As a business owner, you are likely to come across many commercial finance terms that you are unfamiliar with. Knowing some of the basics of these terms can help you find the proper funding you need for every stage of your company.

Factoring

Factoring is also called receivables or accounts receivable financing and is the process of using your current invoices for an advance. Many medical companies work exclusively through the factoring process to have operating capital while waiting for insurance companies and patients to pay the balance. There are two types of factoring: traditional factoring and modern. With traditional factoring, you will sell the invoices outright and put responsibility for their collection on the factor. More modern forms, such as accounts receivable financing, involve paying off an advance secured with the invoices once your client pays their bill. You retain ownership of the invoices and the responsibility for collecting on them; you will then repay the advance plus service fees.

Asset-Based Lending

In commercial finance, asset-based lending is similar to factoring in that you borrow money based on your assets’ value. However, this type of lending differs as it is considered a loan instead of an advance and usually deals in tangible assets such as real estate, equipment, and inventory. A commercial mortgage is an example of asset-based lending because the loan is secured with the property’s collateral, and the amount is based on the value of the real estate. This type of lending is usually used for larger purchases where the asset can serve as the collateral on the loan used to make the purchase. Still, it can also help weather a seasonal slump by getting an advance on the future sales of your goods.

Trade Financing

Most people hear about trade financing and immediately assume that international trade is being discussed. Still, the term is also applied to domestic trade and is defined as lending to facilitate the sale of goods and services. Within the category of trade finance, there are two types requiring distinction: purchase order and inventory finance. With purchase order financing, the lender assures the provider of payment once the goods or services have been delivered. On the other hand, inventory financing is based on a company’s current inventory and not a specific purchase order for each item.

Commercial finance jargon can be broad and cover many different services and financing options your company can use. Knowing key terms can help you find the right financing deals to start a business, grow a company, and even invest in other industries.