One of the quickest and most widely used methods of secured lending is loans against the accounts receivables. This is the major source of collateral for commercial finance companies.

In accounts receivable lending, a separate account is established with a commercial bank, whereby remittance from customers are deposited in that account. The commercial finance company then has a simultaneous deposit to your regular account, less the amount of the daily interest. At no time would a business customer be made aware of the fact that you have their accounts pledged for receivables loan.

Generally speaking, the record keeping process for accounts receivable loans is not cumbersome. It is usually based on a photocopy or carbon copy of your existing sales records.

Acquisition:
A larger company purchases another company with cash or stock as payment. This is a common exit strategy for start-up companies and time at which the investors are repaid their initial investment and a return on that investment.

Annual Report:
Yearly statement of financial condition for a company. It includes balance sheet and income statement items. It may also include a descriptive summation of the organization's highlights.

Balance Sheet:
A quantitative summary of a company’s financial conditions at a specific point in time, including assets, liabilities and net worth. Also called a statement of condition.

Board of Advisors:
A Less formal alternative to a board of directors most commonly used by small companies. A Company’s advisory board usually consists of 3 to 7 members, and meets periodically but doesn’t have legal responsibility for operations.

Board of Directors:
Individuals elected by a corporation’s shareholders or appointed by the management of a private company to oversee the management of a corporation. The members are paid in cash and/or stock (public companies), meet several times each year, and assume legal responsibility for corporate activities. Also called a directorate.

Break-even:
The level of sales necessary for a company to cover all its fixed and variable costs.

Bridge Financing:
A short or medium term investment designed to finance a company until it can tap the public equity markets or other financing sources.
Capital utilized by companies that intend to go public or shell in the near future.

Business Plan:
A document prepared by a company’s management, detailing the past, present and future of the company, usually designed to attract capital investment. This blueprint includes information on the management structure, qualifications and functioning; an evaluation of the market for the business and how to obtain the projected share of the market; the income and valuation of the business and the projected growth of that investment; and set milestones for evaluating the progress of the business development.

Cash, Credit and Collateral:
Lenders evaluate credit based on the “3C’s”. Cash, Character and Collateral. Cash is what most lenders consider the most important. It refers to the ability of the proposed borrower to repay the debt from their available net income. This is also known as “cash flow”. Most lenders want to see a set amount of excess cash flow necessary to service a debt. The general parameter is 1.5 times the debt payment. This category is always the most important of the 3C’s.

Character is the borrower’s history indicating their willingness and commitment to repay debt. In evaluating a request for financing, lenders will use both credit reporting agencies as well as direct contact to credit granting sources to verify the borrower’s track record. Simply put, if the proposed borrower has always paid his credit card arrangement as agreed, he is a good credit risk.

Collateral is the security a lender seeks for secondary repayment of the debt. Even unsecured loans are collateral dependent. If a request is strong in credit and cash, a lender will evaluate the borrower’s assets to repay the loan. If the borrower defaults on payments, the lender will foreclose on the collateral on the collateral and sell it to repay the debt. Every lender establishes Loan to Value ratios (LTV) on all types of collateral. Collateral never makes a “Bad” loan turn to a “Good” loan. If a loan request is weak in credit or cash, collateral will make it better.

All lenders evaluate credit decisions on a risk and reward basis, where risk is the possibility of default and reward is the interest paid on the loan. There is a direct correlation between risk and reward. If the risk is high the reward (interest) is high and if the risk is low the reward (interest) is low.

Cash Flow:
A measure of a company’s financial health. Cash receipts less cash disbursements over a period of time. Cash flow projections help manager’s plan how much cash will be required to keep a company operating.

Cash Flow Statement:
Summaries of a company’s cash flow over a given period of time.

Clean:
Free of debt.

Collateral Loans:
A company may be able to obtain bank loans on the basis of such collateral as chattel mortgages, stocks and bonds, real estate mortgages, and life insurance (up to the cash surrender value). Even with collateral the bank will still give great weight to the company’s ability to repay. The bank may turn down the application no matter how good the collateral, if there is no clear showing of ability to repay. The bank does not expect to liquidate the collateral unless forced to and then will probably not realize book value on a forced sale. The collateral affords the bank some security and a collateral loan is easier to obtain than a line of credit or secured loan for a new or risky business.

Current Assets:
Assets of a company, such as cash, inventory and account receivables, which can readily be converted into cash.

Debt:
Refers to a relationship that obligates a borrower to pay interest and principal. The terms are often in writing and define the relationship. Indentures and mortgage notes area common types of these written documents.

Debt Service:
The interest and mandatory principal payments that a company is obligated to make.

Direct Loan:
This is a credit arrangement by and between two or more parties. The proceeds of the credit extensions area directly used by the borrower as he sees fit, e.g., credit cards, auto loans, business loans, and leasing are all examples of direct lending.

Equity:
Ownership interest in a company or corporation that is represented by the shares of common stock or preferred stock held by the investors.

Equity Capital:
Capital raised from owners.

Equity Financing:
Equity Capital is financing provided whereby the lender takes equity position within the company. A loan is provided under fixed or variable interest rate and the recipient agrees to surrender a portion of the ownership of the business. This is also referred to as “angel” financing.

Equipment Loans:
An example of a non-smoking capital loan would be a loan on equipment. To secure the lender on an equipment loan, a lien is used. The lien is used to collateralize the loan against fixed assets (e.g., a chattel mortgage). A chattel is personal property, which can be moved about such as machinery and equipment as opposed to real property (land and building) which is fixed, and permanent in place.

Factoring:
This is the oldest way of loaning against account receivables. Technically, it is not a loan against the receivables because the factor actually purchases the receivables and there is no further recourse for lack of payment on the receivable. The borrower is not responsible or collection of the receivables.

The use of credit cards is an institutionalized example of factoring. In exchange for a percent of each sale on the credit card, the retailer has passed on the responsibility and risk of collecting payment.

Financial Structure:
The combined debt, equity and financial instruments used to finance a company.

Financing:
Providing the necessary capital.

Fixed Assets:
Refer to items such as buildings, furniture, memberships and long-term leases. Typically, such properties are not intended for sale or disposal within a year.

Fundamental Analysis:
Study of the balance sheet, earnings history, management, product lines and other elements of a company in an attempt to discern reasonable expectations for price of a stock.

Joint Venture:
An agreement between firms to work together on a project for mutual benefits.

Letter of Credit: L/C
A document issued by a bank, which guarantees the payment of a customer’s drafts for a specified period and up to a specified amount.

Leasing:
Virtually every business can benefit from leasing in one form or another. Also, just about ant type of equipment can be leased – new or used. For this reason, more and more companies are opting to lease the equipment they need instead of purchasing it.

Leasing itself is nothing more than an alternate form of equipment financing where the lessor (owner) purchases the equipment from a vendor on behalf of the lessee (user). The lessee maintains possession and use of the equipment, provided he insures the equipment against theft or damage, and pays the lessor a monthly user fee. At the end of the lease, the lessee can purchase the equipment for a nominal fee or give it back to the lessor and begin a new lease, or simply walk away.

Line Of Credit:
A line of credit is a fund made available for the company to use for a period of one year up to the credit limit. They may use as little or as much of the line of credit at any time during the year as they desire.

Liquidation:
To convert to cash. Also, to sell all of the company’s assets, pay outstanding debts and distribute the remainder to shareholders and go out of business.

Liquidity:
The ability of an asset to be converted into cash quickly and without any price discount.

Shareholders:
One who owns shares of stock in a corporation or mutual fund. For corporations along with the ownership comes a right to declare dividends and the right to vote on certain company matters.

Small Business Administration (SBA):
A federal agency that guarantees loans to a small business and provides management and technical assistance through a network of Small Business Development Centers (SBDC), the Senior Core of Retires Executives (SCORE), and Business information Centers (BIC).

Small Business Investment Companies (SBIC):
A private investment company licensed by the Small Business Administration to provide small businesses with debt and equity financing.

Unsecured:
Backed not by collateral but only by the integrity of the borrower.

Unsecured Financing:
Unsecured borrowing is the simplest method of financing. This as its name indicates, relies on the credibility of the borrower to repay the loan. Although it does not directly rely on the collateral, it does evaluate the assets of the borrower to repay the loan upon default.

Although commercial banks are not the only source of this type of financing, they tend to be the major source and prefer making unsecured loans to a going business. Unsecured loans are typically made to provide working capital to an established company or an individual through a commercial bank.

Venture Capital:
Funds invested or available for investing at considerable risk of loss in potentially highly profitable enterprises. Funds made available for start-up firms and small businesses with exceptional growth potential. Managerial and technical expertise are often also provided: also called risk capital.

Venture Capital Firm:
Any investment company that invests its shareholders money in start-up and other risky but potentially very profitable ventures.

Venture Capital Fund:
An investment company that invests its shareholders money in start-up and other risky but potentially very profitable ventures.

Working Capital:
Capital which is required to finance ordinary operations of a company such as purchasing raw materials, paying for labor to produce goods or service, finance accounts receivables etc.

Working Capital Loan:
Working capital loans are usually for the length of the selling season to a period of up to one year. For example, if a company needs working capital to finance merchandise being prepared for the Christmas season (i.e., a toy manufacturer) or for the summer season (i.e., a boat manufacturer), a loan would be made until the inventory is sold and the money collected.

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