an account.
Debit card: – This is a plastic card that can be used instead of cash when you buy something.
Debt: – Debt is when you owe money to another person or organisation.
Debt Arrangement Scheme (DAS): – This is a scheme set up by the Scottish Government to help people manage their debts.
Debt collectors: – Many lenders use debt collection companies to collect debts on their behalf and the staff that collect the debts are debt collectors.
Debt management company: – A Debt Management Company (DMC) is an organisation that can help you draw up a debt management plan. Usually, you have to pay for this service although there are some DMCs who will do this for free. Instead of dealing with each creditor, you make one payment to the DMC and they divide the payment fairly between all your creditors.
Debt management plan: – A debt management plan is an arrangement with your creditors (people you owe money to) to pay back your debts by regular instalments.
Debt Payment Programme: – This is an agreement under the Debt Arrangement Scheme that allows someone in debt to pay debts off over an extended period.
Debt Relief Order: – This is a court order only in England and Wales.
Decree: – This is the technical term for a type of court order which a creditor usually has to have before payment of a debt can be enforced (doing diligence).
Deductions from earnings order: – If you are behind with payments of child support, the Child Support Agency could apply for a deduction from earnings order which allows them to take money direct from your wages or salary.
Default notice: – This is the name of the notice that a creditor has to send you before legal action can be taken if you haven’t paid debts covered under the Consumer Credit Act 1974.
Diligence: – This is the term used to describe a number of legal options for a creditor to use to force you to pay the money you owe.
Direct debit: – This is an instruction to your bank or building society which allows an organisation to collect payments from your account. The amount can be changed by the bank at the request of the organisation.
Direct deductions: – As an employer you may be asked to deduct benefit overpayments an employee owes the Department for Work and Pensions (DWP) from their pay. This is called a Direct Earnings Attachment (DEA).
DWP will write to you and ask you to operate the DEA scheme if any of your employees are affected. DEA only applies to a small proportion of people owing money to DWP.
Earnings arrestment: – When you owe money and are in a job the creditor can seize some of your earnings under an earnings arrestment.
Endowment mortgage: – This is a type of interest-only mortgage. Instead of repaying the loan each month, you only pay the interest on the loan to the mortgage lender and take out an endowment policy with an insurance company and get a lump sum at the end of the mortgage period. You pay the endowment policy monthly. You must get advice because the lump sum might not be enough to pay the mortgage.
Equity: – If you have equity in your property, this means that the property is worth more than what you owe on the mortgage or loan.
Equity release schemes: – An equity release is a way of raising money from the value of your home without having to move out. The loan is repaid later, usually after you die or move permanently to a care home.
Financial Ombudsman Service: – This is an independent organisation which settles complaints between consumers and businesses which provide financial services. It is a non-profit making public body that was set up by the government to meet legal requirements.
Financial Conduct Authority (FCA): – This is one of the agencies which regulates firms in the financial services industry and tries to provide some protection for the consumers in the financial industry. The other agency is the Prudential Regulation Authority.
Financial services compensation scheme: – If your bank or building society goes out of business and has no money left to pay you, you may be able to claim compensation from the Financial Services Compensation Scheme (FSCS).
Gross earnings: – This is your earnings before deductions such as tax.
Hire purchase: – Hire purchase (HP) is a way of borrowing. You hire goods, like a car, and pay for them in instalments. The goods won’t actually belong to you until you’ve made the final payment.
Home purchase plans: – With a home purchase plan the bank, building society or other provider offering the plan will buy the property and become the legal owner. With the agreement at the end of a fixed period, you’ll buy the property from them for the same price they paid. You can still sell the property when you wish.
Homeowner’s mortgage support: – This is a UK Government scheme which could allow you to put off paying some of your monthly mortgage payments for up to two years. It’s aimed at people who’ve had a temporary loss of income such as a cut in working hours or wages, or who have lost their job.
Identity theft: – This is when someone you don’t know gets hold of your personal details, PIN number, telephone or internet banking security details and, for example, uses your accounts to purchase goods in your name.
Inhibition: – This is the term for a process that a creditor can use to prevent someone in debt to them from selling assets.
Initial writ: – This is the name of the legal document that starts civil proceedings in the sheriff court under the ordinary cause.
Injunction: – This is a court order only in England and Wales. In Scotland see Interdict.
Interdict: – This is a court order in Scotland that is like an injunction.
Insolvency practitioner: – Someone appointed to deal with the affairs of a company or an individual when they become insolvent – or goes out of business.
Insolvency Service: – This agency provides a range of services under the Insolvency legislation. It does not provide a service for individuals who are sequestrated in Scotland. See Accountant in Bankruptcy.
Interest: – This is the amount of money you get for keeping your money in, for example, a bank or building society. It is also the cost you pay when you borrow money through a loan or credit agreement.
Interest only mortgage: – This is a mortgage when your monthly payment only pays the interest charges on your loan – you’re not actually reducing the loan itself. This might be an endowment mortgage.
Interest rate: – This is the percentage that is paid on savings or loans.
Investments: – These are financial products which are bought and sold, or traded, on the stock market. They include things like stocks, shares, bonds and trusts.
ISA: – This stand for Individual Savings Account. ISAs are savings and investment plans which allow you to save a certain amount of money each year tax free.
Islamic mortgages: – In an Islamic mortgage, also called a home purchase plan, you don’t pay interest. Instead, the lender makes a charge for lending you the money to buy your property. The charge can be recovered in different ways, for example, by charging you rent.
Liability order: – This is the name of the order that the Child Support Agency will use if you are out of work and have arrears of child support to pay.
Loan sharks: – This is a person who charges large amounts of interest for lending money to someone, especially when their financial position means they cannot borrow money from a bank: Loan sharks target those with bad debt records because they may have difficulty getting loans from the usual sources.
Mail order catalogues: – This is a way of buying goods by post, with payments being spread over a number of weekly instalments.
Magistrates court: – This court only operates in England and Wales. In Scotland see Sheriff Court.
Mandates: – When two or more people decide to open a joint bank account, they have to sign a form called a mandate. The mandate sets out what the joint account holders can do, for example, who can sign cheques and take money out.
Mortgage: – This is a loan taken out with a bank or building society to buy a house or other property. The mortgage is usually for a long period, typically up to 25 years, and you pay it back by monthly instalments. If you don’t pay the mortgage you can lose the property because the mortgage is secured on the property.
Mortgage to rent schemes: – The Mortgage to Rent (MTR) scheme enables you to stay in your home by selling it to a social landlord. You become a tenant of that landlord. Once the property is sold to the social landlord, the secured debts/loans on your property are paid off and you pay rent to the social landlord.
Means enquiry hearing: – If you have to pay a court fine but can’t afford it, you might have to go back to court so they can look at your financial circumstances and decide how much you must pay. This is called a means enquiry hearing.
Mortgage payment protection insurance: – If you’ve lost your job or had a temporary loss of income, check whether you have mortgage payment protection insurance (MPPI). You may have taken a policy out at the same time as you got your mortgage or afterwards. The MPPI policy may cover your mortgage payments if you can’t work because of unemployment or sickness.
Mortgage rescue schemes: – These are schemes which can help if you’re struggling to pay your mortgage. There are several different types of mortgage rescue schemes including: schemes run by private firms and individuals, schemes run by social landlords such as local authorities and housing associations and Government-backed mortgage rescue schemes.
Net earnings: – This is your earnings after deductions such as tax.
Non-secured loans: – Money borrowed from a lender which does not use your property (home) as an extra guarantee of repayment. This means your home is not immediately at risk if you fall into arrears, although the lender can take court action to make you pay the money back
Non-priority debts: – Debts which are less urgent to pay than priority debts because you can’t lose your home or other possessions because you owe money for them.
Occupational pension: – This is a pension scheme set up by employers to provide pensions for their employees. They work in one of two main ways: –
- Final salary scheme (or defined benefit scheme). Your pension is based on your pay at retirement and the number of years you have been in the scheme. In most schemes you pay a set percentage of your wages towards your pension fund and your employer pays the rest
- Money purchase scheme (or defined contribution scheme). Your pension is based on the amount of money paid in and on how the investments have performed. You’ll usually pay a percentage of your wages into the scheme and your employer may also pay a regular amount in but this isn’t always the case.
Overdraft: – You can ask a bank to agree that you can take more money out of your bank account than what’s in there. This is called an agreed or authorised overdraft. If you go over your agreed limit, the bank may return (bounce) cheques or other payments and you’ll be charged additional fees and interest.
Pawnbrokers: – This is someone who lends money according to the value of goods you leave with them (pledge). The pawnbroker must keep the goods for at least six months but you can get them back at any time by paying off the loan plus interest.
Payment protection insurance: – When you take out a loan, credit card or store card, you’re often asked to take out an insurance policy at the same time. This is called payment protection insurance (PPI). PPI is meant to cover the loan or card repayments if you can’t afford them yourself because of illness or unemployment or because you have an accident or become disabled.
Pension: – This is an income paid out after you retire. You can’t spend any money in your pension fund until you have reached the minimum age (often 50). You can often take part of the money as a cash lump sum but the rest must be taken as income.
Personal loans: – When you take out a personal loan, you normally borrow a fixed amount of money, repayable in monthly instalments over an agreed period of time. This is called the term of the loan. You’ll usually be charged a fixed rate of interest and sometimes extra fees, especially if the loan is secured. Some lenders give loans with a variable interest rate. This means that the interest rate may go up or down during the term of the loan.
Personal pension: – A personal pension is a pension plan that is not tied to a particular place of employment. You can make contributions and keep it going even if you change your job.
PIN: – Personal Identification Number – this is a secret number, which you use with a cash machine card. You type it in and the cash machine checks that the card number matches the PIN that was allocated to you or that you changed to suit yourself.
Post office card account: – This is an account with the Post Office that you can use to collect benefits, tax credits and State Retirement Pensions. You can’t pay any other money in.
Priority debts: – These are debts which you need to sort out urgently because there may be serious consequences if you don’t pay them, for example, mortgage and rent debts.
Pro rata offers: – This is a special way of working out what to offer to pay when you are in debt and have more than one creditor.
Professional Career Development Loans: – This is a bank loan for people who want to follow a course of study but don’t have the money to pay for it.
Prudential Regulation Authority: – This organisation sits within the Bank of England. It was created when the Financial Services Agency (FSA) split into two. It regulates and supervises banks, building societies, credit unions, insurers and major investment firms. The other agency is called the Financial Conduct Authority (FCA)
Redemption charge: – This is a fee you might have to pay your mortgage lender if you switch mortgages or pay off your mortgage early.
Repayment mortgage: – This is a mortgage which means that every month your payments to your mortgage lender go towards reducing the money you borrowed (the capital), as well as paying the interest charged on the loan.
Risk: – Risk is defined in financial terms as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment.
Second mortgage: – Second charge mortgages are a secured loan, which means they use the borrower’s home as security. Many people use them to raise money instead of remortgaging
Secured loan: – This is money borrowed from a lender, using your property as an extra guarantee of repayment. This may be called a second mortgage, second charge or further charge. They all mean the same thing. If the amount isn’t paid in full, the lender may take the property back (repossess it) and sell it.
Shared ownership: – If you own your property through a shared ownership scheme, you will usually make a monthly payment towards your mortgage and a rent payment to a landlord. The landlord is often a housing association, or another type of social landlord.
Sheriff Court: – This is a court in Scotland that deals with civil and criminal matters with a sheriff on the bench.
Sheriff officers: – A sheriff officer is an official of the court who has been instructed by the court to do something – for example deliver important documents by hand, or collect a debt.
Shortfall: – A shortfall is the term used to describe the amount of money that is still outstanding on a mortgage or other loan after the property has been sold.
Small claim: – This is a legal procedure in the sheriff court when one party is claiming less than £3,000 from the other party.
Social fund loans: – If you get certain social security benefits you may be entitled to help from the Social Fund for one-off expenses. You have to pay back what you borrow but you don’t have to pay any interest.
Standing order: – This is a method of paying regular amounts from your bank account to a person or organisation that you owe money to. It is your responsibility to change the payment if it needs to be altered.
State retirement pension: – This is a pension paid to you by the Government when you reach retirement age.
Store card: – This is a plastic card issued by a shop that lets you buy goods at that store on credit. You must either pay the full amount, or a minimum amount back each month.
Student loans: – These are low-interest loans for students, authorised by the Government through the Student Loans Company (SLC).
Sub-prime lender: – This is the jargon term for lenders who are willing to make loans to people who are unable to get credit from mainstream lenders, such as high street banks or building societies, because of a poor credit record.
Summons: – This is the term for the document that starts civil proceedings in the civil court.
Tax code: – This code tells your employer how much tax-free pay to give you during each pay period. Your tax code is worked out from your personal tax allowances and other tax adjustments.
Tax credits: – These are means-tested allowances administered by HM Revenue and Customs. Working Tax Credit is available to single people or couples who work enough hours. Child Tax Credit is available to single people or couples with children whether or not they are employed.
Tax-free interest: – Interest on savings is usually taxed but some people don’t have to pay tax. If you are one of them, you should ask your bank or building society for form R85, which you can fill in and return to your branch. This avoids the need to pay tax on your savings.
Trading cheques and vouchers: – These are schemes offered by doorstep lenders. They can be exchanged for goods, usually clothing and soft furnishings and usually at specific shops. You repay the amount to a company agent who normally calls at your home. Interest rates are often high for this type of credit.
Trust Deed or Protected Trust Deed: – This is a legally binding agreement between you and your creditors. Your assets and property are passed to a trustee who will manage your financial affairs with the aim of paying your creditors as much as possible of the debt owed to them.
Unauthorised transactions: – This is money going out of, or into your account, that you didn’t know about and haven’t allowed. An example is something that has been paid for with your credit card that you didn’t know about, and you had not given your permission for.
Unsecured creditor: – This is a creditor who does not hold any security (for example, like a mortgage) for money owed. The debt is not ‘secured’ on anything that can be sold or seized to sell.
Variable interest: – If you have a mortgage or other type of loan with variable interest, repayments will go up if interest rates go up. If interest rates fall, not all lenders drop their rates but might do.
Withdrawal: – This is the technical term for taking money out of your bank or building society account.
Writing off a debt: – If you have no money to spare to pay off your debts, your creditors (the people you owe money to) may agree to write off your debt. This means they agree to stop taking action against you to get their money back.
- Appeal – An appeal is how you object to or dispute a government decision. Government departments’ decisions are not always right. If you think that a decision about your tax, tax credits or other benefits is wrong, you might be able to ‘appeal’ that decision.
- Blind person’s allowance – This is a special allowance that blind people or people with very poor eyesight can claim on top of their personal allowance. If you are eligible for it, you might be able to earn extra income before paying income tax. If you are certified blind and are on a local authority register, or if you live in Scotland or Northern Ireland and are unable to perform any work for which eyesight is essential, you can claim blind person’s allowance.
- Civil partners – Civil partners are two people of the same sex who live together in a relationship similar to marriage. They form a civil partnership when they legally register their partnership in front of witnesses.
- Class 2 contributions – These are a type of National Insurance contribution paid by people who are self-employed. It is a fixed weekly amount.
- Class 4 contributions – These are another type of National Insurance contribution paid by people who are self-employed. The amount depends on the taxable profit of your business.
- Coding notice – A coding notice is a letter which tells you what your tax code is and how it has been worked out. It is important you check to make sure it is right otherwise you might pay too much or too little tax. You should get help if you cannot understand your coding notices.
- Complain – If you are unhappy about how an organisation has treated you or dealt with your case, you can complain. Most organisations have a formal complaints procedure.
- Compliance checks – This means HM Revenue & Customs want to ask you questions about information or forms you have sent in such as a tax return or tax credits claim.
- Council tax – Council tax is the local tax in England, Scotland and Wales. You pay it to your local council, and they use it to provide local services. In Northern Ireland you will pay rates instead of council tax.
- Department for Social Development – This is the government department that is responsible for most state benefits in Northern Ireland.
- DWP – The Department of Work & Pensions (DWP) is the government department that is responsible for most state benefits in England, Scotland and Wales.
- Domicile – Your place of domicile depends on a number of things such as your family history and your longer-term plans. If you and your parents came from another country and you still think of that other country as your natural home, you will probably have a foreign or non-UK domicile.
- Earnings – Earnings are money or income in return for the work you do or profits from your business. Earnings can include other things like your employer allowing you to use a car for your private use, providing you with accommodation or paying for your meals.
- Employee – An employee is someone who works for somebody else (called an employer). An employer will often ask an employee to sign a contract of employment – a document that records the terms they will work on (for example: working hours, how much you will be paid, what happens if you are ill). There does not have to be a written contract for you to be legally counted as an employee.
- Employer – An employer is a person or business that has to give work to someone and pay them for it under a contract of employment. The employer directs and controls the work that the employee does. You can be an employer even if you are self-employed, if you pay other people to do work for you.
- Gig economy – This is a fairly new and developing area of the economy, for those who work on an ad hoc basis or ‘gigs. These workers have traditionally been classed as self-employed for employment law purposes; however, this view has recently been challenged by individuals claiming they should be reclassified as ‘workers’ for employment law.
- GOV.UK – This is the main website for most of the UK government departments and includes information on benefits, student loans and tax.
- Government Gateway – This is a central place where you can register to use online government services.
- HMRC – HM Revenue & Customs (HMRC) are the part of the government that deals with tax, National Insurance contributions, working tax credit, child tax credit and child benefit.
- Income – Income is money you get, for example from work you do or from interest on savings.
- Income tax – Income tax is tax that you pay on most types of income.
- Independent tribunal – An independent tribunal is a group of people who look at appeal cases. In a tax context, they will look at your case if you are not happy with a decision about your tax or state benefits.
- Investments – These are things you buy because you think they might be profitable and earn you money in the future. Investments can include property, shares, savings in a bank account and paintings.
- Jobcentre Plus – Jobcentre Plus is part of the Department of Work & Pensions (DWP). They are responsible for some state benefits, including jobseeker’s allowance, employment and support allowance and universal credit. In Northern Ireland these benefits are dealt with by the Jobs and Benefits Office.
- Land & Property services – Land & Property Services is the department responsible for collecting rates in Northern Ireland.
- Local authorities – Local authorities (also known as councils) are responsible for the services in the area where you live. They also collect council tax.
- Local taxes – Local taxes are taxes you pay to your local authority or Land & Property Services (in Northern Ireland). They pay for local services in your community.
- Mandatory reconsideration – The first stage of the appeal process for decisions on tax credits. The mandatory reconsideration process asks HMRC to reconsider their original decision.
- Married couples – Married couples are two people who have got married, by giving notice and having either a religious or civil ceremony in front of witnesses.
- National Insurance contributions – You pay National Insurance contributions to HM Revenue & Customs if you are aged 16 and over, and you are an employee or self-employed. You can also pay voluntary contributions. The contributions build up your entitlement to state benefits. You usually stop paying contributions once you reach state pension age.
- National Insurance number – Your National Insurance number is your personal reference number for the whole UK system of National Insurance and state benefits. This number ensures the National Insurance contributions you pay are noted on your record with HM Revenue & Customs.
- National living wage – This is a premium on the national minimum wage for employees aged 25 and over.
- National minimum wage – The national minimum wage sets the minimum hourly rates that employers must pay their employees in the UK. HM Revenue & Customs enforce the rules.
- Parental settlement – this is when your income is taxed as if it belongs to your parents (or step-parents) and not you. This occurs if you are under 18 years old, not married or in a civil partnership and your parents (or step-parents) have given you funds that produce an annual income of over £100.
- Pay As You Earn – This is a system of collecting and paying income tax and National Insurance contributions. If you are an employee, your employer deducts income tax and National Insurance contributions from your income, and pays them to HM Revenue & Customs for you.
- Payslip – A payslip is a statement that contains details of your pay and any tax and National Insurance contributions deducted. Your employer might give you a paper payslip or send it to you electronically.
- Penalty – A penalty is a fine you might have to pay because you have broken a rule. For example, late filing of your Self-Assessment tax return.
- Pension age – This is the age at which you can claim your pension. Find out when you will reach state pension age using the calculator on GOV.UK.
- Personal allowance – Most people who live in the UK can claim a personal allowance. This is the amount of income you can have each tax year before having to pay income tax.
- Personal Tax Account – this is an online system operated by HM Revenue & Customs on GOV.UK. It allows you to manage some of your tax affairs online.
- Rates – Rates are a local tax in Northern Ireland, which you pay to Land & Property Services. Councils use your rates to provide local services.
- Residence – To decide your tax residence position, you must follow the Statutory Residence Test. What country you are resident in for tax purposes partly depends on the number of days you spend there.
- Salary – Your salary is the regular payment of your wages from an employer. Your salary might include items other than just money. For example, your employer might also pay for private medical insurance, accommodation for you or other things which have value.
- Scottish income tax – From 6 April 2017 the Scottish Parliament has had the power to set its own bands and rates of income tax for Scottish taxpayers on non-savings income. This income tax is collected and administrated by HM Revenue & Customs.
- Self-Assessment – This is the system for giving details of your income and gains to HM Revenue & Customs. It involves completing tax returns.
- Self-employed – If you set up your own business and take responsibility for its success or failure, you might be self-employed.
- Social Security Scotland – the department of the devolved Scottish administration that is responsible for paying certain state benefits.
- State benefits – State benefits are paid by the UK Government to people who meet certain conditions, for example people with children, or people on a low income.
- Student loans – These are loans from the Student Loan Company, a government-owned organisation that provides loans and grants to students at universities and colleges in the UK.
- Tax – Tax is money paid to the government to pay for services and to run the state. HM Revenue & Customs collect most taxes, but some taxes (such as tax on vehicles) are collected by other bodies. There are also local taxes for the area where you live.
- Tax credits – There are two tax credits – child tax credit and working tax credit. You may be eligible to claim one or both of them, depending on your household circumstances. HM Revenue & Customs (HMRC) deal with claims for tax credits.
- Tax-free – If something is tax-free, it means you do not need to pay any tax on it. Something which is tax free might also be described as ‘exempt from tax’, ‘not taxable’ or ‘non-taxable’.
- Tax residence status – Your tax residence status is one factor in deciding whether or not you have to pay UK tax on your income and gains.
- Tax return – If you are within Self-Assessment, you have to complete a tax return every year to tell HM Revenue & Customs about your income and gains. You can also claim allowances and reliefs. Some people have to complete a tax return even if their tax is simple or there is no tax to pay.
- Tax year – The tax year is from 6 April in one year to the following 5 April. You might see the tax year written as ‘2020/2021 tax year’. This means 6 April 2020 to 5 April 2021.
- Textphone – A textphone is something that can be used by people with hearing difficulties. A textphone, sometimes called a Minicom, is similar to a standard telephone. It plugs into your telephone socket at home, and has a keyboard and display that lets you type and read conversations.
- Text relay – Text relay (previously called type talk) is a service that allows textphone users to contact people who are using a standard telephone. It does this by using a ‘relay assistant’ who changes type to talk and talk to type.
- Universal credit – Universal credit is a single benefit run by the Department of Work & Pensions (DWP) which combines benefits for in and out of work support, housing, and childcare costs, with additional payments for people who have disabilities or caring responsibilities. Tax credit claimants will be moved onto universal credit over the next few years.
- VAT – Value Added Tax is a tax on expenditure that is charged by registered traders. If turnover in a rolling 12-month period is more than £85,000, the trader will most likely be obliged to register for and charge VAT on their sales invoices.
- Verify – Verify is the government’s new gateway to using online digital services, it can be used to make claims for example for the marriage allowance and tax refunds.
- Wages – Wages are the money your employer pays you in return for the work you do for them. Wages can also include other things, such as your employer giving you something other than cash that has a value or benefit to you.
- Welsh income tax – From 6 April 2019 the Welsh government has the power to partially set the rates of income tax for Welsh taxpayers on non-savings income, the UK government will also set part of these tax rates. This income tax is collected and administrated by HM Revenue & Customs.