• July 31st, 2014

Glossary

Stumped by lending jargon? Fear not, we’ve collected the most common words and phrases into an easy to scan and understand glossary.

Crowd-funding

Crowd funding or crowdfunding (alternately crowd financing, equity crowdfunding, or hyper funding) describes the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations.[1]

Crowd funding is used in support of a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, startup company funding,[2] movie[3] or free software development, and scientific research.[4]

Crowd funding can also refer to the funding of a company by selling small amounts of equity to many investors. This form of crowd funding has recently received attention from policymakers in the United States with direct mention in the JOBS Act; legislation that allows for a wider pool of small investors with fewer restrictions. The JOBS Act was signed into law by President Obama on April 5, 2012.

The U.S. Securities and Exchange Commission has been given approximately 270 days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of investors.[5] Some rules have already been proposed by the SEC.[6][7]

Factoring

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. In “advance” factoring, the factor provides financing to the seller of the accounts in the form of a cash “advance,” often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor’s discount fee (commission) and other charges, upon collection from the account client. In “maturity” factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. Factoring differs from a bank loan in several ways.

The emphasis is on the value of the receivables (essentially a financial asset), whereas a bank focuses more on the value of the borrower’s total assets, and often also considers, in underwriting the loan, the value attributable to non-accounts collateral owned by the borrower. Such collateral includes inventory, equipment, and real property,[1][2]

That is, a bank loan issuer looks beyond the credit-worthiness of the firm’s accounts receivables and of the account debtors (obligors) thereon. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Third, a non-recourse factor assumes the “credit risk”, that a purchased account will not collect due solely to the financial inability of account debtor to pay. In the United States, if the factor does not assume credit risk on the purchased accounts, in most cases a court will re-characterize the transaction as a secured loan.

FDIC

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system by:

- insuring deposits,
- examining and supervising financial institutions for safety and soundness and consumer protection, and
- managing receiverships.

Kickstarter

Kickstarter is a funding platform for creative projects. Everything from films, games, and music to art, design, and technology. Kickstarter is full of ambitious, innovative, and imaginative projects that are brought to life through the direct support of others.

Since our launch on April 28, 2009, over $350 million has been pledged by more than 2.5 million people, funding more than 30,000 creative projects. If you like stats, there’s lots more here.

Lending Club

Lending Club is an online financial community that brings together creditworthy borrowers and savvy investors so that both can benefit financially. We replace the high cost and complexity of bank lending with a faster, smarter way to borrow and invest.

The Lending Club experience is truly liberating: You can join in minutes.

If you’re borrowing, you can apply for a loan and get an instant rate quote. If you’re investing, you can open an account instantly and get started building a portfolio that can earn more than other investments with comparable risk. Everything is done online, so the whole process is fast, confidential, private, and secure.

Payday loans

A payday loan (also called a payday advance) is a small, short-term unsecured loan “regardless of whether repayment of loans is linked to a borrower’s payday”.[1][2][3] The loans are also sometimes referred to as “cash advances“, though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Pay day advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries and, within the USA, between different states.

Peer-to-peer financing

Peer-to-peer lending (also known as person-to-person lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is the practice of lending money to previously unrelated individuals or “peers” without the intermediation of traditional financial institutions (banks). It takes place on online lending platforms that are provided by peer-to-peer lending companies on their websites and is facilitated by credit checking tools of varying complexity.

Prosper.com

Prosper.com is America’s first peer-to-peer lending marketplace, with more than 1,510,000 members and over $411,000,000 in funded loans.

Prosper.com allows people to invest in each other in a way that is financially and socially rewarding. On Prosper.com, borrowers list loan requests between $2,000 and $25,000 and individual lenders invest as little as $25 in each loan listing they select. In addition to credit scores, ratings, and histories, investors can consider borrowers’ personal loan descriptions, endorsements from friends, and community affiliations. Prosper.com handles the servicing of the loan on behalf of the matched borrowers and investors.

Unbanked

The unbanked are described by the Federal Deposit Insurance Corporation (FDIC) as those without an account at a bank or other financial institution and are considered to be outside the mainstream for one reason or another. The FDIC estimates there are 10 million unbanked or underbanked American households.[1] The majority of them are American born while a growing number are immigrants where the two groups have low income as a commonality and lack the minimum balance to open checking and savings accounts.[2] According to Congressman Hinojosa, half of the unbanked had a bank account previously but are choosing to not have an account and opting to using the services of check-cashers and payday lenders instead.

Underbanked

The underbanked are people or businesses that have poor access to mainstream financial services normally offered by retail banks. The underbanked can be characterized by a strong reliance on non-traditional forms of finance and micro-finance often associated with disadvantaged and the poor, such as cheque-cashers, loan sharks and pawnbrokers.

The underbanked are a distinct group from the unbanked, who are characterized by have no banking facilities at all.

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