Business Funding Glossary — B2B Finance Terms Explained
Plain-language definitions for business owners — not textbooks. Each term links to the relevant guide where context helps.
A
Accounts Receivable (AR) Money owed to your business by customers for goods or services already delivered. Outstanding invoices are AR. Factoring companies advance cash against AR; banks use AR as collateral for lines of credit.
Advance Rate The percentage of an invoice’s face value that a factor advances immediately. An advance rate of 90% on a $10,000 invoice means you receive $9,000 upfront; the remaining $1,000 (the reserve) is held until your customer pays. Typical advance rates: freight 90–97%, staffing 85–92%, general B2B 80–92%, healthcare/construction 70–85%. See: Invoice Factoring Guide.
Assignment of Claims Act Federal law (31 U.S.C. § 3727) governing how receivables from federal government contracts can be assigned to a factoring company or lender. Requires written assignment, notification to the contracting officer, and assignment to a single financial institution. Government contractor factoring companies must follow this framework. See: Government Contractor Factoring Guide.
Assignment (of receivables) The legal transfer of ownership of a receivable from your business to the factor. When you factor an invoice, you assign the right to collect that payment to the factor. Your customer is notified via a Notice of Assignment.
B
Bill of Lading (BOL) A legal document issued by a carrier to a shipper confirming receipt of cargo for transportation. In freight factoring, the signed BOL is the primary document required to advance on a load invoice. The BOL proves delivery has occurred.
Business Associate Agreement (BAA) A HIPAA-required contract between a healthcare provider and any vendor handling protected health information (PHI). A healthcare factoring company must sign a BAA before receiving any patient-linked billing data. See: Healthcare Factoring Guide.
C
Charge-Back The return of an invoice to the seller when a customer fails to pay. Under recourse factoring, the factor charges the unpaid invoice back against your reserve account after a defined period (typically 60–90 days). You then owe the advance amount to the factor.
Capital Lease (Finance Lease) A lease structured so that the lessee effectively owns the asset — typically a $1 buyout lease where you pay $1 at lease end to take title. Treated as a purchase for accounting and tax purposes: the asset and corresponding liability appear on your balance sheet, and the full cost qualifies for the Section 179 deduction. Contrast with Operating Lease. See: Equipment Leasing Guide.
Certified Development Company (CDC) A nonprofit organization certified by the SBA to deliver SBA 504 loans in a specific geographic area. In an SBA 504 transaction, the CDC provides the SBA-guaranteed debenture at a fixed below-market rate (40% of the project cost). There are approximately 270 CDCs operating across the US. For a full overview of federal lending programs, see the SBA loan types directory. See also: SBA 504 vs. Equipment Loan.
Chargeback (retail) A deduction taken by a retailer from an invoice payment for supplier compliance violations, returned merchandise, or promotional allowances. Distinct from a factoring charge-back. Retail chargebacks reduce the effective payment received on an invoice and are factored into advance rates for retail suppliers. See: Retail Factoring Guide.
Concentration Limit A cap on the percentage of your factored portfolio that can come from a single customer. Most factors set concentration limits at 20–25% per customer. If one customer represents 60% of your revenue, discuss this openly — factors may decline or limit advances on that customer to manage their own exposure.
Confidential Invoice Discounting A form of invoice financing where your customers are not notified that a third party is involved in financing. The business continues to collect from customers and passes funds to the lender. Unlike standard factoring, no Notice of Assignment is sent. More expensive and typically reserved for larger businesses with established credit. Compare: Fundbox Review.
D
Debt Service Coverage Ratio (DSCR) A measure of a business’s ability to repay its debt obligations from operating income. Calculated as: Net Operating Income ÷ Total Annual Debt Payments. Most lenders require a DSCR of at least 1.25x — meaning the business generates $1.25 in income for every $1.00 in debt payments. SBA lenders and banks use DSCR as a primary underwriting metric.
Dilution The reduction in actual AR value caused by returns, credits, discounts, chargebacks, or disputed invoices. A factor’s advance rate partially reflects expected dilution — if your invoices are routinely paid at less than face value, the factor prices that risk into the advance. High dilution industries (retail suppliers, construction) receive lower advance rates than low-dilution industries (staffing, government contracting).
F
Factor A financial company that purchases accounts receivable (invoices) from a business at a discount, advances cash immediately, and collects payment from the business’s customers. “Factoring company” and “factor” are interchangeable terms.
Factor Rate A decimal multiplier used in merchant cash advances — not in factoring (despite the name). A factor rate of 1.3 means you repay 1.3× the advance amount (e.g., $65,000 total on a $50,000 advance). Factor rates are fixed — they do not reduce with early repayment. See: MCA Guide.
Freight Broker An intermediary who connects shippers with carriers for the transportation of cargo. In trucking factoring, the freight broker is typically the entity that owes payment on the load invoice. Factors run credit checks on freight brokers before advancing on their invoices. See: Trucking Factoring Guide.
Farm Credit System A network of federally chartered cooperative lending institutions providing credit to agricultural businesses and rural communities. A government-sponsored enterprise (GSE) similar in structure to Fannie Mae. Farm Credit lenders are owned by their borrowers (cooperative model) and may return earnings as patronage dividends. Often offers lower rates than commercial banks for agricultural borrowers. See: Agricultural Equipment Financing Guide.
Fair Market Value (FMV) Lease An operating lease in which the buyout price at lease end is whatever the equipment is worth in the open market at that time — not a predetermined amount. Monthly payments are lower than a capital lease because the lessor retains a meaningful residual value. Best for fast-depreciating equipment where you may want to upgrade rather than own at lease end. See: Equipment Leasing Guide.
G
Guarantee Fee (SBA) An upfront fee charged by the SBA on 7(a) loans, based on the guaranteed portion of the loan (75% of the loan amount for most 7(a) loans). The fee ranges from 0% (loans under $150,000) to 3.75% (loans over $1,000,000) of the guaranteed portion. Lenders typically pass this fee to the borrower, increasing the effective APR. See: SBA Loan Calculator.
H
Holdback (MCA) In a merchant cash advance, the holdback (also called the retrieval rate) is the percentage of daily credit and debit card sales the MCA provider collects each day until the advance is repaid. Typical holdback rates: 10–25% of daily sales. See: MCA Guide.
Holdback (factoring reserve) Sometimes used interchangeably with reserve — the portion of the invoice face value held by the factor until the customer pays. This usage is distinct from the MCA holdback; context determines meaning.
I
Invoice Financing A loan or line of credit secured by outstanding invoices, where the business retains the customer relationship and collects payment itself. Distinct from invoice factoring, where the factor collects from the customer directly. See: Invoice Financing vs. Invoice Factoring and Fundbox Review.
L
Lien Waiver A document in which a contractor, subcontractor, or supplier waives their right to file a mechanic’s lien against a property, typically in exchange for payment. Construction factoring companies require lien waivers before advancing on progress billings. Conditional lien waivers waive rights only upon actual receipt of payment; unconditional waivers waive rights immediately. See: Construction Factoring Guide.
M
Master Lease Agreement A framework agreement between a business and an equipment lessor establishing base terms for the leasing relationship, allowing multiple equipment schedules (individual leases) to be added without renegotiating terms each time. Useful for businesses that acquire equipment regularly from the same lessor. See: Equipment Leasing Guide.
Money Factor The financing charge in an equipment or vehicle lease, expressed as a small decimal (e.g., 0.00250). To convert to an approximate APR, multiply by 2,400: a money factor of 0.00250 equals approximately 6% APR. Always ask for the money factor when comparing leases and convert to APR for comparison with loan rates. See: Equipment Leasing Guide.
MCA Stacking Taking a second (or third) merchant cash advance while the first is still outstanding, typically from a different provider. Stacking increases total daily holdback and is a leading cause of MCA-related cash flow crises. Most MCA agreements prohibit stacking without lender consent. See: MCA Guide.
Mechanic’s Lien A legal claim filed by an unpaid contractor, subcontractor, or supplier against a property on which they performed work or supplied materials. Mechanic’s lien rights complicate construction factoring because they create a competing claim against the receivable. See: Construction Factoring Guide.
Medicare Assignment The process of a healthcare provider accepting Medicare’s approved amount as full payment and directing Medicare to pay a third party (such as a factor) on their behalf. Medicare regulations permit assignment of receivables under specific conditions. See: Healthcare Factoring Guide.
N
Non-Recourse Factoring A factoring arrangement in which the factor absorbs the loss if the customer becomes legally insolvent. Non-recourse protection does not cover invoice disputes, slow payment, or any non-payment reason other than verified insolvency. Non-recourse typically costs 0.5–2% more per period than recourse factoring. See: Recourse vs. Non-Recourse Factoring.
Notice of Assignment A letter sent by the factor to your customer notifying them that your invoice has been assigned to the factor and that payment should be directed to the factor rather than to you. Standard in factoring; not used in invoice financing.
O
Operating Lease A lease in which the lessor retains ownership and meaningful residual value of the equipment at lease end. Monthly payments are lower than a capital lease because you are paying only for the depreciation during the lease term, not for full ownership. At lease end, you can return the equipment, purchase at fair market value, or renew. Best for fast-depreciating technology and equipment you plan to upgrade. See: Equipment Leasing Guide.
Origination Fee An upfront fee charged by a lender for processing and funding a loan, expressed as a percentage of the loan amount (typically 1–5%). Deducted from loan proceeds at funding. Increases the effective APR relative to the stated interest rate. Example: a $100,000 loan with a 3% origination fee means you receive $97,000 but repay based on $100,000. Always include origination fees when calculating True APR. See: Business Loan Calculator.
P
Patronage Dividend A return of earnings by a cooperative lender (such as a Farm Credit System institution) to its borrower-members, typically paid annually as a percentage of interest paid. Patronage dividends reduce the effective cost of borrowing from cooperative lenders, sometimes meaningfully (1–2% effective rate reduction). See: Agricultural Equipment Financing Guide.
Prompt Payment Act Federal law (31 U.S.C. § 3901) requiring federal agencies to pay vendor invoices within 30 days of receipt and acceptance, with interest accruing on late payments. Predictable payment timelines under the Prompt Payment Act make government contractor factoring less expensive than commercial factoring — lower risk for the factor translates to lower fees. See: Government Contractor Factoring Guide.
Purchase Order (PO) Financing A funding arrangement in which a finance company pays your supplier directly so you can fulfill a large customer order you couldn’t otherwise fund from working capital. The financier is repaid when the customer pays their invoice. Used by product-based businesses — importers, distributors, manufacturers. Costs 3–6%/month — more expensive than invoice factoring because the lender advances funds before delivery. See: Purchase Order Financing Guide and PO Financing vs. Invoice Factoring.
Q
Quick Pay A program offered by freight brokers that pays carriers faster than standard terms — typically in 1–3 business days — in exchange for a discount (typically 1.5–3% of the load invoice). Alternative to freight factoring for carriers whose brokers offer it. See: Trucking Factoring Guide.
R
Recourse Factoring The most common form of factoring, in which the seller (your business) is responsible for buying back invoices that customers fail to pay. If your customer becomes insolvent or disputes the invoice, the factor charges the invoice back to your reserve account and you must cover the advance. Less expensive than non-recourse factoring. See: Recourse vs. Non-Recourse Factoring.
Reserve The portion of the invoice face value held by the factor until the customer pays. Calculated as 100% minus the advance rate. On a $10,000 invoice with a 90% advance rate, the reserve is $1,000. When the customer pays, the factor releases the reserve minus the factoring fee.
Retainage The percentage of each progress payment (typically 5–10%) that a general contractor or project owner withholds until a construction project is substantially complete. Retainage is not typically factorable because it is not due until project completion. See: Construction Factoring Guide.
S
Seasonal Payment Schedule An equipment loan or lease repayment structure where payments align with seasonal cash flow rather than equal monthly installments. Common in agricultural financing — a farmer might make one annual payment at harvest rather than twelve monthly payments. Most common through manufacturer financing programs (John Deere Financial, CNH Capital) and Farm Credit System lenders. See: Agricultural Equipment Financing Guide.
Section 179 A US tax provision allowing businesses to deduct the full purchase price of qualifying equipment in the year it is placed in service, rather than depreciating over multiple years. For 2026, the deduction limit is $1,220,000 (phase-out begins at $3,050,000 in total equipment placed in service). Applies to purchased equipment and capital leases; does not apply to operating leases. Verify current limits with a tax adviser. See: Equipment Financing Guide.
Soft Costs Non-physical expenses associated with an equipment purchase that some lenders will roll into the financing — including installation, delivery, training, software, and maintenance contracts. Soft cost limits vary by lender (typically 20–30% of total financed amount). Confirm soft cost eligibility at application. See: Medical Equipment Financing Guide.
Spot Factoring Factoring individual invoices on a per-transaction basis, without a long-term contract or volume commitment. More expensive per invoice than contract factoring, but offers flexibility for businesses with variable invoice volumes.
U
UCC-1 Financing Statement A legal document filed with the state by a lender or factor to publicly establish their security interest in a borrower’s assets. Most factors file a UCC-1 against your accounts receivable when you enter a factoring agreement. This filing can conflict with bank liens — review your existing loan agreements before signing with a factor.