Working Capital Finance Glossary

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 Core concepts of Factoring

• Accounts receivable (AR): Outstanding invoices representing money customers owe a business for goods or services already delivered but not yet paid.

• Factor / factoring company: A specialized finance firm that purchases a business’s receivables to provide immediate working capital.

• Advance: The upfront cash payment issued by the factor, usually ranging from 70% to 90% of the invoice amount.

• Advance rate: The percentage of an invoice’s face value paid immediately. This rate is influenced by industry risk, invoice size, and customer credit quality.

• Reserve: The remaining portion of the invoice withheld until the customer pays. Once collected, the reserve is released to the business minus applicable fees.

• Factoring fee: The cost of the service, often called the discount rate. It compensates the factor for credit risk, administration, and collections.

Types of factoring

• Recourse factoring: The seller retains responsibility if the customer fails to pay. Unpaid invoices must be repurchased or replaced, making this option less expensive.

• Non-recourse factoring: The factor assumes credit risk tied to customer insolvency or bankruptcy. Higher fees reflect the added protection.

• Spot factoring (single-invoice factoring): A transactional approach allowing a business to factor individual invoices without an ongoing commitment.

• Whole ledger factoring (full-service factoring): A long-term arrangement where most or all invoices are consistently sold to a single factor.

• Confidential factoring (non-notification):Customers are unaware of the factoring arrangement. Payments are routed through an account controlled by the factor but branded in the business’s name.

• Reverse factoring (supply chain finance): A buyer-led financing structure that enables suppliers to receive early payment while extending buyer payment terms.

Other factoring terms

• Customer / debtor: The entity obligated to pay the invoice.

• Dilution: The reduction between invoiced amounts and actual collections due to returns, credits, disputes, or write-offs.

• Notice of Assignment (NOA): Formal notification advising customers that invoice ownership has been transferred and payment instructions have changed.

• Uniform Commercial Code (UCC) filing: A public filing used by factors to perfect their security interest in purchased receivables.

• Verification: A confirmation step where the factor validates invoice legitimacy directly with the customer before advancing funds.

Core concepts of Asset-Based Lending (ABL)

• Asset-based lending (ABL): A credit facility secured by business assets such as receivables, inventory, equipment, or real estate.

• Collateral: Assets pledged by a borrower to secure repayment. If default occurs, the lender has rights to liquidate these assets.

• Borrowing base: A formula-driven calculation that determines how much credit is available, based on advance rates applied to eligible collateral.

• Advance rate: The percentage of an asset’s appraised or eligible value that can be borrowed against.

• Availability: The unused portion of the credit facility that remains accessible after outstanding borrowings.

Types of ABL collateral

• Accounts receivable: Invoices owed by customers, with preference given to current, collectible balances from creditworthy payors.

• Inventory: Finished goods or raw materials, typically financed at lower advance rates due to valuation volatility.

• Equipment: Tangible business assets financed based on appraised value, age, and remaining useful life.

• Real estate: Commercial property used as loan security, often structured similarly to a mortgage.

Loan management and conditions (ABL)

• Revolving credit facility: A flexible structure allowing repeated draws and repayments up to the borrowing base limit.

• Eligibility: Standards defining which assets qualify for inclusion, often excluding slow-moving inventory or aged receivables.

• Field exam / audit: Periodic onsite reviews to confirm asset existence, valuation, and reporting accuracy.

• Covenants: Financial or operational requirements imposed to manage lender risk.

• Liquidation value: The estimated recovery value of assets under forced-sale conditions.

• UCC filing: A legal filing establishing the lender’s priority claim on collateral.

Core concepts of Purchase Order Financing

• Purchase order (PO): A binding commitment from a customer to buy specific goods at agreed pricing.

• Financing company / lender: The capital provider that pays suppliers directly and is repaid by the end customer.

• Borrower: The business fulfilling the purchase order.

• Supplier / vendor: The entity providing goods or materials, paid directly by the financing company.

• Customer: The end buyer who ultimately pays for the goods after delivery.

• Profit margin: The spread between customer payment and supplier cost; sufficient margin is critical for approval.

Transaction process (PO financing)

• Eligibility: Review of PO validity, customer credit strength, and supplier reliability.

• Advance rate: The portion of supplier costs funded, sometimes reaching 100%.

• Fees: Typically assessed monthly on outstanding advances; longer collection periods increase total cost.

• Letter of credit (LOC): A payment guarantee issued to suppliers to ensure shipment.

• Collection: Customer remits payment directly to the lender upon invoice issuance.

• Remittance: Remaining profit is released to the borrower after repayment and fees.

Comparison with other financing

• PO financing vs. factoring: PO financing funds production before delivery; factoring advances cash after invoicing.

• PO financing vs. traditional loans: Approval is driven by customer strength rather than borrower balance sheets, with no installment payments.

Management Buyout (MBO)

Core concepts

• Management buyout (MBO): The purchase of a company by its existing leadership team, typically supported by external debt and equity capital. MBOs are often used when founders retire or corporations divest non-core operations.

• Management buy-in (MBI): An acquisition led by an outside management team that replaces the incumbent leadership after closing.

• Buy-in management buyout (BIMBO): A blended transaction where current management partners with external executives to acquire the business.

• Seller: The current owner(s) exiting the business, which may include founders, families, corporations, or financial sponsors.

• Financial sponsor: An institutional or private investor providing capital and transaction expertise to support the acquisition.

• Target company: The operating business being acquired by the management group.

Financing and valuation

• Leveraged buyout (LBO): A structure that uses a meaningful amount of borrowed capital to fund the acquisition, secured by the company’s assets and cash flow.

• Sources and uses: A transaction summary outlining where capital originates and how it is deployed, including purchase price, fees, and refinanced obligations.

• Rollover equity: Ownership retained by management post-transaction, aligning incentives with investors.

• Senior debt: Bank-provided financing with first-priority claims on assets and lower relative pricing.

• Mezzanine financing: Subordinated capital that blends debt and equity features, offering flexibility at a higher cost.

• Seller financing: Deferred consideration where the seller receives part of the purchase price over time.

• Enterprise value: The total operating value of a business, inclusive of equity and debt.

Process and post-transaction

• Due diligence: A detailed review of financials, operations, and legal matters prior to closing.

• Transition plan: A roadmap for leadership continuity and operational stability.

• Post-acquisition integration: Operational alignment following closing, typically smoother in MBOs due to management continuity.

• Exit strategy: The long-term plan for monetizing ownership, such as a sale or recapitalization.

Leveraged Buyout (LBO)

A leveraged buyout is the acquisition of a company using a high proportion of debt relative to equity, relying on the target’s cash flow to service that debt.

Core concepts

• Leverage: The strategic use of borrowed capital, often comprising 70–90% of the total purchase price.

• Sponsor / acquirer: The party leading the transaction, commonly a private equity firm.

• Target company: A business with predictable earnings and asset support suitable for leverage.

• Collateral: Assets pledged to secure acquisition debt.

• Cash flow: Operating income used to meet interest and principal obligations.

• Exit strategy: The sponsor’s plan to realize returns, typically within three to seven years.

• High-yield debt: Risk-adjusted financing instruments often used to supplement senior debt.

Financing structure

• Equity contribution: Capital invested by the sponsor, bearing first-loss risk.

• Senior debt: Lower-cost bank financing with top priority in repayment.

• Mezzanine financing: Subordinated capital with enhanced returns for added risk.

• Seller financing: Deferred payments that reduce upfront capital requirements.

Types of LBOs

• Management buyout (MBO) • Management buy-in (MBI) • Public-to-private buyout • Secondary buyout • Hostile takeover

Cash Flow Loans

A cash flow loan is underwritten primarily on a company’s ability to generate future earnings rather than on hard collateral.

Core concepts

• Cash flow: Net operating cash available to service debt.

• Unsecured financing: Lending not directly tied to specific asset collateral.

• Historical and projected earnings: Financial performance used to assess repayment capacity.

• Working capital: Funds used for daily operating needs.

Assessment criteria

• EBITDA: A proxy for operating profitability and debt service ability.

• Credit multiplier: A factor applied to EBITDA to determine borrowing capacity.

• Personal guarantee: A personal repayment commitment from owners.

• Financial covenants: Performance thresholds designed to protect lenders.

Related financing

• Term loans • Revolving credit facilities • Invoice finance • Merchant cash advances

Unsecured Loans

Core concepts

• Unsecured loan: Financing issued without pledged collateral.

• Creditworthiness: Evaluation of repayment likelihood based on credit history and cash flow.

• Personal guarantee: A personal backstop for business obligations.

• Default: Failure to meet repayment terms, potentially resulting in legal remedies.

Types of unsecured financing

• Unsecured term loans • Unsecured lines of credit• Business credit cards • Merchant cash advances • Invoice factoring

Loan management and conditions

• Interest rate: Pricing reflecting elevated lender risk.

• Debt-to-income ratio: Measure of repayment capacity.

• Financial covenants • Limited personal guarantees • Unlimited personal guarantees

Determining an EBITDA Multiple

Core concepts

• EBITDA: A normalized measure of operating profitability.

• EBITDA multiple: A valuation ratio expressing enterprise value relative to earnings.

• Enterprise value (EV): Total business value inclusive of debt and equity.

• Comparable company analysis: Market-based benchmarking method.

• Valuation: The process of estimating economic worth.

Factors influencing the multiple

• Adjusted EBITDA • Growth prospects • Company size • Customer concentration • Competitive moat • Management depth • Industry trends • Working capital needs

Process and negotiation

• Due diligence • Normalized earnings • Deal structuring • Exit multiple

Independent Sponsor (Fundless Sponsor)

Core concepts

• Independent sponsor: A deal sponsor raising capital transaction by transaction.

• Fundless sponsor: A legacy term for independent sponsors.

• Deal-by-deal capital: Equity raised specifically for each acquisition.

• Capital providers: Family offices, institutions, or private investors.

Deal sourcing and compensation

• Proprietary deal flow • Closing fees • Management fees • Carried interest • Sponsor co-investment

Deal structure and process

• Letter of Intent (LOI) • Due diligence • Special-purpose entities • Governing agreements • Broken-deal costs • Hurdle rates • Platform investments

Private Equity Firms

Core concepts

• Private equity firm: An investment manager acquiring and scaling private companies.

• Private equity fund: A pooled investment vehicle.

• Limited partners (LPs) • General partners (GPs)• Portfolio companies • Accredited investors

Investment strategies

• Leveraged buyouts • Venture capital • Growth equity • Mezzanine financing • Distressed investing • Add-on acquisitions

Compensation and returns

• 2 and 20 structure • Management fees • Carried interest • Hurdle rates • Exit strategies

Deal process

• Capital calls • Due diligence • Enterprise value • Distribution waterfalls

Investment Banking

Core functions

• Underwriting • Mergers and acquisitions advisory

Client base

• Corporations • Governments • Institutional investors

Bank structure

• Front office • Middle office • Back office

Bank types

• Bulge bracket • Elite boutique • Middle-market banks

Mezzanine Funding

Core concepts

• Subordinated debt • Equity participation • Capital stack positioning • Higher yield requirements

Structure and uses

• Interest-only periods • Bullet repayments • Growth and acquisition financing

Risks

• Higher capital costs • Potential dilution • Restrictive covenants

Family Office Lending

Strategic role

• Patient capital • Customized structures • Bank alternative financing • Portfolio diversification • Strategic partnership • Niche market focus