Investment dictionary

Investment dictionary

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When it comes to investments and personal finance there are a lot of terms used that most people just getting into investment by themselves are not used to. Every time I write a new post on this blog and use one of those terms I will add a simple description of it to this dictionary. If you would like me to add anything to the dictionary, please drop me a message below! 

AML

AML stands for Anti-Money Laundering. It refers to a number of policies that governments, banks, and financial institutions have to abide by. They are obligated to proactively monitor clients and new customers so corruption and money laundry can be prevented. They also have to report any kind of financial crime. When you as an investor are asked to supply picture id, address id and documentation on where the funds you are investing are coming from by e.g. supplying bank statements and copies of your paychecks, this is part of the AML procedures. 

Balloon payment

A balloon payment is a large payment, usually, the full principal, paid at the same time as the last interest payment of a loan. Balloon refers to the large final repayment. During the loan period, it is then common for the lender only to receive interest payments. 

Buyback (Repurchase)

Buyback is an option that some crowdlending platforms offer. It can be for all loans or projects on their platforms or just for some project or loan providers. This usually has a great impact on if investors choose to invest on the platform or not. Buyback is when a platform or a loan provider offers to buy back your original investment when the loan has not been current for some time. This is usually 30 or 60 days late. So if a lender stops paying off the loan, then the platform or loan provider will buy the loan back from you and pay back your principal, ones the buyback kicks in. How is this possible? As an investor, you will make let’s say 13% as interest payments in the loan. However, the loan provider or platform may earn 30 % on the same loan. This supplies a buffer for repurchasing defaulted loans and keeping the investors happy. Be aware that a buyback guarantee is not a 100 % guarantee. If a loan provider goes under and goes bankrupt, then you are in a bad place. If there is a financial crisis, then it could also be possible that buyback would be disabled over a period of time.  

Crowdlending

Crowdlending is a wider term then peer-2-peer lending or P2P in short. It allows individuals and companies to finance themselves through a large and diverse group of individual private investors and thereby cutting a traditional bank out of the equation. This modern model allows people to lend small amounts of money to a company or an individual in exchange for financial returns in the shape of interest payments. 

Invoice financing

Invoice financing is a way for businesses to borrow money against the amounts due from customers invoices. When a business sell a product or service to a customer or another business, it often happens on credit in the form of an invoice with a number of days until the amount owed is due. Invoice financing help improve cash flow and working capital in the business as them have the money sooner to pay salaries to employees, reinvest into their business earlier or pay suppliers. The lender gets a small amount of the invoice as a fee for lending the money. Invoice financing is usually short term. 

Passive income

Passive income is a stream of income that you earn with none or very little active effort. It is the art of not trading your time for money (active income) and the model will literally make money for you while you sleep. Many times it requires a big initial effort and will then make you money with little or no effort afterward. Examples of passive income is rental income, stock dividends, royalties from books/music/pictures and crowdlending income. 

Principal

The principal is the amount of money you originally put into your investment and now earn interest on in return. When you borrow money, it refers to the amount of money you borrow, excluding interest payments and fees. 

Secondary market

A secondary market is a functionality that some crowdlending platforms have implemented for their investors. It is a marketplace for investors to buy and sell investments between each other. If there is a lack of new loans on the platform and the platform is popular, you may be able to sell your investments at a premium. The opposite could also be the case. A secondary market is a great functionality for investors who wish to exit the platform and liquidate their funds before time, by selling of their investments. If there is no secondary market, the investor is forced to stay until the loans are repaid. 

SEPA transfer

SEPA is short for Single Euro Payments Area. It is a bank transfer in euro, that you can use to deposit funds to a foreign bank account from your own bank account. 

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