Economic Development Finance

IEDC Certification (Credit Analysis)

Accounts Payable

Represents the claims of suppliers related to goods & services they have furnished to an entity but for which they have not yet been paid. It is part of the current liabilities of an entity

Accounts Receivable

Money owed to the entity by it’s customers. It is part of the current assets of an entity.

Accruals

Money owed to providers of good or services for which typically no bill exists or is ever sent. This includes wages, payroll taxes, interest due on loans, and rent.

Accruals are recorded as liabilities on the balance sheet, reflecting obligations that will be settled in the future.

Appreciation

The increase in value of an asset or investments that results from inflation or direct investments that enhance the value of growth.

Asset

The economic resources owned by an entity that has commercial or market value.

Balance Sheet

A financial statement that summarizes the financial position of an entity by outlining its assets, liabilities, and equity. Assets must equal L + E.

Balloon Payment

The last payment of a loan that is substantially larger than subsequent payments.

Bond

A certificate of debt issued by a government or business guaranteeing payment of the original investment plus interest by a specified future date. Municipal bonds are issued by a city, county, town, or district.

Interest earned on these bonds is exempt from federal income tax and in some cases, state income tax.

Revenue bonds are backed by revenues received from a specific project such as a toll bridge.

Industrial Revenue bonds are municipal revenue bonds to finance industrial or commercial construction

Book Value

The historic price paid for an asset less total accumulated depreciation to date. This is compared to market value.

Callable

An option held by the issuing entity of a bond to redeem the bond before the maturity date.

This feature allows issuers to take advantage of lower interest rates.

Capital Gains (Loss)

The difference between the price an investor pays for an investment and the proceeds received from the sale of that investment.

When the sale price exceeds the purchase price, it is a capital gain; if the sale price is lower, it results in a capital loss.

Capital Gap

The difference between the supply of private sector financial capital and the demand for that capital.

Capitalize

To supply with capital of investment funds

Capitalization

The total funding of an entity consisting of debt, stock, and retained earnings used to finance operations and meet debt obligations.

Cash

Often in finance, cash has a broader definition that includes actual cash (money) and highly liquid short-term investments such as money market funds and treasury bills.

Cash Flow

A financial statement showing all the actual cash receipts and disbursements of an entity for a specified period of time.

Collateral

Assets of a borrower pledged to secure a debt against default.

Commercial Bank

A private, for-profit financial institution that specializes in short and medium-term business, personal and real estate loans.

Compensating Balances

A demand deposit is usually required by a commercial bank as a condition for extending a line of credit or a bank loan.

Competitive Grant

A grant that requires applicants to complete against one another in terms of need or appropriateness for the funding

Cost of Goods Sold

Direct costs incurred in the production of goods sold by an entity

Credit Risk

The chance that the return on an investment will be less than expected or that the borrower will not meet the terms of the loan or investment and that secondary repayment resources such as collateral will be insufficient to cover the losses.

Countercyclical

Any event or factor that counterbalances the peaks and troughs of the business cycle.

Current Assets

Cash and other assets often called cash equivalent (such as inventory, accounts receivable, and pre-paid expenses) are reasonably expected to be realized in cash or sold or consumed within 12 months

Current Liabilities

Obligations of a company that are expected to be satisfied (paid) either using the current assets or by the creation of other current liabilities within 12 months. This includes accounts payable and the current portion of long-term debt.

Debenture

A bond backed by the general credit or reputation of a business rather than a specific lien on assets.

Debt Capital

Funds obtained from borrowing.

Debt Limit

A constitutional or legislative restriction on the amount of funds that a state or municipal government can borrow, usually expressed as a specific sum of money or a fixed percent of the assessed value of all taxable property within the government’s jurisdiction

Debt Service

The cash required in a given period, usually one year, for payment of interest and the current payments of loan principal on outstanding debt. Also, the borrower’s ability to meet debt and interest obligations

Default

Failure to pay financial obligations

Direct Financing

To provision of own funds by a lender to borrower without going through another organization, typically used in terms of governments, foundations, and non-profits. See indirect financing.

Discount Rate

A weighted rate of return that accounts for inflation and other risks associated with an investment.

Dividend

The share of profits of an entity distributed to its stakeholders. Dividends may be paid in cash, stock, and other security.

Due Dilligence

Evaluation of an entity’s financial statements or portfolio of loans to determine its creditworthiness and other risk factors

Empowerment Zone

A type of enterprise zone. It is designated area, either urban or rural, that suffers from blight or economic distress where special benefits are offered to businesses located in the area to encourage economic development. Benefits include employment credits, tax credits, and tax-exempt financing. The program was created under the Omnibus Budget Recon Act of 1993

Enterprise Zone

A generic term for designated geographical areas of which various tax incentives and grants are targeted to encourage investment by businesses and the creation and retention of jobs

Entitlement Community

Qualifying areas of annual CDBG funding based on a set formula. To qualify the area must be a central city of a metropolitan area, urban county, or city with populations over 50,000 suffer from blight, poverty, aged housing, and other factors.

Equity Capital

Funds that the owners have personally invested in an entity, as distinguished from debt capital, as well as the residual value of an entity after deducting liabilities from assets and paying dividends

Fixed Costs

Costs that are independent of the level of production (e.g rent or mortgage); the opposite of variable costs

Full Faith and Credit

Federal Government clause involving loan guarantees that allow the government to guarantee loans by promising to use its taxing powers

Grants-in-aid

A direct transfer of funds from a higher level of government to a lower level of government or business

Income Statement

A financial statement that derives the net income of an entity by summarizing the sources of current revenue and the costs associated with obtaining that revenue

Indirect Financing

The provision of funds from a lender to a borrower through another entity, process, or incentives. Examples of indirect financing include guarantees of loans, linked deposits, and tax breaks and credits.

Inflation

An overall general rise in prices expressed a percentage increase.

Insolvency

The inability to pay one’s debts when they come due

Leverage

1) The relation of debt to equity; the use of borrowed funds by an entity. 2) The use of incentives to induce private sector lenders, individuals, or businesses to invest capital in a designated area, project, or business

Letter of Credit

A document usually issued by a commercial bank verifying that the client has credit for a specified amount, against which drafts can be drawn.

Liability

Financial obligation to an outside party to be satisfied in the future

Lien

A claim on a secondary repayment source such as collateral to secure payment on an investment

Linked deposits

The practice of tying the deposit of public money in a commercial bank to conditions regarding the bank’s lending and investment practices

Liquidity

The ability to convert assets to cash quickly without loss of market value. It also refers to the ability of an entity to meet its current obligations

Liquidity Risk

The uncertainty that an entity may not be able to liquidate its assets to meet demands for cash withdrawals, requiring the entity to sell its assets at a loss

Loan

A sum of borrowed $ that must be repaid with or without an established amount of interest

Loan Guarantee

A promise by a third party to cover a loan in case of default

Loan Packaging

Help a business structure an overall financial plan and prepare the application package to apply for financing

Market Value (Appraised Value)

Also, fair market value is the estimated value of an asset if sold on the market

Maturity

The amount of time before an investment or debt comes due.

Net Income

An income statement identity. The amount remaining after all costs, expenses, and allowances, for depreciation have been deducted from the total receipts of an entity.

Net Worth

The amount of by which total assets (typically measured by their fair market value) exceed total liabilities

Notes

A written promise to pay a debt, like bonds

Operating Cycle

The process of producing a product or service, getting it to the market, and collecting the proceeds from its sale. It is also defined as the flow of cash through the normal operations of a company.

Opportunity Cost

The benefit foregone by making an investment or incurring a liability

Options

An agreement that permits the purchase or sale of something within a specified period of time according to specified terms

Par Value

The principal of a bond or preferred stock (also face value)

Pooling

Also Risk Pooling. A method of spreading the risk burden. Individual investors purchase small shares of several investments. If a particular investment fails, the investor only loses his share of that investment rather than the whole investment.

Present Value

The value today of a future payment or stream of payments

Principal

The amount of debt, exclusive of accrued interest

Pro Forma

Projected Financial Statements

Rate of Return

How much money an investor will make on an investment compared to their original investment. Return on investment is either interest payments on debt investment, dividends on equity investments, or any capital gain (the increase in value of an investment over the initial investment)

Redlining

The practice of financial institutions designating certain areas of a city or certain groups as too risky for lending

Retained Earnings

Net income that is not distributed as dividends to investors

Return on Investment (ROI)

Net income divided by dollars invested

Revolving Loan Fund

A pool of funds that are lent out, whereby the loan repayments and income are recycled or plowed back into the pool which increases funds available for lending

Risk

The degree of uncertainty that an investment will be lost

Secondary market

Markets where ownership of an investment is transferred from one owner, usually the original, to another

Security

The pledging of assets to cover a liability in case of default.

Security Risk

The chance that the value of the pledged collateral on an investment is less than the value of the investment

Seed Capital

Equity money supplied to help a venture launch its operations

Sinking Fund

A fund to which contributions are made, periodically to ultimately pay debt or replace assets

Small Business Investment Company (SBIC)

A venture capital firm licensed and monitored by the SBA. The SBIC can be capitalized with SBA funds.

Solvency

The entity’s ability to meet interest expenses and obligations associated with long-term debt

Subordinate Position

A claim on a property, asset, or repayment of a debt that is considered after the interest of another party. Subordinate positions can apply to all debt instruments

Trade Credit

Short-term credit or loan provided by a goods or service supplier to its customers; that is, the supplier does not demand advance or simultaneous payments for its sales

Tax Abatement

The lowering rates on specific taxes, normally taxes owed on real or other property, below the rates commonly levied within the community

Term Loans

Debt capital repayable according to a specific schedule. It includes medium- and long-term loans.

Underwriting

The process of evaluating a potential borrower in terms of its creditworthiness, risks involved, and performance potential

Variable Costs

Items costs that change directly and proportionately with changes in the production volume (eg Utility bills); the opposite of fixed costs

Variable Interest Rates

Interest Rates that are tied to money-market indicator, normally a US treasury bill, move up and down with that market indicator. Also called floating rates or adjustable rates

Venture Capital

Investment Capital is subject to considerable risk, generally associated with capitalizing new or unproven business

Warrant

An agreement that gives the owner the option within a specified period of time to purchase equity capital

Working Capital

Current assets of an entity including cash, marketable securities, accounts receivables, inventory, and prepaid expenses. Net Working Capital is current assets and fewer current liabilities.