How To Decipher Commercial Finance Jargon

Even among industry professionals, the jargon associated with commercial finance can be confusing and difficult to understand as multiple terms can be used for the same service, and each firm may use a different set. Deciphering some of this jargon can help you and your business choose the best financing option for your unique needs.

Factoring

The first thing you should know when deciphering finance jargon is that the broadest category in the industry is usually factoring. This category can include traditional factoring and invoice factoring, two different things with essential distinctions. Traditional factoring refers to the actual sale of the invoice to a factor, providing credit protection to the client and giving the factor more risk. Invoice factoring, or accounts receivable financing, involves using invoices to secure an advance from a factor. The client is still responsible for collecting the account and repaying the advance once the customer has paid the invoice.

Trade Finance

When people outside the commercial finance industry hear “trade finance,” they often think of international trade. Still, since any finance which helps clear the way for sales is trade finance, it is also applicable in domestic markets. Purchase order and inventory financing fall into this category, as do most other financing options, and it is essential to distinguish between these two terms. Inventory financing uses a company’s current inventory to secure financing, usually repaid through selling those goods. Purchase order financing, however, is a type of credit in which the financing company guarantees the supplier of payment for a purchase order, and the ordering company has more time to pay for the supplies.

Asset-Based Lending

Factoring falls under asset-based lending, as do working capital financing and revolving lines of credit. In this form of lending, you will be using assets, such as invoices, equipment or credit scores, to secure the financing needed. Commercial real estate financing and equipment financing will also be considered asset-based lending options because you are using the property purchased with the financing as collateral for the loan.

Commercial finance jargon does not have to be as confusing as many firms will have you believe with the various services they offer. You can usually break up these services by whether they are used to facilitate trade, whether an asset is used as a basis for the loan, and what that asset is. For most companies, asset-based lending involves using real estate, invoices or inventory as collateral.

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