Glossary of Financial Terms
An asset is a resource with economic value owned or controlled by an individual, corporation or public authority that can generate revenues and provide future economic benefit. Assets can be short or long-term, depending on when they could or are expected to be used. Assets contribute to increase an organisation’s value and benefit its operation.
The term bankability refers to the willingness of financial institutions to finance a project or proposal. In other words, a project is considered bankable if banks and financial institutions are inclined to finance it. Different criteria are considered by investors for a project to be bankable, such as adequate planning, demonstration of political will and rational risk allocation as well as a coordinated enabling environment and a solid return on the investment.
Bonds are investment securities in which an investor lends money to a borrower for a set period of time, in exchange for regular interest payments. Bonds are commonly described as fixed-income instruments, since fixed payments are earned on the investment over the duration of the bond. Bonds are used by companies, public authorities, states and governments to finance their projects and operations.
Capital Expenditures (CAPEX)
Capital expenditures are costs that occur when purchasing, improving or maintaining physical assets of an investment project. Examples include costs of planning processes, installation or equipment.
The term cash flow describes the net amount of cash and cash equivalents that is generated or consumed by a company, organisation or individual in a given time period. A cashflow statement reports on the sources and usage of cash by an organisation over a period of time.
Citizen Financing is an innovative financial scheme that uses citizens’ investment for funding a project. In this financing scheme, citizens or communities pool together their own financial resources to implement a project aimed at their own common good. Citizen financing is also sometimes referred to as citizen funding or public financing and can be organised in different ways, e.g. crowdfunding, cooperatives, etc.
A commercial loan is a debt-based funding arrangement between a business and a financial institution. Commercial loans are typically extended to businesses to fund large capital expenditures, short-term funding needs or day-to-day operational costs.
A cooperative is an autonomous association of persons who voluntarily cooperate for their mutual social, economic and cultural benefit. In other words, this means that a cooperative is a form of business ownership run by and for their own members. Cooperatives raise equity capital through a large number of investors, including citizens, and obtain debt capital from cooperative banks or subsidized loans.
Crowdfunding refers to a collective effort by people who network and pool their money together, usually via de the internet, in order to invest in and support efforts initiated by other people or organisations. A crowdfunding campaign usually collects small contributions from a large number of citizens, typically through an intermediary web-based platform.
The discount rate refers to the interest rates applied to calculate the present value of future cash flows. As part of a Discounted Cash Flow Analysis, the discount rate is used to calculate the Net Present Value (NPV) and contributes to accounting for the time value of money and the riskiness of an investment as well as making different investments more comparable.
Discounted Payback Period
The discounted payback period is the time taken to recover the initial cost of investment, but it is calculated by discounting all the future cash flows. This method of calculation does take the time value of money into the account.
Debt capital refers to funds or assets generated by borrowing from a lender for fixed periods of time. In other words, any form of capital an organisation raises by taking out loans. In debt financing, an organisation borrows money to be paid back in the future with interest./div>
Energy Performance Contracting (EPC)
Energy performance contracting, or EPC, is an innovative financing scheme offered by a contractor (usually an Energy Service Company) to clients who are interested in performing energy efficiency improvements but have limited financial means or technical capacities to implement the necessary measures. In EPC, an ESCO finances the project and implements energy efficiency investments. The project is based on the guaranteed energy savings that will be generated in the future, which are stated in EPC contract.
Energy Service Company (ESCO)
An ESCO is a company that offers energy services which may include the implementation of energy efficiency projects. The three main characteristics of an ESCO are: (1) they guarantee energy savings and/or the same level of energy service at lower costs; (ii) their remuneration is directly tied to the energy savings achieved; and (iii) they can finance or assist in arranging financing for energy projects by providing a savings guarantee.
Equity capital refers to the funds paid into a business by investors in exchange for shares of this business. From a valuation perspective, it represents the amount of money that would be returned to a company’s shareholders if all the assets were liquidated and all corporate liabilities set. This is the core funding of a business, to which debt capital may be added.
Financial statements are a collection of written reports that convey an organisation’s financial results, financial positions and cashflow. In general, this includes a balance sheet, income statement and cashflow statement. Financial statements are used by investors, market analysis and creditors to evaluate an organisations earnings potential and financial position.
Financing schemes are the mechanisms through which financial institutions provide funds for the realisation of activities, purchases or investments of an organisation. Through financing schemes, future expected money flows are put to use for projects that start in the present.
Funding sources refer to the budgetary resources for the development and implementation of programmes and projects. Types of funding sources include grants, bonds, awards, private donations or internal capital allocated within an organisation.
Green bonds are bonds in which proceeds are exclusively applied to finance or re-finance, in part or completely, new or already existing green projects. As any bonds, green bonds are financial assets used for raising capital from investors through debit capital markets. The difference between green bonds and other regular bonds is the label “green”, which assures the bonds will exclusively finance projects that result in environmental benefits. Green bonds can be issued by city governments, utilities companies (water, transport, energy, etc), corporations or states or development banks.
A grant is an award, usually financial, given by one entity for a specific purpose, such as facilitate a goal or incentivize performance in a specific area. Unlike loans, grants do not have to be paid back, but it is expected that the funds are employed for their stated purpose, which typically serves some larger good.
Guarantee funds are a type of collective investment scheme that ensures the payback of a pre-determined percentage of the invested capital on a specific date in the future. In this scheme, loans are provided to the borrower by a commercial lender or financial institution. Should the loans default or the borrower fail to meet the payment under the established conditions, another entity – the guarantor - absorbs the credit risk and/or covers the loss. Guarantee funds are, therefore, a way of transferring the credit risk from a creditor to another entity.
Innovative financing refers to a range of non-traditional activities aimed to raise additional funds for the development and implementation of an investment project. Innovative financing instruments contribute to attract financing from other public or private investors to areas of strong interest of public authorities and organisations. In the field of sustainable energy, innovative financing schemes for the implementation of energy efficiency and/or renewable energy production projects include: Citizen finance; Energy Performance Contracting (EPC); Internal Contracting (Intracting); Green bonds; Guarantee funds; Soft loans; Revolving Funds; Third-party financing, etc.
Internal Contracting (Intracting)
Developed for financing energy-saving measures in the building sector, intracting involves booking saved electricity or heating costs from energy improvement measures to a separate account to reinvest in further measures. With an initial investment, a self-reinforcing financial resource cycle is set up. Even with a tight budget, significant contributions to climate protection can be made.
Internal Rate of Return (IRR)
The Internal Rate of Return, or IRR, corresponds to the discount rate that sets the net present value of all cashflows of an investment project equal to zero. It is expressed as percentage that indicates the expected annual rate of return to be earned on a project. In general, investments with higher IRRs are more attractive to financial institutions.
Investment size refers to the total amount of investment necessary for the implementation of a project, considering all the foreseen measures and components.
Letter of Intent (LOI)
A letter of intent is a document outlining a preliminary commitment of two parties to do business with another before an agreement is finalised. A LOI can be used to clarify the terms of a prospective deal, to officially declare a partnership or negotiation and to declare a mutual understanding of fundamental terms of an agreement. Letters of intent can be used by different parties for many purposes, and are commonly present in major business transactions and project financing proposals.
Leverage refers to an investment strategy in which borrowed funds are used to undertake and increase the potential return of a project. Organisations use leverage to launch new projects, finance the purchase of inventory and expand their operations. The term “leverage ratio” refers to a set of ratios that highlight an organisation’s financial leverage in terms of its assets, liability and equity.
A loan is a type of credit in which a sum of money is lent from one party to another in exchange for future payment of the value. In taking a loan, the borrower incurs a debt, which has to paid back often with interest and/or finance charges within a given period of time.
A market analysis is a quantitative and qualitative assessment of a market, demonstrating its dynamics and attractiveness within the industry from the financial viewpoint. Market analysis are often a key part of a project proposal and provide a holistic picture of the market in which a project or programme should be implemented. The assessment can include topics such as demographics and segmentation, market needs, competition, risks and barriers and regulatory aspects.
Municipal bonds are liquid debt securities issued by a state, municipality or country to raise fund for capital investments. These bonds are provided to collect money for various community projects, and can be thought as loans made by investors to local governments. As the interest paid on municipal bonds is often tax-free, these can be an attractive investment option for investors who are generally paying high-income taxes.
Net Present Value (NPV)
The Net Present Value is used to determine today’s value of future cash flows, through the application of a discount rate. A positive NPV indicates that the earnings expected from an investment exceed the anticipated costs.
Operational Expenditures (OPEX)
Operational Expenditures are the costs that occur in the daily operation of an investment project. Examples include maintenance costs, staff costs, costs for external sub-contracting, etc.
One-bill schemes are an innovative mechanism of financing energy efficiency. Through On-bill financing, the up-front costs of energy efficiency measures can be brought down to zero by adding a periodical line item to the customer’s utility bill. Based on the cooperation between energy utilities and financial institutions, On-Bill schemes are a method of financing energy efficiency through utility bills as a repayment vehicle.
Ownership of assets
The term refers to the rights and control over the assets concerned by an investment project, such as property, cash and investments, inventory, equipment, etc. To be bankable, it is important that a project proposal includes detailed information on who has the ownership over the assets in the foreseen investment project.
Profitability is a measure of the ability of an organisation to produce return on an investment based on its comparison with an alternative investment. In other words, it refers to an organisation’s capability to generate profits from its operations. The two key aspects of profitability are the revenues and expenses of an organisation.
Public-private partnership (PPP)
Public-private partnerships (PPP) are instruments of collaboration between a government agency and a private institution to finance, build and operate projects. Public-private partnerships can contribute to make possible the implementation of public projects or allow for these to be completed sooner.
Project financing readiness assessment
The project financing readiness assessment aims at supporting mentees of the PROSPECT+ Capacity Building Programme in assessing the financial maturity of their planned or ongoing local sustainable energy projects.
Revenue refers to the income generated by the daily operations performed within an investment project. Revenue streams can include, for example, energy savings generated, operation and maintenance fees, energy supply, etc.
Revolving funds refer to a pool of capital replenished by the cost-savings from energy efficiency and renewable energy projects or by the interests paid by the sustainability measures financed by the fund. These cost-savings or interest revenues continuously finance new investments in similar projects, resulting in a sustainable funding cycle.
A risk profile is a quantitative evaluation of an organisation’s willingness and ability to take risks as well as of their reliability. A risk profile is important for determining the allocation of investment assets of an organisation, as well as to mitigate potential risks and threats of the development and implementation of a project.
Simple Payback Period
Simple payback period refers to the time required to recover the initial outlay of an investment through the cash inflows generated by this investment. The Simple Payback Period is usually expressed in years and calculated as the total cost of the investment divided by the expected annual energy savings. Investments with a shorter payback period are more attractive for financial institutions.
Soft loan schemes refer to loans below market rates and with longer payback periods. Soft loans may provide interest-free periods at the beginning of the loan. Through this mechanisms, public funding can facilitate and trigger investments.
Third-party financing refers to debt financing. As the term suggests, project financing comes from a third-party, such as a financial institution or an investment fund.