When it comes to commercial operations, finances are one of the most important elements—but some of the jargon can be confusing.
To help you figure it out, this article goes over some key commercial finance terms and what they mean.
In accounts-receivable financing, an invoice—that is, a payment request a company has made to a client—serves as collateral for a loan. This shifts risk onto the borrower, because if they fail to repay the loan, the lender assumes control of the invoice. However, this can be helpful in commercial finance for obtaining funds more quickly.
In factoring, a company assigns an invoice to a lender. The lender advances funds to the company against that invoice. This is different from accounts-receivable financing in that the borrower does not retain ownership of the invoice: The lender buys it, usually at a discounted rate. The upside for the seller is that the funds are immediately available, rather than becoming available whenever the customer pays the invoice. Variants include discount factoring and traditional factoring.
Asset-based lending is another term that often arises in commercial finance. It involves a lender advancing money based on the value of a company’s assets, most notably accounts receivable. Depending on the agreement, the lender may also advance money based on assets like real estate, equipment, and inventory.
Companies use purchase-order financing when they need to assure a supplier that they will be paid. Essentially, it involves Company A borrowing money from a lender to create the funds necessary to fulfill an order placed with Company B. This is not the most common situation, but still, many companies find themselves making use of purchase-order financing.
For more information on how finances work, take a look at BizCap Commercial Finance’s other blog posts or get in touch with us today.