SME Financing in Canada, 2002 — Appendix B

Glossary of Terms

Aboriginal: A person who identifies with at least one Aboriginal group (i.e. North American Indian, Métis or Inuit) and/or who is a Treaty Indian or a Registered Indian as defined by the Indian Act of Canada and/or who is a member of an Indian Band or First Nation.

Credit Risk: Risk that a borrower may default on obligations, thus a danger that repayment will not take place.

Collateral: An asset or security that is pledged to support or secure a loan (e.g. a collateral mortgage on a house or a pledge of a bond taken as security by a bank to support a term or operating loan).

Debt: The money that one owes.

Debt Financing: A form of financing, other than leasing or factoring, that results in a debt on the part of the borrower.

Demand Loan: A loan that must be repaid in full on demand.

Disbursements: The total amount flowing from investors to investee companies.

Equity: The residual value of a business or investment after all debts and other claims are settled.

Equity Financing: Any form or financing based on the equity of the business.

Factoring: The sale of receivables from one company to another at a discount.

Fast-growth Stage: The stage at which a business is growing at a rate much faster than the economy.

Financial Institutions: Establishments that handle monetary affairs, including banks, trust companies, investment dealers, insurance companies, leasing companies and institutional investors.

Financings and Investments: A transaction with an investee company representing one round of financing, in which multiple investors can participate. For example, if three investors participated in one transaction, it would be recorded as one round of financing and three investments.

Investee Company: A firm that has secured an equity or quasi-equity investment from one or more venture capital investors.

Knowledge-based Industries: Since there is no consensus on a definition of KBIs, Industry Canada has proposed the use of a two-tiered categorization of industries that would be appropriate for selecting Standard Industrial Classification (SIC) codes as indicators for banks lending to KBIs. The categories are:
Tier I – a narrow band of science and technology-based firms, comprising knowledge producers; and
Tier II – a broad band of «high knowledge» firms that, based on measures of research and development and knowledge worker inputs, could be considered businesses of innovators and high-knowledge users (see Appendix A for additional detail).

Labour-sponsored Venture Funds: Venture capital corporations established by labour unions. They function as other venture capital corporations but are subject to government regulation.

Lease: An agreement to rent for a period of time at an agreed price.

Line of Credit: An agreement negotiated between a borrower and a lender that establishes the maximum amount against which a borrower may draw. The agreement also sets out other conditions, such as how and when money borrowed against the line of credit is to be repaid.

Maturity Stage: The stage at which sales have stopped growing.

Mezzanine Financing: According to Macdonald & Associates Limited, a senior investment that provides the cash flow of term lending with the capital gains of share ownership. Mezzanine financing generally includes subordinated convertible debt and yield based on preferred shares, often structured with warrants or options.

Winding-down Stage: The stage at which sales have started to decrease.

Woman-owned Business: A business that is more than 50 percent owned by a woman or women.

Mortgage: A debt instrument by which the borrower (mortgager) gives the lender (mortgagee) a lien on property as security for the repayment of a loan.

Operating Loan: A loan intended for short-term financing to support cash flow or to cover day-to-day operating expenses. Loans of this type are part of the line of credit.

Partnership: A non-incorporated business venture of two or more individuals or companies. Profits and losses flow directly and equally to the partners.

Quasi-Equity Financing: A type of financing that involves a mix of debt and equity. The equity allows investors to achieve a high rate of return upon the success of the company, while the debt component entails premium price contributing to the return of the investor.

Request: The act of approaching any type of credit supplier for new or additional credit for business purposes.

Refusal: The act of refusing to authorize a final request for financing in a given year.

Retained Earnings: The amount of earnings retained and reinvested in a business and not distributed to the shareholders as dividends.

Rural Location: A location in which the second digit of the postal code is zero (except in the province of New Brunswick). A community with less than 1500 points of call (or POCs – destinations to which mail is delivered) or where a majority of the POCs are concentrated in an area with a population density of less than 400 per square kilometer. Areas within a community that are separate from the population concentration of the community and are served through one or more postal installations that have less than 1500 POCs. Additionally, a post office that does not have a letter carrier associated with it can be deemed a rural office.

Seed Stage: The stage at which a business has no clients yet and has not fully developed its business plan.

Slow-growth Stage: The stage at which a business's sales are slowly increasing.

Small and Medium-sized Enterprises: Firms with less than 500 employees and less than $50 million in annual revenues.

Start-up Stage: The stage at which a project is clearly defined or the prototype is finished and the business is starting commercialization.

Subordinated Debt: A non-conventional financing instrument whereby the lender accepts a reduced rate of interest in exchange for equity participation.

Term: Usually the duration of a loan.

Term Loan: A loan intended for medium-term or long-term financing to supply cash to purchase fixed assets such as machinery, land or buildings, or to renovate business premises.

Underpricing: The difference between the closing or opening price of a product on the first day of trading and the initial offering price of the firm, expressed as a percentage of the initial offering price.

Urban Location: A location in which the second digit of the postal code is not zero (except in the province of New Brunswick). A community (defined as a city, town, township or settlement) that has 1500 points of call (POCs – destinations to which mail is delivered) or more and where the majority of these POCs are concentrated in an area of the community with a minimum population density of 400 per square kilometer. Also, a post office with letter carriers assigned to it is considered urban.

Venture Capital: Risk capital invested in privately held companies by VC firms, through the underwriting of newly issued stock and/or convertible bonds.

Venture Capitalist: An entity investing in a company or companies that have an element of risk but offer potentially above-average returns.

Visible Minorities: Persons other than Aboriginal persons who are non-Caucasian or non-white.

Working Capital: The excess of current assets over current liabilities. This represents the amount of net non-fixed assets required for day-to-day operations.