Terms used in commercial lending, explained.
- Account Debtor
An account debtor is the party that owes payment on a receivable, typically the customer of a factoring client or borrower. In factoring and asset-based lending, the account debtor is who ultimately pays the invoice, making their creditworthiness and payment behavior central to verification, collections, and concentration analysis.
- Accounts Receivable Reconciliation for Commercial Lenders
Accounts receivable reconciliation is the process of matching a borrower's reported AR balance against independent data sources (bank statements, payment records, debtor confirmations) to verify accuracy and identify discrepancies. For commercial lenders, this is a core risk management activity.
- Advance Rate
The advance rate is the percentage of eligible collateral, typically accounts receivable or inventory, that a lender will advance to a borrower. Applied to the eligible pool after ineligibles are removed, it determines how much funding is available under a factoring facility or asset-based loan.
- Amortization
Amortization is the process of paying off a loan through scheduled payments that each cover interest and a portion of principal, so the balance falls to zero by maturity. The amortization schedule sets exactly how much of every payment goes to interest versus principal over the life of the loan, and it is the schedule a servicer administers on each payment.
- Asset-Based Lending vs Factoring: Key Differences
Asset-based lending (ABL) and invoice factoring are both forms of receivables financing, but they differ in structure, collateral scope, cost, and borrower profile. ABL is a revolving credit facility secured by multiple asset classes. Factoring is the outright sale of individual receivables to a third party.
- Bridge Loan vs Conventional Loan
A bridge loan is short-term financing, often interest-only and quick to close, used to bridge a gap until a property is sold, stabilized, or refinanced into permanent debt. A conventional loan is long-term, amortizing, lower-rate financing for a stabilized asset held over years. The bridge loan trades a higher rate for speed and flexibility; the conventional loan trades slower underwriting for lower long-term cost.
- Cash Conversion Cycle
The cash conversion cycle (CCC) measures how many days it takes a business to turn its investment in inventory and other resources into cash from sales. It is calculated as days inventory outstanding plus days sales outstanding minus days payable outstanding (DIO + DSO - DPO). The longer the cycle, the more cash is tied up in operations, which is the working capital gap that commercial lending fills.
- Cash Posting
Cash posting, also called cash application, is the process of recording an incoming payment and applying it to the correct invoice(s) and customer account. In factoring and asset-based lending it is the step that turns a raw bank deposit into an accurate, invoice-level update of what has been collected and what is still outstanding.
- Charge-Off
A charge-off is when a lender declares a debt unlikely to be collected and removes it from its books as an asset, recognizing the loss, usually after the loan is severely delinquent. It is an accounting recognition, not forgiveness: the borrower still owes the debt, and the lender can keep pursuing it, sell it, or recover it later. The charge-off rate is a core measure of a portfolio's credit quality.
- Chargeback (in Factoring)
In factoring, a chargeback is when a factor charges an unpaid or disputed invoice back to the client, reversing the advance it made. Chargebacks arise in recourse factoring, where the client, not the factor, bears the credit risk if the account debtor does not pay.
- Concentration Limit
A concentration limit is a cap, set in a credit or factoring agreement, on how much of the borrowing base a single debtor (or related group of debtors) may represent. Balances above the cap are treated as ineligible and excluded from the collateral that supports availability.
- Covenant Breach (Covenant Default)
A covenant breach, or covenant default, occurs when a borrower fails to satisfy a covenant in its loan agreement. It is usually a technical (non-payment) default that triggers lender remedies such as a cure period, a waiver, repricing, or acceleration, even while the borrower is still making payments on time.
- Covenant-Lite (Cov-Lite)
A covenant-lite, or cov-lite, loan is a loan that lacks maintenance financial covenants and relies only on incurrence covenants tested when the borrower takes a specific action. Common in syndicated leveraged loans and increasingly present in private credit, cov-lite structures give borrowers flexibility but remove the lender's periodic early-warning signals.
- Cross-Aging (Cross-Age Rule)
Cross-aging is an eligibility rule that makes all of a debtor's invoices ineligible once a defined share of that debtor's balance is past due. If more than, say, 50 percent of what a debtor owes is delinquent, the lender treats the entire balance, even the current invoices, as ineligible, on the logic that a debtor struggling to pay old invoices is a risk on the new ones too.
- Cross-Collateralization
Cross-collateralization is when the same collateral secures more than one loan from a lender, so a single asset or pool of assets backs multiple obligations, and a default on one can put all the cross-collateralized assets at risk. It is common in asset-based lending and equipment finance, often paired with a blanket lien over a borrower's assets and a cross-default clause.
- Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is the average number of days a business takes to collect payment after a sale is made on credit. It measures the efficiency of receivables collection and is a core indicator lenders use to gauge the quality and liquidity of an accounts receivable portfolio.
- Debt Service Coverage Ratio (DSCR)
The debt service coverage ratio (DSCR) measures a borrower's ability to cover its debt payments out of operating income. It is calculated as net operating income divided by total debt service, and lenders use it as a core underwriting test and covenant, especially in commercial real estate and cash-flow lending.
- Debt Yield
Debt yield is a property's net operating income divided by the loan amount, expressed as a percentage. It measures a lender's return on the loan based on the property's cash flow alone, independent of the interest rate, amortization, or market cap rate, making it a value-independent test of leverage.
- Double Pledging (Double Factoring)
Double pledging is the fraudulent practice of financing the same invoice or receivable with more than one lender, or pledging collateral that has already been assigned to another secured party. It is one of the most common and costly forms of factoring fraud.
- Eligible Receivables
Eligible receivables are the accounts receivable a lender will actually lend against, after ineligible items are removed. They are the qualifying pool, invoices that meet the facility's criteria for age, debtor, concentration, and quality, to which the advance rate is applied to determine availability.
- Embedded Lending
Embedded lending is the delivery of credit, such as factoring or working-capital finance, inside a non-financial platform's own product, so a business can access funding where it already works rather than going to a separate lender. It is powered by the lender's operations being exposed as APIs.
- Equipment Financing vs Leasing
Equipment financing is a loan to buy equipment: the business owns the asset, builds equity, and the loan is secured by the equipment. An equipment lease rents the asset for a term, with the lessor as owner and an option to return, renew, or buy at the end. Financing suits long-life equipment a business will keep; leasing suits fast-depreciating or frequently upgraded equipment and preserves cash.
- Factor Rate
A factor rate is a pricing format used in merchant cash advances and some short-term business financing, expressed as a decimal multiplier (such as 1.25) applied to the funded amount to determine total repayment. Unlike an interest rate, it is a fixed cost that does not change with how quickly the advance is repaid.
- Factoring Fee (Discount Rate)
The factoring fee, also called the discount rate, is the cost a business pays a factor for purchasing its receivables. It is usually expressed as a percentage of the invoice face value and accrues either as a one-time flat charge or on a tiered schedule that grows the longer an invoice stays unpaid.
- Factoring Reserve (Reserve Account)
A factoring reserve is the portion of an invoice's face value that a factor withholds at funding and does not release until the debtor pays. It cushions the factor against dilution, disputes, and short-pays, and the reserve account is reconciled and released net of fees once collection clears.
- Field Examination (Field Exam)
A field examination is a periodic on-site review a lender performs on a borrower's collateral, books, and operating processes in asset-based lending and factoring, used to confirm that reported accounts receivable, inventory, and controls support the funds advanced against them.
- Financial Covenant
A financial covenant is a contractual condition in a loan agreement that requires the borrower to maintain specified financial metrics, such as a minimum debt service coverage ratio or a maximum leverage ratio, tested on a regular schedule. It gives the lender an early, measurable signal of deteriorating credit before a payment is ever missed.
- Headless Factoring
Headless factoring is a factoring operation in which the engine, the verification, funding, reconciliation, and collections logic, is separated from the user interface and exposed as programmable services. The lender keeps its own front end and systems and calls the factoring functions through an API, rather than working inside one closed application.
- Interest Reserve
An interest reserve is a portion of a loan's proceeds that the lender sets aside at closing to cover the borrower's interest payments during a construction or transition period, before the asset produces income. It draws down as interest accrues, and a reserve that runs dry before the project stabilizes is a common source of trouble in construction and bridge lending.
- Invoice Discounting
Invoice discounting is a form of receivables finance in which a business borrows against its unpaid invoices while keeping control of its own sales ledger and collections. Unlike factoring, it is usually confidential, so the business's customers are not told a financier is involved and continue paying the business directly.
- Invoice Factoring vs Accounts Receivable Financing
Invoice factoring is the sale of receivables to a factor, which advances against them, often notifies the customer, and may run collections. Accounts receivable financing is a loan secured by receivables: the business keeps ownership and collections, the facility is usually confidential, and availability is sized by a borrowing base. Factoring is a purchase; AR financing is a revolving loan against the same asset.
- Invoice Factoring vs Business Line of Credit
Invoice factoring sells receivables for immediate cash and is underwritten mainly on the customers' credit, so available funding scales with sales. A business line of credit is revolving bank debt underwritten on the business's own financials, with a fixed limit the borrower draws on and repays. Factoring is easier to qualify for and scales with receivables; a line of credit is usually cheaper but harder to obtain.
- Invoice Factoring vs Merchant Cash Advance
Invoice factoring advances cash against invoices a business has already issued and is repaid when the customer pays, while a merchant cash advance advances cash against future sales and is repaid from a daily or weekly share of those sales at a fixed factor rate. Factoring underwrites the customer's credit and is usually cheaper; an MCA underwrites the business's sales and is faster, broader, and more expensive.
- Invoice Factoring vs Purchase Order Financing
Purchase order financing pays a supplier so a business can fulfill a confirmed order, before the goods ship and before any invoice exists. Invoice factoring advances cash against the invoice after the goods are delivered and billed. They fund different stages of the same order: PO financing covers production, and factoring monetizes the resulting receivable, often repaying the PO facility.
- Invoice Verification
Invoice verification is the process of confirming that an invoice is genuine and owed before a lender funds against it. The lender contacts the account debtor directly, across email, portals, or phone, to confirm the goods or services were delivered and the amount is payable, which is the single most powerful control against fraud and dilution.
- Letter of Credit
A letter of credit is a bank's written guarantee that a buyer's payment to a seller will be made on time and in full, with the bank paying if the buyer cannot. Payment is triggered by the seller presenting compliant documents, not by the goods themselves. Letters of credit reduce counterparty risk in trade, especially cross-border, by substituting the bank's creditworthiness for the buyer's.
- Loan Servicing
Loan servicing is the ongoing administration of a loan after it is originated: collecting and applying payments, maintaining records, managing escrows and reserves, monitoring performance and covenants, communicating with the borrower, and reporting to funders and investors, all the way through payoff or resolution of a default. It is the operational work that keeps a loan performing and a portfolio reportable.
- Loan Tape
A loan tape is a structured, loan-level data file that lists every loan or receivable in a portfolio along with its key economic and performance fields. Lenders, funders, and investors use it to underwrite, monitor, and reconcile a book of credit.
- Loan Workout
A loan workout is the process of renegotiating a troubled or defaulted loan so it can perform again or the lender can recover more than it would through foreclosure or liquidation. Lender and borrower agree to modified terms, such as forbearance, a rate or maturity change, or additional collateral, to avoid a worse outcome for both sides. It is the core discipline of distressed loan servicing.
- Loan-to-Value (LTV)
Loan-to-value, or LTV, is the ratio of a loan amount to the appraised value of the collateral securing it, expressed as a percentage. A $7,000,000 loan against a property worth $10,000,000 has an LTV of 70 percent. It is a core measure of how much equity cushion stands between the lender and a loss.
- Lockbox (in Commercial Lending)
A lockbox is a controlled bank account or post office box to which a borrower's customers send their payments, so that incoming collections flow directly to the lender rather than the borrower. It is the primary mechanism for establishing cash dominion in asset-based lending and factoring, giving the lender first access to receivable proceeds and a reliable record of what each debtor actually paid.
- Merchant Cash Advance (MCA)
A merchant cash advance (MCA) is not a loan but a purchase of a business's future receivables or sales at a discount. The funder advances a lump sum and is repaid by collecting a fixed amount or a percentage of the business's daily or weekly sales until a set total, the funded amount times a factor rate, is paid back.
- Merchant Cash Advance vs Business Loan
A merchant cash advance is the purchase of a business's future sales at a discount, repaid from a daily or weekly share of sales at a fixed factor rate, and qualified mainly on sales volume. A business loan is borrowed capital repaid in fixed installments over a set term with interest, qualified on credit and financials. The MCA is faster and easier to get but far more expensive; the loan is cheaper and predictable.
- Mezzanine Financing
Mezzanine financing is a layer of capital that sits between senior debt and equity in the capital stack. It is subordinated to senior debt but ranks ahead of common equity, and is usually structured as subordinated debt with an equity kicker or as preferred equity. It costs more than senior debt and less than equity, and is used to fill the gap between what senior lenders provide and the total capital a deal needs.
- Net Funds Employed (NFE)
Net funds employed (NFE) is the amount of money a factor or receivables lender actually has outstanding to its clients at a point in time: advances made against purchased receivables, net of reserves held back and cash collected. It is the core measure of a factor's deployed capital and the base on which yield is earned, the receivables-finance equivalent of loans outstanding.
- Notice of Assignment (NOA)
A Notice of Assignment is a formal letter that informs an account debtor (the party that owes on an invoice) that the underlying receivable has been assigned to a factor or lender, and directs the debtor to remit payment to the assignee rather than to the original seller.
- Notification vs Non-Notification Factoring
Notification factoring is an arrangement in which the account debtor is formally told that its invoice has been assigned to a factor and instructed to pay the factor directly. In non-notification factoring, the debtor is not told and continues to pay the business, which then settles with the factor.
- Personal Guarantee
A personal guarantee is a legal promise by an individual, usually a business owner, to repay a business debt from their own assets if the business cannot. It sets aside the limited liability of the company for that debt, making the guarantor personally liable. Lenders require personal guarantees to align the owner's incentives and gain recourse beyond the business, especially for smaller or thinly capitalized borrowers.
- Prepayment Penalty
A prepayment penalty is a fee a lender charges when a borrower pays off a loan before maturity, compensating the lender for the interest income it loses. It is common in commercial real estate, equipment, and term lending, and comes in several structures such as a step-down fee, yield maintenance, or defeasance. It protects the lender's expected yield and shapes when refinancing makes sense.
- Promissory Note
A promissory note is a written, legally binding promise by a borrower to repay a specific sum to a lender, either on demand or on a set schedule, under stated terms. It is the core evidence of a debt, setting out the amount, interest rate, payment schedule, maturity, and what happens on default. Every loan rests on a note or its functional equivalent.
- Recourse vs Non-Recourse Factoring
Recourse and non-recourse factoring differ in who bears the loss when a debtor fails to pay an assigned invoice. In recourse factoring, the client must buy back (or replace) an unpaid invoice; in non-recourse factoring, the factor absorbs the loss, but only for a defined credit event such as the debtor's insolvency, not for commercial disputes.
- Remittance Advice
Remittance advice is the document or data a payer sends with or alongside a payment to explain what it covers: which invoices are being paid, in what amounts, and any deductions taken. It is what lets a lender match an incoming payment to the right invoices during cash application.
- Reserve Release
Reserve release is the payment a factor makes to its client after a financed invoice is collected, returning the held-back reserve net of fees. The reserve is the portion of the invoice the factor did not advance up front, and it is released once the debtor pays and any chargebacks or disputes are resolved.
- Residual Value
Residual value is the estimated worth of a financed asset at the end of a lease or loan term. In equipment finance it is set at origination and directly affects the payment: a higher residual lowers the periodic payment but leaves the lender exposed to the asset being worth less than expected at term end.
- Retainage (Retention)
Retainage, also called retention, is a percentage of each construction progress billing that the owner or general contractor withholds until the work is substantially or fully complete. It functions as a contractual holdback that secures performance, and it materially affects how much of a construction receivable a lender or factor will actually advance.
- Reverse Factoring (Supplier Finance)
Reverse factoring, also called supplier finance or confirming, is a buyer-led financing arrangement in which a funder pays a buyer's approved invoices to its suppliers early at a small discount, and the buyer repays the funder at the invoice maturity date. Because it is initiated by the buyer using its stronger credit, suppliers get cheaper, faster financing than they could obtain on their own.
- Revolving Credit Facility
A revolving credit facility, or revolver, is a line of credit a business can draw down, repay, and redraw up to a set limit over the facility's term, paying interest only on the drawn balance. Unlike a term loan's one-time lump sum, a revolver flexes with the borrower's needs, which makes it the core structure of asset-based lending and working-capital finance.
- SBA Loan vs Conventional Loan
An SBA loan is made by a lender but partly guaranteed by the U.S. Small Business Administration, which lets the lender offer lower down payments, longer terms, and more flexible eligibility in exchange for more paperwork and a slower close. A conventional loan carries no government guarantee, so the lender bears the full risk and sets stricter terms but can fund faster. The guarantee is the core difference.
- Split Funding (Split Withholding)
Split funding is a merchant cash advance repayment method where the funder collects its share directly from the merchant's card-processing settlements. The processor splits each batch of credit-card sales, routing a set percentage to the funder before the remainder reaches the merchant, so repayment tracks actual sales volume.
- Spot Factoring
Spot factoring is the sale of a single invoice or a small, hand-picked set of invoices to a factor for immediate cash, rather than committing the entire receivables ledger under an ongoing facility. It lets a business raise working capital on a one-off, as-needed basis.
- Term Sheet
A term sheet is a mostly non-binding document that outlines the key terms and conditions of a proposed loan before the full legal documents are drafted. It sets out the amount, pricing, term, collateral, covenants, and conditions the parties agree to in principle, serving as the blueprint the loan agreement is built from once both sides commit.
- True Sale
A true sale is a transfer of receivables or other assets structured so that ownership genuinely passes to the buyer, rather than the transaction being recharacterized as a secured loan. It matters because in a true sale the assets leave the seller's estate, so if the seller goes bankrupt the buyer's receivables are protected. It is the legal foundation of bankruptcy-remote factoring and securitization.
- UCC Filing (UCC-1 Financing Statement)
A UCC filing is a UCC-1 financing statement recorded with a state filing office (usually the Secretary of State) to give public notice of a lender's security interest in a borrower's collateral. It is the step that perfects the lien under Article 9 of the Uniform Commercial Code and establishes the lender's priority against other creditors.
- Unitranche
A unitranche is a single debt facility that blends what would traditionally be separate senior and subordinated tranches into one loan, with one blended interest rate and one set of documents. Behind the scenes lenders may split the economics into first-out and last-out pieces, but the borrower sees a single facility from a single counterparty. It is a defining structure of private credit and direct lending.
- What Are Ineligible Receivables in Commercial Lending?
Ineligible receivables are accounts receivable that a lender excludes from the borrowing base calculation because they fail to meet predefined eligibility criteria. These criteria are specified in the credit agreement and are designed to ensure that only high-quality, collectible receivables support the outstanding loan balance.
- What Is a Borrowing Base Certificate (BBC)?
A borrowing base certificate is a periodic report submitted by a borrower to its asset-based lender. It details the value of eligible collateral, applies concentration limits and exclusions, and calculates the maximum amount the borrower can draw under the revolving credit facility.
- What Is Dilution in Factoring?
Dilution is the percentage difference between the face value of receivables purchased by a factor and the amount actually collected. It captures all non-payment reductions: credit notes, returns, allowances, disputes, short-pays, and write-offs. High dilution erodes a factor's margin and signals underlying problems with the client's business or debtor relationships.
- What Is Invoice Factoring?
Invoice factoring is a financial transaction in which a business sells its outstanding accounts receivable to a third party (the factor) at a discount. The factor advances a percentage of the invoice face value immediately, then collects payment directly from the debtor. Once the debtor pays, the factor remits the remaining balance minus a fee.
- Whole-Turnover Factoring
Whole-turnover factoring is a facility in which a borrower assigns and funds its entire eligible sales ledger, every qualifying invoice from approved account debtors, rather than choosing individual invoices to sell. The whole-of-book commitment lets a factor price more keenly and rely on portfolio diversification instead of cherry-picked single exposures.
- Working Capital
Working capital is the money a business has available to fund its day-to-day operations, calculated as current assets minus current liabilities. It measures whether a business can cover its short-term obligations, and the gap between paying suppliers and collecting from customers is what most commercial lending, from factoring to lines of credit, exists to finance.