ACCOUNTS RECEIVABLE FACTORING. Please see factoring.
ACCOUNTS RECEIVABLE FINANCING. This is a loan secured by accounts receivable, often a revolving line of credit and is often abbreviated as A/R. Lenders may require additional collateral. Depending on the type of accounts receivable, the lender’s advance rate can range from 65% to 85% of the face value of the accounts receivable aged under 90 days.
ADVANCE RATE. This is the percentage that a lender advances to the company based on appraised, book or agreed values.
ASSET-BASED FINANCING. This is a loan secured with collateral. Often this is a revolving credit line secured by accounts receivable and inventory. It can also refer to term loans secured by equipment or real estate. The lender usually has a first lien on these assets.
CAPEX. This term refers to capital expenditures which include purchase of new equipment. Often lenders make an allowance for use of cash flow for CAPEX.
CASH-FLOW ORIENTED FINANCING. This refers to loans that are based completely or substantially on the cash flow produced by the borrower. Often no other collateral is required. Such loans are typically reserved for well-established businesses with predictable cash flows and strong intangibles such as technology, market leadership, or established brand names.
COLLATERAL. This usually consists of tangible assets such as real estate, equipment, accounts receivable, or inventory. Sometimes intangible assets such as patents, company name, or future cash flow can be used as collateral. Often a borrower’s guarantee, either corporate or personal, is required. Loans having collateral are called secured loans, collateral-based financing, equipment-based financing, real estate financing or asset-based financing. Lenders almost always require an appraisal of fixed assets by a national appraisal firm acceptable to the lender. Lenders often rely on the borrower’s accounting systems for values of A/R and inventory.
DEBT FINANCING. There are amortizing loans or term loans where you pay back both principal and interest over the term of the loan, interest-only loans and revolving credit lines where you pay only the interest on the amount borrowed. Under a loan, collateral may or may not be required depending on the financial condition of the company. Debt may be characterized as senior debt or subordinated debt.
EQUIPMENT-BASED FINANCING. This is a loan secured with a particular piece or set of equipment. The lender usually has a purchase money security interest specific to the equipment making this senior debt. Lenders may require additional collateral and almost always require an appraisal by a national appraisal firm acceptable to the lender.
EQUITY FINANCING. The sale of preferred stock, common stock, options or warrants in the corporation, either privately or in the public markets. Venture capital is a type of equity financing.
FACTORING. This is the sale of accounts receivable invoices to a third party who then assumes the obligation of collecting the invoice. Factors can move quickly to get funds to a business but are usually the most expensive way to finance accounts receivable. Most factors initially pay 70% to 90% of the invoice amount followed by an additional payment when they collect the invoice. Ultimately, factors discount the invoice from 2% to 5% or more. Factors advance funds under one of two conditions: where the factor assumes all the liability for the invoice (non-recourse) or where the factor can come back to the business should the invoice become uncollectible and require reimbursement (recourse).
FORCED LIQUIDATION VALUE. This is an appraisal term representing the appraiser’s best judgment on the value of the appraised item under circumstances where there is NOT adequate time to collect bids for the sale of the item. This contrasts with orderly liquidation value.
INTEREST-ONLY TERM LOANS. These are loans for a fixed period of time during which only interest is repaid for some or all of the term. Usually, term loans are secured by some type of collateral such as real estate or equipment. Lenders almost always require an appraisal by a national appraisal firm acceptable to the lender.
INVENTORY FINANCING. This is a loan secured by inventory, often a revolving credit line. Lenders may require additional collateral and may require an appraisal by a national appraisal firm acceptable to the lender. Depending on the type of inventory, the lender’s advance rate can range from 35% to 80% of the orderly liquidation value of the inventory. The stronger the accounting controls over inventory, the more aggressive the advance rates can become.
LEASING. When structured as an operating lease, this is a form of financing that avoids the down payment usually required for the purchase of equipment. Because leased equipment is not owned by the company, it does not appear on the balance sheet. A financing lease does appear on the balance sheet.
MEZZANINE DEBT. Please see subordinated debt.
ORDERLY LIQUIDATION VALUE. This is an appraisal term representing the appraiser’s best judgment on the value of the appraised item under circumstances where there is adequate time (usually three months) to collect bids for the sale of the item. This contrasts with forced liquidation value.
PURCHASE ORDER FINANCING. This is the assignment of purchase orders to a third party who then assumes the obligation of billing and collecting. Usually, this type of financing is related to a specific transaction where the company requires cash to be able to acquire the raw materials to manufacture the goods for which it has received the purchase order. This is the most expensive way to finance because the third party assumes both the production risk and the collection risk.
REAL-ESTATE BASED FINANCING. This is a loan secured by real estate. It is senior debt, usually having a term of at least seven years, and requires payment of principal and interest over the period of the loan. Lenders may require additional collateral and almost always require an appraisal by a national appraisal firm acceptable to the lender. Environmental assessment reports are also usually a requirement.
REVOLVING CREDIT LINES. These are loans for which the principal amount is variable. Usually in place for two to three years with renewal options, these loans have a maximum advance amount and often use an advance rate applied to accounts receivable and inventory to determine the amount that may be outstanding at any particular reporting period. Usually, revolving credit lines are secured by accounts receivable and inventory. They are often accessible through banks and are tied to a bank operating account.
SALE OF ASSETS. The sale of current assets such as accounts receivable (factoring) or long term assets such as real estate or equipment.
SBA LOANS. This is a federally insured loan usually at lower interest rates but always requiring an owner’s personal guarantee. To be eligible, a company must be a small business as defined by the SBA and meet several other requirements.
SECURED LOANS. These are loans secured by collateral. A first or second lien is usually filed on the collateral by the lender. Lenders almost always require an appraisal by a national appraisal firm acceptable to the lender for fixed asset loan.
SENIOR DEBT. This refers to debt secured by collateral on which the lender has put in place a first lien. Usually this covers all the assets of a corporation and is often used for revolving credit lines. Lenders almost always require an appraisal by a national appraisal firm acceptable to the lender.
STRUCTURED FINANCE. This usually refers to cash flow financing where there is little or no collateral involved in the loan, but there is strong historical operating cash flow to support debt repayment.
SUBORDINATED DEBT. This is a loan secured by collateral on which the lender has a second position behind the senior debt lender. Because of the higher risk to the subordinated debt lender, some type of additional compensation is usually necessary, typically in the form of warrants or options on the company’s stock. Often, repayment can be arranged as interest only for some portion of the term of the debt.
TERM LOANS. These are loans for a fixed period of time during which both interest and principal are repaid on a regular basis. There can be a balloon principal payment at the end of the term. Usually, term loans are secured by some type of collateral such as real estate or equipment. Lenders almost always require an appraisal by a national appraisal firm acceptable to the lender.
VENTURE CAPITAL. This is a type of equity investment usually best suited for rapidly growing companies that require a lot of capital or start-up companies with a strong business plan. A typical venture capital investment usually requires sale of 25% to 55% of the company to the investor.