By Stuart Wilkie, Head of Commercial Finance at Anglo Scottish
The outlook for SMEs in 2026 is bright, with 73% of SME owners expecting growth. During 2024, almost half of small businesses in the UK used external finance to fund their growth, spreading the cost of key assets and helping establish a consistent cash flow all year round.
The number of SMEs prepared to use external finance to grow is on the up, too, with a stronger appetite for risk reported by Asset Finance Connect. When it comes to applying for finance for the first time, however, understanding the industry terms and what they actually mean can be a challenge.
So, with that in mind, here are 11 key terms that you need to know when applying for finance – from the one-size-fits-all finance agreements to specialised terms.
1. Working Capital
If you’re a business owner, you should be familiar with the concept of working capital – a measurement of whether your business has enough short-term resources to cover long-term obligations. It’s calculated by subtracting your current liabilities from your current assets.
However, it might be helpful to understand how lenders view your working capital. They want to understand how your working capital changes over time, whether you’re susceptible to seasonality, and how resilient your cash flow is.
2. Secured/Unsecured
If you’ve heard of security or collateral before, you might find yourself asking about the difference between secured and unsecured loans. Under a secured loan, you’d pledge your assets (like property or equipment) to show the lender that you’re capable of repaying your loan.
If you default on your loan, the lender can claim these assets.
3. Personal Guarantee
For smaller SMEs, personal guarantees (PGs) are increasingly common requirements if applying for a loan – particularly for unsecured loans. If your business doesn’t have the history or assets to sufficiently convince a lender of your ability to repay, they may ask for a personal guarantee: a promise that you, the individual, will personally repay the loan if the business cannot.
Be aware of the risk associated with personal guarantees and know the implications before signing!
4. DSCR (Debt-Service Coverage Ratio)
This term is fairly common in commercial property finance transactions and is a formula that refers to your business’ ability to repay loans comfortably. “Debt service” means the total amount required to fully repay your loans in a given period (usually a year).
Your DSCR is calculated as your net operating profit divided by your debt service. Typically, any ratio over 1.25 is a good example of financial security and will be looked at favourably by a lender.
5. Loan-to-Value Ratio (LTV)
When you’re financing an asset or property, this ratio helps establish how much of that item’s value has been funded via loans – and how much you’ve contributed yourself via equity or a deposit.
Lower LTVs mean you’ve contributed more of the asset’s value yourself and are less reliant on the loan – meaning less risk for the lender, and possibly better loan rates.
6. EBITDA
EBITDA is a commonly used acronym that stands for “Earnings Before Interest, Tax, Depreciation and Amortisation”. EBITDA is a useful consideration for lenders because it gives a good example of how well a company is truly operating.
External and accounting factors can affect a company’s overall net profit, while EBITDA provides a truer representation of your firm’s ability to comfortably make loan repayments.
7. Intercreditor Agreement
Need multiple lines of credit with multiple lenders? Some companies need multiple specialised services that only certain lenders can provide – or they might only be eligible for certain loan terms from a specific lender.
An intercreditor agreement is a set of rules between your two lenders that defines their individual rights and responsibilities in the event that you’re unable to repay your loan.
8. Interest Roll-Up
Some loans may be subject to interest roll-up – this means that you won’t pay interest during the course of your loan. Instead, interest accrues over time, and you’ll pay the combined amount of the loan and your built-up interest at the end of the loan period.
Interest roll-up will let you defer interest payments until the end of the loan – though your total debt will be larger, so consider whether this is right for you.
9. Drawdown
Drawdown refers to the process of releasing funding from an approved facility. In longer-term finance agreements for housing developments, funding is released – or “drawn down” in stages when the project reaches specific milestones.
10. Invoice Factoring/Discounting
These are two forms of invoice finance that allow your business to get access to a percentage of the value of your unpaid invoices from a lender, rather than being stuck waiting on your debtors to pay up.
In both agreements, a lender will usually pay you up to 90% of your unpaid invoice’s value – the difference lies in whether you or the lender handles the collection of the invoice.
11. Exit Strategy
This one’s fairly straightforward and is usually used in development finance – lenders are likely to ask for your exit strategy to ascertain how you plan to repay the loan. Do you plan to sell the property? Refinance? A long-term mortgage conversion? To secure a development loan, you’re going to need a clear and credible exit strategy.
For more, visit: https://www.angloscottishfinance.co.uk/commercial-finance
Anglo Scottish Asset Finance Limited
