5th Line Resource Center

Question 1

Term

Term Loan

Answer

A term loan is a fundamental type of loan that provides borrowers with a lump sum of cash upfront in exchange for a promise to repay the amount, plus interest, over a predetermined period. This fixed structure makes it a popular financing option for both businesses and individuals seeking predictable repayment schedules.

Question 2

Term

Delay Draw Term Loan

Answer

A Delay Draw Term Loan is a specialized form of debt financing that provides borrowers with a commitment for a total loan amount, which can then be drawn down in multiple tranches or funding schedules over a specified period. Unlike a traditional term loan that disburses a lump sum upfront, the delay draw loan structure offers significant flexibility, allowing companies to access additional funds when truly needed, often tied to specific growth milestones or strategic objectives.

Question 3

Term

Line of Credit

Answer

A Line of Credit (LOC) is a flexible and adaptable type of revolving credit that provides borrowers with access to funds up to a certain limit. Unlike a traditional term loan which disburses a single lump sum, a line of credit allows you to draw funds as needed, repay them, and then re-borrow up to your available credit limit, much like a credit card.

Question 4

Term

Revolver

Answer

A revolver loan, also widely known as revolving credit or revolving debt, refers to a type of credit facility that allows a borrower to draw funds up to a certain limit, repay the outstanding balance, and then borrow again up to that limit, as long as the account remains open and in good standing. The term 'revolver' specifically highlights the nature of this debt when a balance is carried from month to month, where the borrower continuously uses and repays the credit line.

Question 5

Term

Lease Line of Credit

Answer

A Lease Line of Credit is a specialized financial facility that provides businesses with a flexible and efficient way to acquire multiple assets through leasing over time. Unlike a single lease agreement for one piece of equipment, a lease line of credit allows you to complete multiple leases (e.g., for various types of equipment) within a predetermined, fixed period of time, up to your pre-approved credit limit.

Question 6

Term

Revenue-based Financing

Answer

Revenue-Based Financing (RBF), often referred to as RBF, is an innovative and increasingly popular alternative funding method where financing is repaid typically by the borrower paying a percentage of their monthly revenue until the agreed amount is repaid. This means payments fluctuate with your business's performance, offering significant flexibility compared to traditional fixed-payment loans.

Question 7

Term

Growth Capital

Answer

Growth capital refers to the financing specifically raised and used to support the rapid growth and expansion of a business. Unlike seed funding or early-stage venture capital which focus on proving a concept, growth capital is typically sought by more mature companies that have demonstrated product-market fit, achieved significant traction, and are looking to accelerate their scale.

Question 8

Term

Working Capital

Answer

Working capital is a vital financial metric that represents the capital used to finance a company’s everyday operations. It's the difference between a company's current assets (what it owns or is owed that can be converted to cash within a year) and its current liabilities (what it owes within a year). Essentially, it's the liquid cash available to cover short-term operational needs.

Question 9

Term

CAPEX Financing

Answer

CAPEX Financing, short for Capital Expenditure Financing, refers to the various methods and strategies businesses employ to fund the acquisition, maintenance, or improvement of long-term physical assets. These assets, known as capital expenditures, are typically large investments that benefit the company for more than one year, such as property, buildings, machinery, equipment, vehicles, or significant technological upgrades.

Question 10

Term

Asset-based Financing (ABL)

Answer

Asset-Based Financing (ABL) is a highly flexible form of commercial lending where a loan or line of credit is secured by a company's underlying collateral. Unlike traditional bank loans that primarily rely on a company's cash flow or credit score, ABL leverages a business's tangible assets to provide immediate and ongoing capital. This makes it a powerful tool for companies looking to maximize their borrowing capacity.

Question 11

Term

PIK

Answer

Payment in Kind (PIK) refers to a specific type of debt financing arrangement, most commonly seen in more complex financial structures, where interest on debt is paid not with cash, but with additional debt. In essence, the borrower's interest obligation is added to the principal amount of the loan, rather than being paid out in cash during the term.

Question 12

Term

Interest Rate

Answer

An interest rate is fundamentally the amount charged on top of the principal (the amount loaned) by a lender to a borrower, expressed as a percentage of the principal. It represents the cost of borrowing money or the return on lending money. For the borrower, it's the price paid for the use of borrowed funds; for the lender, it's the compensation for providing those funds and taking on risk.

Question 13

Term

Warrants

Answer

In finance, a warrant is a long-term, transferable security that gives the holder the right, but not the obligation, to buy common shares of stock directly from the issuing company at a fixed price for a pre-defined time period. Often referred to as stock warrants or equity warrants, they serve as an incentive or a 'sweetener' in various financial transactions.

Question 14

Term

Commitment Fee

Answer

A commitment fee is a common charge in credit transactions levied by a lender on a borrower for the promise to make funds available. It's essentially a fee for the lender's commitment to provide financing, whether the borrower draws all of the funds immediately or not. These fees are a standard component that must be factored into the overall cost of capital when evaluating a loan or credit facility.

Question 15

Term

Interest-Only Period (IO)

Answer

An Interest Only Period (IO) is a defined segment of time within the total term of a loan facility during which the borrower makes payments equal only to the amount of interest due, effectively not paying down any of the principal amount borrowed. This repayment structure is designed to provide immediate cash flow relief, making it a strategic choice for specific financial situations.

Question 16

Term

Pre-Payment Fees

Answer

A prepayment fee, also widely known as a prepayment penalty or early payoff fee, is a charge that some lenders impose when a borrower pays off a loan before its scheduled maturity date. This fee is designed to compensate the lender for the loss of anticipated interest income and other costs associated with an early loan termination.

Question 17

Term

Covenant

Answer

In the realm of finance and lending, a covenant refers to a legally binding agreement between the borrower and the lender that stipulates certain activities will or will not be carried out by the borrower. These conditions are embedded within loan agreements and are designed to protect the lender's interests by ensuring the borrower maintains a certain level of financial health and operates responsibly.

Question 18

Term

Business Development Company (BDC)

Answer

A Business Development Company (BDC) is a specific type of publicly traded investment firm designed to invest in firms to help them grow, particularly in their initial stages of development or within the underserved middle-market. BDCs typically provide capital to small and medium-sized private companies, often through a combination of debt and equity investments.

Question 19

Term

SBIC

Answer

A Small Business Investment Company (SBIC) is a unique type of privately owned and managed investment fund that is licensed and regulated by the U.S. Small Business Administration (SBA). SBICs play a crucial role in increasing access to capital for American small businesses, serving as a bridge between private capital and government-backed resources. They are specifically designed to provide debt and equity financing to U.S. small businesses to support their growth and innovation.

Question 20

Term

Credit Fund

Answer

A Credit Fund, often referred to as a Private Credit Fund, is an investment vehicle through which investors combine or pool their capital to enable the manager of the fund to make investments predominantly in loans to various private companies. These funds operate outside of traditional banking channels, engaging in what is known as direct lending to businesses that may not have access to public debt markets or prefer non-bank financing solutions.

Question 21

Term

Subordination

Answer

A subordination agreement is a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor. This means that in the event of a borrower's financial distress, such as foreclosure or bankruptcy, the 'senior' debt will be paid in full before the 'junior' or 'subordinated' debt receives any repayment.

Question 22

Term

Revenue Retention

Answer

Revenue retention measures the recurring revenue kept from existing customers over a period, factoring in upgrades, downgrades, and churn, but excluding new customer revenue. It's a key indicator of customer loyalty and business health, showing how much revenue you retain from your current base.

Question 23

Term

Cap Table

Answer

A capitalization table, commonly known as a cap table, is a comprehensive spreadsheet or document that meticulously breaks down a company's shareholders' equity. This dynamic financial tool provides a detailed overview of who owns what percentage of the company, the type of equity they hold, and how that ownership changes over time. It is an essential record that tracks all forms of equity, including common stock, preferred stock, warrants, and convertible instruments.

Question 24

Term

Preference

Answer

Liquidation preference is a critical provision within a company's investment terms that dictates who gets paid when in the event of a company sale, dissolution, or other 'liquidation event'. In essence, it grants preferred shareholders the right to receive a specified amount of money from the sale proceeds before common shareholders receive any payout.

Question 25

Term

Waterfall

Answer

A waterfall analysis, often referred to as an exit waterfall or payout waterfall, is a detailed financial illustration that maps out precisely how funds flow and are distributed to various shareholders in the event of a company sale, acquisition, or other liquidity event. This complex calculation takes into account every aspect of the company’s ownership structure, ensuring transparency and accuracy in distributing sale proceeds.

Question 26

Term

Liquidity Event

Answer

A liquidity event is a pivotal transaction that allows owners of a private company, such as founders, employees, and investors, to convert their illiquid equity (like company stock or options) into cash or other marketable securities.

Question 27

Term

SaaS

Answer

SaaS, short for “Software as a Service,” represents a modern software licensing and delivery model that has revolutionized how businesses and individuals access and use applications. At its core, SaaS allows users to access software via the Internet on a subscription basis, completely eliminating the need to install or maintain the software on their local computer or servers.

Question 28

Term

Managed Service

Answer

A managed service refers to the proactive management and maintenance of an organization's IT infrastructure and end-user systems by a third-party organization known as a Managed Service Provider (MSP). In essence, Managed Service Providers maintain the IT operations (software, SaaS subscriptions, hardware, security, etc.) of their clients, allowing businesses to focus on their core competencies without the burden of day-to-day IT challenges.

Question 29

Term

Tech-enabled Service

Answer

Tech-enabled services represent a powerful evolution in service delivery, characterized by their unique combination of human expertise and advanced technology. They leverage digital tools to enhance, automate, and streamline various aspects of service operations, while critically retaining the indispensable 'high-touch' human elements of customer interaction and problem-solving.