When a company or developer looks for finance, the conversation with the bank or fund quickly fills up with acronyms: LTV, DSCR, covenants, waterfall. This glossary explains what each term means and, above all, why the lender looks at it when analysing a deal.
It is organised in four sections: types of finance, risk metrics, collateral and structure, and the deal process. If you have a specific deal and want to know how a credit committee would see it, tell us about it.
1. Types of finance: Alternative finance · Private credit · Direct lending · Sale-and-leaseback · Rent back · Bridge loan · Land finance · Development loan · Senior debt · Subordinated debt · Mezzanine · Participating loan · Equity · Refinancing · Debt restructuring · Crowdlending · Real estate crowdfunding · Credit line · Trade bill discounting · Factoring · Confirming · ICO lines
2. Metrics and ratios lenders look at: LTV · LTC · DSCR · ICR · Net financial debt / EBITDA · EBITDA · Leverage · Covenants · IRR · Yield · Cap rate · ECO valuation · Market value and liquidation value · Pre-sales
3. Collateral and deal structure: Mortgage security · Mortgage ranking · Pledge · Personal guarantee · Waterfall · Bullet repayment · Grace period · Arrangement fee · Exit fee · Cash sweep · Construction certificate
4. Process, documents and players: Credit committee · Term sheet · Due diligence · Information pack · Family office · Debt fund · Crowdfunding platform · Signing
TYPES
Types of finance
Alternative finance
Any finance that does not come from a bank: debt funds, family offices, crowdlending platforms or private investors. It is usually faster and more flexible than bank finance, and also more expensive, because it takes risks banks will not. See alternative finance.
Private credit
Loans made by non-bank investment funds and not traded on any market. The fund negotiates terms directly with the company and can accommodate deals that fall outside bank criteria.
Direct lending
A form of private credit in which the fund lends directly to the company, with no bank in between. In Spain the English term is used, usually for medium-term loans for growth, acquisitions or refinancing.
Sale-and-leaseback
The company sells a property it uses (an industrial building, a hotel, offices) and stays on as tenant under a long-term lease. It turns a fixed asset into cash without giving up its use. See sale-and-leaseback.
Rent back
Often used as a synonym for sale-and-leaseback. Sometimes it refers to arrangements with a shorter lease after the sale, while the seller reorganises.
Bridge loan
Short-term finance covering the time until a specific event: the sale of an asset, the signing of long-term financing or receipt of a grant. It is repaid in one go when that event happens. See bridge loans.
Land finance
A loan to buy a plot or land before building. Banks grant it very cautiously, because land generates no income and its value depends on planning and licences.
Development loan
Finance to build a real estate development. The money is not released in one go: it is drawn down as construction progresses, against completion certificates. See land and development finance.
Senior debt
The debt repaid first if things go wrong, usually with the main collateral (for example, the first-ranking mortgage). It is the lowest risk for the lender and therefore the cheapest.
Subordinated debt
Debt repaid after the senior debt. It takes more risk and requires a higher return.
Mezzanine
Finance that sits between senior debt and shareholders’ equity. It completes a deal when the bank will not lend the full amount and the developer or business owner does not want to put in more equity. See mezzanine.
Participating loan
A loan whose interest depends partly on the company’s performance. Under Spanish company law (préstamo participativo) it counts as equity, which strengthens the balance sheet in the eyes of other lenders.
Equity (equity partner)
Capital an investor contributes in exchange for a stake in the project or the company. It is not repaid like a loan: the investor gains or loses depending on the result.
Refinancing
Replacing existing debt with new debt on better terms: longer tenor, lower repayments, a different interest rate or less collateral. See refinancing.
Debt restructuring
Reorganising a company’s debt as a whole, usually with several creditors, to match its real repayment capacity.
Crowdlending
Loans funded by many investors through a platform. In Spain these platforms must be authorised by the CNMV (the Spanish securities regulator) as crowdfunding service providers.
Real estate crowdfunding
Investment by many small investors in a real estate project through an authorised platform, as shareholders or as lenders.
Credit line
A facility the company draws on as needed, up to a limit, paying interest only on the amount drawn. It is the usual tool for working capital. See bank financing.
Trade bill discounting
The bank advances the amount of invoices or bills the company will collect later, for a fee.
Factoring
The company assigns its receivables to a finance provider, which advances the money and handles collection. It can be with recourse (if the customer does not pay, the company is liable) or without recourse.
Confirming
A service in which the bank manages a company’s payments to its suppliers. The supplier can choose to be paid before the due date, at a cost.
ICO lines
Loans funded by the Instituto de Crédito Oficial (the Spanish state financial agency) and arranged through banks, often with terms or public guarantees that make approval easier.
METRICS
Metrics and ratios lenders look at
LTV (loan to value)
The ratio between the loan amount and the value of the asset securing it. A €600,000 loan on a property valued at €1,000,000 has an LTV of 60%. The lower it is, the more cushion the lender has if it has to enforce the collateral.
LTC (loan to cost)
The ratio between the loan and the total project cost: land, construction, fees and expenses. It is the key metric in development, because it shows how much the lender puts in and how much the developer does.
DSCR (debt service coverage ratio)
Available cash flow divided by the debt service due in the period (interest and principal). A DSCR below 1 means the deal does not generate enough cash to meet its repayments.
ICR (interest coverage ratio)
Operating profit (or net rental income, in real estate) divided by finance costs. It measures whether the company covers its interest comfortably, without counting principal repayment.
Net financial debt / EBITDA
Interest-bearing debt minus cash, divided by annual EBITDA. It shows how many years the company would take to repay its debt from what its business generates. It is the first ratio a credit committee looks at for a company.
EBITDA
Earnings before interest, taxes, depreciation and amortisation. It approximates the business’s ability to generate cash from its ordinary activity.
Leverage
The extent to which a company or project is financed with debt rather than equity. More leverage multiplies the shareholder’s return when things go well, and the risk when they go badly.
Covenants
Undertakings the company gives in the financing agreement. They can be financial (keeping a ratio below a limit) or behavioural (no further borrowing, no dividends, quarterly reporting). A breach may allow the lender to demand early repayment.
IRR (internal rate of return)
The annual return on an investment taking into account when each euro goes in and comes out. It is the usual measure for comparing projects or the true cost of a financing with fees.
Yield
In real estate, the annual rent an asset generates divided by its price. There is gross yield (total rent) and net yield (after the owner’s costs).
Cap rate
The net annual rent of a property divided by its value. It is used to value income-producing assets: for the same rent, a lower cap rate means a higher value.
ECO valuation
A property valuation by a valuation firm approved by the Bank of Spain under Order ECO/805/2003. It is the valuation Spanish banks require to grant a mortgage.
Market value and liquidation value
The first is the reasonable price in an ordinary sale. The second is what would be obtained in a quick sale. A fund looks at both, because the second is what counts if it has to enforce the collateral.
Pre-sales
Sale contracts for homes signed before or during construction. Banks usually require a minimum percentage of pre-sales to finance a development, as proof of demand.
COLLATERAL
Collateral and deal structure
Mortgage security
The lender’s right over a property: if the loan is not repaid, it can enforce it and recover from the sale. It is the most common security in real estate backed finance.
Mortgage ranking (first and second mortgage)
The order in which creditors with a mortgage over the same property are repaid. The holder of the first mortgage is repaid first; the second only from what is left, which is why it costs more.
Pledge
Security over assets other than real estate: shares in the company, receivables, account balances. In fund deals, a pledge over the shares of the development company is common.
Personal guarantee
A commitment by a person or another company to pay if the borrower does not. When it is joint and several, the lender can claim directly from the guarantor.
Waterfall
The order set in the agreement for distributing the cash the deal generates: first costs, then senior debt, then subordinated debt and, finally, the shareholders. It determines who is paid first and who bears the risk if cash runs short.
Bullet repayment
Principal is repaid in full at maturity, with only interest paid over the life of the loan. Common in bridge loans and fund financing.
Grace period
An initial period in which no principal is repaid, only interest. It gives headroom while the project starts generating income.
Arrangement fee
A percentage of the amount paid when the loan is signed. It has to be added to the interest rate to compare the true cost of two offers.
Exit fee
A percentage paid when the loan is repaid, at maturity or early. Common in alternative finance.
Cash sweep
A clause requiring part of the excess cash to be used to repay debt early. It reduces the lender’s risk and limits what the shareholder can distribute.
Construction certificate
A document from the project architect certifying the work completed in a period. Under a development loan, the bank releases funds against each certificate.
PROCESS
Process, documents and players
Credit committee
The body within a bank or fund that decides whether a deal is approved and on what terms. It analyses repayment capacity, collateral, the sector and the people behind it.
Term sheet
A short document setting out the main terms a lender proposes: amount, tenor, rate, fees, collateral and conditions. It is not binding, but it sets the basis for negotiating the agreement.
Due diligence
The in-depth review the lender carries out before signing: accounts, contracts, legal, planning and tax status, and the condition of the asset. The outcome can change the terms or stop the deal.
Information pack
The document that presents the deal to the lender: who is borrowing, what for, with what collateral and how it will be repaid. A good pack anticipates the committee’s questions and shortens timelines.
Family office
A structure that manages a family’s wealth. Some invest in debt or equity of companies and real estate projects, with more flexibility than a fund.
Debt fund
An investment vehicle that raises money from professional investors to lend to companies or projects. Each fund has its own policy: sectors, ticket sizes, tenors and acceptable collateral.
Crowdfunding platform
A company authorised by the CNMV that connects projects seeking finance with many investors, either as loans (crowdlending) or as equity (crowdfunding).
Signing (formalización)
Signing of the financing agreement, usually before a notary where there is mortgage security, and release of the funds.
Have a deal and want to know how a credit committee would see it?
Tell us what you need to finance, with what collateral and over what period. We will tell you which type of finance fits and what the lender will ask for.