Industry-specific or organizational-specific jargon is designed to quickly and effectively impart knowledge to those “in the know” and is generally thought of as a type of short-hand. Sometimes, this jargon can get in the way when you are trying to research concepts, products, or services within the industry, especially when it comes to commercial finance. When trying to find financing for your company, you can run into several terms with the same meaning but sound vastly different. Such as invoice factoring and accounts receivable financing.
Some standard terms to describe services offered to businesses by finance firms include traditional factoring, accounts receivable financing, and invoice factoring. These three terms all describe how a business can use its invoices to receive a cash advance from a finance company. In traditional factoring, the invoices are sold to the factor, and your client will pay them instead of you. You use your invoices as collateral on an advance from the firm. Your client pays you the amount due on the invoice, and you repay the advance plus a small fee. Accounts receivable financing and invoice factoring are two terms describing the same thing. You can also find asset-based lending, invoice factoring, and inventory financing services that use a company’s assets to secure an advance from a factoring company.
Categories of Finance Services
Commercial finance services can be broken into three main categories, factoring, asset-based lending, and trade finance. Knowing this and the distinctions between the categories can help you understand the services you need and which ones are offered. Asset-based lending works much like factoring in that you are using assets as collateral on an advance or loan. This category can include inventory financing, equipment loans, and accounts receivables. Trade finance is often misunderstood as international trade, but domestic deals are also part of this category. Trade finance is any financing option that facilitates sales. This can include all of the other types and purchase order financing, where the firm pays your supplier upon delivery of goods, and you repay the firm once you sell them. So while you may need trade financing, you may need the more specific asset-based lending service known as invoice factoring.
Commercial finance has many jargon terms, which can mean the same thing, especially when referencing the services finance firms offer to companies like yours. To understand which financing you need, you must first understand how to categorize the services.
Understanding the terminology used in the commercial finance field will help you get the funding solutions you need.