Glossary of Business Banking Terms

Small business owners can sometimes struggle to understand the different terms used by banks. Our Glossary of Business Banking Terms aims to de-mystify the most common banking terms by explaining in plain English what they mean. Please note that because there are so many different descriptions applied to fees, we have grouped all the different types under the one heading of FEES.

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Annualised Percentage Rate (APR) The APR takes into account all the costs associated with the loan (not just the interest rate) and expresses them as an average interest rate to enable like with like comparisons of alternative offerings.
Agent An agent is someone who acts on behalf of another person or organisation.
Amortisation To pay off principal and interest under a loan over a period of time usually by instalments. The amortisation period is the amount of time a loan is calculated over (and repaid).
Assignment Legal transference of a right or a title to an asset to another party.
BBSW & BBSY The 90 day Bank Bill Swap Rate (BBSW) and the Australian Bank Bill Swap Rate (BBSY) are commonly used reference rates for pricing commercial loans and they can be found in daily newspapers. BBSW is set daily based on the average mid price of market rates supplied by select bank bill market participants.BBSY is calculated similarly except that the average bid price is used instead of the average mid price. Thus, BBSY rates are usually around 5 basis points higher than BBSW.
Basis Point A term used to measure the rate of interest. For example, one hundred basis points equal 1.00%.
Break Fees (or costs) Penalty charges for “breaking” or discontinuing the agreed fixed term of a loan.
Bridging Finance Finance that enables you to acquire assets pending the sale of existing assets.
Business Day Any day on which banks in Melbourne or Sydney are able to effect settlement through Reserve Bank of Australia.
Capital Adequacy Ratio This measures the proportion of total assets funded by equity. See also Debt to Equity ratio
Capped Loan A loan where the interest rate cannot exceed a set level for a period of time, but unlike fixed rate loans, the rate can fall.
Charge The term used to describe any right established over a borrower’s assets to secure a debt or performance of an obligation.
Cleared funds The amount of money in an account that is available for you to access.
Clicks and Mortar A type of business model that includes both online and offline operations, which typically include a website and a physical store
Collateral Security Additional or supporting security given in addition to the principal security.
Combination Loan Also known as split loans, combination loans occur when various loans are put together to form one loan.
Compliance Certificate Borrowers who must meet agreed bank covenants are required to provide a compliance certificate at each reporting date, usually quarterly.
Conditions Precedent Sometimes banks require certain conditions to be met before the facility becomes available to be drawdown
Conditions Subsequent At other times banks will allow a drawdown but certain conditions must be after subsequent to the drawdown.
Cross Default When there are a number of entities within a borrowing group, the default by one borrower may allow the bank to call a default on other borrowers.
Debtor Finance A common form of working capital finance where the bank lends against debtor invoices. Well suited to growing SMEs which don’t have property to offer as security. See Factoring & Invoice Financing
Debt Service Ratio(DSR) A ratio that indicates the capacity of a business to generate surpluses in order to cover the interest payable of debt.
Debt to Equity Ratio This is a measure of the extent to which a borrower is reliant upon debt to fund assets. See also Capital Adequacy Ratio and Gearing
Debt to EBITDA Ratio Measures earnings capacity against the total level of debt.
Default Failure to meet a contractual obligation by a specific due date.
Default Rate This is the rate if interest a borrower will be charged in the event of a default.
Disbursements The fees and charges, including any government fees, associated with establishing a loan.
Documentary Credit A written assurance of a bank to pay a specific amount in the agreed currency upon submission of required documents (also called Letter of Credit)
Documentary collection The payment method to deliver documents and payments between the exporter upon payment by the importer.
Drafts An international bank cheque issued in a foreign currency.
Draw Down Act of transferring money from lending institution to the borrower after the loan has settled.
Economic Costs A phrase used by banks to describe the cost of unwinding a fixed rate contract (see Break Costs and exit Fees)
Events of Default Facility agreements will often include certain events that entitle the bank to call a default on the loan.
Events of Review Facility agreements will often include certain events that give the lender a right to review the loan.
Facility Agreement The formal document which incorporates all the terms and conditions of a loan. See Letter of Offer.
Facility Limit The maximum amount of money which can be borrowed as per the Facility Agreement

Application Fees What you get charged when you apply for a loan. This is usually only charged if and when you are offered the loan.
Break Fees Costs you may be up for if you break or repay your loan before due date.
Customer Margin The % amount added to the base or indicator rate to reflect your “creditworthiness”.
Default Margin The margin you will pay if you go into default.
Discharge Fees An administration fee to cover the costs incurred in finalising a loan account.
Establishment Fees Fees payable to a lender to cover the costs of setting up a loan.
Exit Fees Penalties changed by the lender when a loan is paid off before the end of its term.
Facility Fees Another name for a Line Fee.
Issuing Fees Usually applies to bank guarantees where a charge is made whenever a new guarantee is issued.
Line Fees A flat % fee charged on facility limits.
Liquidity Fees A fee charged by banks to compensate the bank for increased costs of raising wholesale funds to lend to customers.
Restructure Fees A fee charged on the restructure of a facility.
Service Fees Another name for a Line Fee.
Unused Fees A fee charged only on the portion of the facility that is not used.
Usage Fees Used Fees
Financial Covenants See Loan Covenants.
Fintech Literally means “financial technology” and encompasses all businesses in the banking and finance sector which predominantly use technology in order to offer new products and services and/or disrupt existing players. See also Marketplace lenders.
Fixed Rate A loan that has an interest rate that does not fluctuate.
Foreign Exchange Contract An agreement for the purchase and sale of a foreign currency.
Gearing A generic word that relates to how much debt is in a business relative to equity. See Debt to Equity ratio.
Guarantor A party who agrees to be responsible for the payment of another party’s debts should that party default.
Indicator Lending Rate The rate that dictates the base interest rate payable for various commercial loans including overdrafts and term loans.
Interest Cover Ratio A measure of the extent to which earnings (EBITDA) cover interest expense.
Interest Rate Swap An agreement between two parties where one stream of future interest payments is exchanged for another based on a specific principal amount. Swaps usually involve exchanging a fixed payment for a floating payment that is linked to an interest rate.
Invoice Discounting The sale by a business (the client) and the purchase by the discounter of trade debts on a continuing basis. The client retains the sales accounting functions and is responsible for collection of the debts. The debtors are usually unaware of the involvement of the discounter.
Invoice Factoring The sale by a business (the client) and the purchase by the factor of trade debts on a continuing basis. The factor will carry out some part of the sales accounting function, as agreed between the client and the factor. The debtors are aware that all the debts have been assigned to the factor, and that payment must be made to the factor to discharge the debt.
Leasing A finance agreement that provides the lessee the right, for a stated period of time, to use property owned by the lessor in return for a series of payments (lease rentals) by the lessee to the lessor.
Letter of Offer See Facility Agreement.
Line of Credit A flexible loan arrangement with a specified limit to be used at a customer’s discretion.
Loan Agreement The contract between the lender and the borrower, which sets out the conditions that apply to a loan.
Loan Covenants Lenders may stipulate in a facility agreement that the borrower must comply with certain requirements usually financial performance benchmarks like Interest Cover Ratio, Capital Adequacy Ratio, Working Capital Ratio and Debt/EBITDA Ratio.
Loan to Value Ratio (LVR) The loan to value ratio is a percentage rate reflecting the amount of debt taken on board to funds an asset(s) compared to the total value of the asset(s).
Margin The difference between the lender’s interest indicator rate and the rate the borrower pays. Often called the “lending margin” this equates to the fee the lender charges for the risk it is taking on board.
Marketplace Lending A relatively new term that is generally used to describe lenders who use online platforms to lend to SMEs and consumers. Marketplace lenders can lend off their own balance sheet or raise funds from investors via a P2P platform or a combination of the both. See also Fintechs.
Material Adverse Events/Changes A clause that can provide a lender with the right to review or even terminate an agreement. See also Events of Default and Review.
Merchant A provider of goods or services who allows payment for goods or services to be affected by performing an Electronic Transaction.
Non Disclosure Agreement An agreement that both borrowers and lenders can execute to provide added comfort when sharing confidential information. Also called Confidentiality Agreement.
Overdraft An extension of credit created by drawing more funds from a bank account than the balance permits.
Overdrawn When a sum of money is taken out of a bank account that exceeds the account balance or overdraft limit. Fees are usually charged for overdrawn accounts.
PPSA The Personal Property Security Act enables holders of a security interest in personal property (stock, debtors, plant etc.) to register and thereby protect their interest in those assets.
Peer to Peer (P2P) lending An online platform that matches borrowers and lenders.
Power of Attorney Provides the authority to act for another party in specified or all financial or legal matters.
Prepayment Any amount paid to reduce the principal balance of the loan before the due date or any amount in addition to the minimum repayment. Fees may apply to prepayments.
Principal The amount of money that was borrowed on which interest is paid.
Principal & Interest (P&I) Loan The borrower repays a portion of the principal and the accrued interest over the term of the loan by regular instalments.
Risk Exposure to the chance of loss when investing over time. Lower risks are normally associated with lower returns.
Risk grade Calculated by a bank to assess how secure a loan or investment is likely to be. The higher the risk grade, the higher the margin that will be charged by the bank.
Risk profile The amount of risk you are prepared to take for the prospect of earning a higher return.
Rollover A continuation of an existing borrowing or investing arrangement.
Securitisation Turning a pool of diverse assets into a bond or other security that can be bought and traded by investors.
Set-Offs A legal clause that allows a lender to offset deposits when there is a loan default. It can also refer to a way of managing a set of bank accounts where credits can be used to set-off debits in order to reduce the overall interest cost.
Term A period of time in which the loan must be repaid.
Unencumbered An asset or business free of liabilities, restrictions or mortgages.
Unsecured When a lender lends money without taking assets as security.
Valuation A report detailing a professional’s opinion as to what an asset is worth.
Variable Interest Rate This is a fluctuating rate of interest charged by lenders. Variable interest rates change as official market interest rates rise and fall.
Venture Capitalist A venture capitalist is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets.
Working Capital Ratio A measure of the extent to which current assets cover current liabilities.