Small and Medium-sized Enterprise Financing in Canada - Glossary of Terms

Angel Investors: A high net worth individual active in venture financing, typically participating at an early stage of growth.

Capital Lease: A lease that meets one or more of the following criteria, meaning it is classified as a purchase by the lessee: the lease term is greater than 75 percent of the property's estimated economic life; the lease contains an option to purchase the property for less than fair market value; ownership of the property is transferred to the lessee at the end of the lease term; or the present value of the lease payments exceeds 90 percent of the fair market value of the property.

Churn Rate: Percentage of SMEs that enter and exit the marketplace annually.

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).

Conditional Sales Contract: Credit that allows the vendor of the asset to retain legal title until the purchaser has made full payment.

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

Crown Corporation: A corporation that was established by a country's government.

Current Assets: A balance sheet item that equals the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. A company's creditors will often be interested in how much that company has in current assets, since these assets can be easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations.

Debt: A financial obligation to a lender; the amount of debt and interest payable is agreed upon over a designated period.

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

Debt to Equity Ratio: A measure of a company's leverage, calculated by dividing long-term debt by common shareholders' equity, usually using the data from the previous fiscal year. Sometimes, long-term debt plus preferred shareholder's equity is divided by common shareholders' equity, since preferred stock can be viewed as a form of debt. A company with a higher debt/equity ratio can offer greater returns to shareholders but is riskier.

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

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

Domestic Banks: Includes the six large domestic banks and several smaller ones as defined by the Office of the Superintendent of Financial Institutions.

Entrepreneur: An individual who starts his/her own business.

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

Equity Financing: Any form or financing that is 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.

Finance Companies: Includes enterprises that provide financing to businesses, often for the purchase of goods and services, but do not accept deposits. Debt financing is commonly provided, however, companies that purchase accounts receivable or provide both debt and lease financing are also included here. Examples include the acceptance companies of vehicle and equipment manufactures, factoring companies and most government business enterprises. Enterprises providing only lease financing are usually classified as leasing companies.

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

Financial Leverage: Is a measure of the ability of a firm to service its debts and arises when a firm finances part of its business with securities that entail fixed financing charges.

Financial Market Imperfection or Gap: Exists where groups of businesses are systematically denied access to financing they ought to, on objective criteria, be accessing.

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.

Fixed Assets: A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate and furniture.

Follow-On Financing: A supplementary round of financing in an existing portfolio company that builds on the original financing, generally in line with business growth and development. Venture-backed firms are often engaged in multiple follow-on deals. Typically, a venture-backed company receives cumulative rounds of financing to facilitate its progression from one stage of development to the next.

High-Growth SMEs (GSMEs): Cumulative sales growth rates of 50 percent or more over a three-year period, covering the years 1997–2000, and is applicable to all Canadian SMEs from the self-employed up to firms with fewer than 500 employees.

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

Informal Investors: An individual who invests personal capital directly in a business owned by others. Investors include friends, family and business angels.

Initial Public Offering (IPO): The first sale of stock by a company to the public.

Institutional Investors: Includes pension funds and insurance companies such as Quebec's Caisses des dépôts et placements, Ontario Municipal Employees Retirement System, and the Ontario Teachers Pension Plan. Through the late 1980s and the first half of the 1990s, pension funds were unwilling to consider VC investments as part of their portfolio.

Insurance Companies: Includes life, health, property, and casualty insurers and re-insurers.

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.

Labour-Sponsored Venture Capital Corporations (LSVCCs): 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.

Leasing Companies: Includes enterprises providing lease financing, usually for vehicles or equipment.

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.

Long-term Debt to Equity Ratio: A measure of the financial leverage of a firm (the ability of a firm to service its borrowings). This ratio does not include current liabilities (short-term debt such as accounts payable) because it is assumed that this debt will be paid off through inventory rollover and through receivables and is therefore not a reliable measure of the creditworthiness of a firm.

Love Money: Financing extended by close friends and family. Lending is usually based on the relationship between individuals rather than on a formalized risk assessment.

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

Medium-Sized Enterprise: A firm with 100–499 employees.

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.

Micro-enterprise: A firm with one to four employees.

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 Lease: A lease for which the lessee acquires the property for only a small portion of its useful life. An operating lease is commonly used to acquire equipment on a short-term basis. Any lease that is not a capital lease is an operating lease.

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

Other Banks: Includes foreign banks, trust companies and all other deposit-accepting institutions except credit unions and caisses populaires.

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

Personal and Business Guarantees: Promise made by an entrepreneur that obligates him/her to personally repay debts his/her corporation defaults on.

Portfolio Managers, Venture Capital Companies and Financial Funds: Includes enterprises typically engaged in managing pools of assets. Examples include mutual fund companies, investment advisors, venture capital companies, labour-sponsored venture capital funds, mutual funds and segregated funds.

Quasi-Equity: A specialized form of private equity, characterized chiefly by use of subordinated debt, or preferred stock with an equity kicker.

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.

Recession: Two consecutive quarters of declining GDP.

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

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

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

Risk Capitial: Funds made available for start-up firms and small businesses with exceptional growth potential. Managerial and technical expertise are often also provided.

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 kilometre. 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 fewer than 1500 POCs. Additionally, a post office that does not have a letter carrier associated with it can be deemed a rural office.

Secured Loans: A loan backed by assets belonging to the borrower in order to decrease the risk assumed by the lender. The assets may be forfeited to the lender if the borrower fails to make the necessary payments.

Slow-Growth Stage: The stage at which a business' sales increase slowly.

Small and Medium-Sized Enterprises: Demand-side survey: Firms with less than 500 employees and less than $50 million in annual revenues. Supply-side survey: less than $1 million in authorization.

Sole Proprietorship: A business structure in which an individual and his/her company are considered a single entity for tax and liability purposes. A sole proprietorship is a company that is not registered with the state as a limited liability company or corporation. The owner does not pay income tax separately for the company, but he/she reports business income or losses on his/her individual income tax return. The owner is inseparable from the sole proprietorship, so he/she is liable for any business debts.

Stages of Development:

• Early Stages of Development
  Seed Stage: A developing business entity that has not yet established commercial operations and needs financing for research and product development.
  Start-up Stage: A business in the earliest phase of established operations that needs capital for product development, initial marketing and other goals.
  Other Early Stage: A firm that has begun initial marketing and related development and needs financing to achieve full commercial production and sales.
  
  
• Later Stages of Development
  Expansion Stage: An established or near-established company that needs capital to expand its productive capacity, marketing and sales.
  Acquisition/Buyout Stage: An established or near-established firm that needs financing to acquire all or a portion of another business entity for growth purposes, such as an Acquistion for Expansion Financing.
  Turnaround Stage: An established or near-established company that needs capital to address a temporary situation of financial or operational distress.
  Other Stage: Includes Secondary Purchase, or the sale of portfolio assets among investors, and working capital.

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

Term: 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.

Trade Credit: A company's open account arrangements with its vendors.

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 kilometre. Also, a post office with letter carriers assigned to it is considered urban.

Venture Capital: Risk capital invested by VC firms in privately held companies, 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.

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.

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.