While the process of obtaining financing for your business itself can be overwhelming, sorting through the language and terminology doesn’t have to be a part of your journey. Here’s a breakdown on some common finance terms to help you along in your search.
A/R financing or accounts receivable financing or factoring provides immediate capital based on future income backed by an invoice. In this case, your business would provide services, deliver an invoice to your client. The lender will then verify the client, the service and the invoice before advancing you between 60-90% of the invoice value. As the client pays the invoice, the lender will keep the money in an account owned by them and when the entire invoice is paid off, you will receive the total payment minus the advance and the lender’s fee(s).
Under a traditional factoring finance agreement, the lender owns the invoice and takes on the responsibility of making sure the client pays their invoice: therefore taking on a greater risk. This form of financing is great for protecting your business’ credit and assets.
This kind of financing is best for solving long-term financial needs. In this situation, lenders provide financing using your inventory, equipment, commercial real estate and invoices (accounts receivable) as collateral. However, lenders will want to see a robust and accurate accounting system as they will be auditing it often. This form of financing is better for growing businesses looking for a little extra money to grow their business through sales.
Trade financing is any financing used to facilitate a sale. This could be through Purchase Order (PO) financing—where a purchase order assures payment—or inventory financing, where inventory is the basis of the financing with no attachment to a specific purchase order.
Whatever financing you receive should be manageable within your current operating processes and should have a cost and accounting structure that will be suitable for the duration of your financing needs.
For more information and tips about obtaining financing for your company, contact GP Solutions today.