Definitions

Accounts Receivable Financing
Accounts Receivable/Account Receivable
Cash Flow Factoring
Asset Based Lending
Purchase Order Financing
Inventory Financing
Letter of Credit
SBA Loan

Accounts Receivable Financing

Accounts Receivable Financing is the selling or pledging of a company's account receivable, at a discount, to a Factor, a Commercial Finance Company or to an Accounts Receivable Financing Company who then assumes a risk of loss. The terms “Factor, Commercial Finance Company, and Account Receivable Financing Company”- all describe businesses that advance you cash in return for earning a fee when your accounts receivable are paid. You receive a portion, usually 80% to 90% of the face value of your receivables in advance of payment from your customers in return for a fee, or interest, to be paid to the commercial finance company. When the commercial finance company is paid by the customer, the appropriate fees are deducted and the remainder is rebated to you. “Accounts receivable financing” is also called accounts receivable factoring, factoring financial services, invoice factoring and cash flow factoring. The terms are used to convey the same meaning.

Accounts Receivable/Account Receivable

An account receivable is money which is owed to your company by a customer for products and services provided on credit. This is treated as a current asset on a balance sheet. A specific sale is treated as an account receivable after the customer is sent an invoice. A business has an account receivable after billing their customer for products or services that have been actually delivered according to mutual agreement. Commercial Finance Companies are paid for factoring financial services when the accounts receivable are paid by your customers.

Cash Flow Factoring

Cash flow factoring is accounts receivable financing that is transparent to your customer. A commercial finance company provides you credit based on your accounts receivable without directly notifying your customer. Cash flow factoring is also known as non-notification factoring.

Asset Based Lending

Asset based lending or asset based financing refers generically to commercial finance transactions i.e. loans secured by a wide variety of assets. Businesses can obtain asset based lending by using the liquid, current assets of the company (such as accounts receivable and/or inventory) or the fixed assets of a business (such as plant, real estate, and equipment) as collateral.

Asset based financing relies on the value of the underlying collateral to minimize the loan's credit risk. Commercial finance is the term most commonly affiliated with the industry group of asset based lenders that provides all types of asset based loans to business and commercial borrowers. Asset based lenders are sometimes referred to as secured lenders. Asset Based Lending is generally less costly than Accounts Receivable Financing and transparent to a company’s customers.

Purchase Order Financing

Purchase Order financing is the assignment of purchase orders to a third party, a commercial finance company, who then assumes the obligation of billing and collecting. Usually, this type of financing is related to transactions where your company requires more cash flow to be able to pay for the manufacture of the goods for which you have received a purchase order. The Purchase Order Company may assume both the production risk and the collection risk.

Purchase order financing can be used to finance all current and subsequent orders to improve a company’s cash flow. The process works as follows: 1) Your company obtains a purchase order for products to be sold another company; 2) A letter of credit may be issued, based on a finance companies’ credit, to guarantee payment to suppliers or factories producing the goods; 3) The order is shipped, delivered and accepted by your customer; 4) The customer receives an invoice for the goods; 5) The Purchase Order Company pays the supplier/factory; 6) a commercial finance company or Accounts Receivable Finance Company pays the Purchase Order Financing Company after the products are delivered to your customer; 7) The customer pays the commercial finance company for goods received; 8) The accounts are settled and the profit is paid to you.

Inventory Financing

Inventory financing is a loan secured by the inventory of a business. Inventory finance enables distributors and dealers in a broad range of industries to hold more stock without cash flow strain and to generate more sales. Inventory financing is available to distributors and dealers in a broad range of sectors such as industrial, construction, computer, office, telecommunications, agricultural / viticulture, motorcycle, road transport, airline and marine industries. Inventory finance is often part of an Accounts Receivable Financing commercial finance package.

Letter of Credit

A Letter of Credit is a binding document that guarantees payment for goods to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the delivery of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability. It is typically a component of Purchase Order Financing and Accounts Receivable Financing. A Letter of Credit for small business finance is often issued by a bank, based on the creditworthiness of the commercial finance company that is funding small business loans to improve cash flow in a commercial finance transaction.

SBA Loan

Small Business Administration Loans are business loans originated by Banks and Commercial Finance Companies- a portion of which is guaranteed by the U.S. government. Many businesses are eligible for SBA financing. SBA loans are government guaranteed loan programs. The SBA 7(a) program offers long term financing for purchasing a business, buying out a partner, equipment financing, working capital, debt refinancing, real estate purchase, construction and improvements. This program may be combined with Accounts Receivable Financing and Inventory Financing to acquire or refinance a business with a working capital line of credit. SBA programs are also available to purchase owner-occupied commercial real estate.