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The sale of commercial invoices at a discount for immediate cash. Seller receives cash advances. Two major types of factoring: Recourse and Non-Recourse.

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Glossary of Common Financial Terms

Knowing what these commonly used financial terms and words mean will help you understand concepts better and take better financial decisions.

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Recourse and Non-recourse

Recourse: The financial institution has the right to recover cash advances if invoices are not collectable.

Non-recourse: The financial institution, the buyer of invoices, assumes the credit risks for non-payment of invoices.

Accounts receivable

Money owed to a business by its customers for goods and services sold but not yet collected.

Accounts receivable financing

A short-term loan collateralized by accounts receivable.

Funding source

An investor, financial institution, or an investment company that provides money or capital to a business.

Cash flow

The income generated by a business from its operation. A positive cash flow means that a business has sufficient income to cover expenses. A negative cash flow means that expenses are exceeding income or revenue.

Bridge loan

A short-term loan, also known as a "swing loan" or "gap-loan", until medium or long-term financing can be arranged. It is used in conjunction with deals, where medium or long-term financing requires more time for closing.


An asset or something of value that is pledged by a borrower to secure a loan.

Alternative financing

Non-traditional or unconventional financing. Usually, such financing is not available through banks or other traditional lenders. Venture capital funding, purchase order financing, and non-recourse factoring are just a few examples of alternative financing.

Asset based loans

Short-term loans collateralized by a company's assets - such as accounts receivable, inventory, equipment/machinery or real estate. In default, the lender may claim the assets.


Something of value that is owned by or owed to a business. It includes inventory and accounts receivable known as current assets, and includes land, buildings, and equipment known as fixed assets.


Refers to a business' total wealth or net assets. Capital can also refer to funds used to start a business or the rights (equity) of the owners in a company.

Receivable aging

A schedule or report of accounts receivable according to the length of time they have been outstanding. It shows which accounts are not being paid in a timely manner.

Line of credit

An agreement wherein a lender commits itself to lend up to a specified amount over a certain period without requiring the borrower to file another application.


A transaction that involves the sale of equipment to a leasing company and subsequent lease of the same equipment back to its original owner, who continues to use the equipment. Only equipment with a very high sustainable value is considered for such a transaction. Sale-leaseback also occurs in real estate, whereby an owner sells property to an investor, then leases the property back, usually for a 20-year term or longer. Companies in need of working capital can benefit from this practice.


An agreement in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate. It is commonly used in equipment and real estate transactions.

Equity financing

A method of raising business capital in which a portion of a business and its future profits is sold to an investor or investment company.


Goods in stock, either finished goods or material to be used to manufacture goods.

Working capital

The amount of capital that a business uses to finance day-to-day operations. It is calculated by taking current liabilities from current assets.

Letter of credit

A guarantee by a bank that a customer's bills for a certain amount will be paid. It is frequently used in international trade.