Business Loan – a vehicle by which a bank or other entity gives you a lump or revolving sum of money to run your business now in turn for repayment at a later date. The business loan repayment amount includes the amount they gave you plus some additional interest amount. Most business loans are backed by collateral that introduces a margin of safety for the business loan lender to ensure they get paid back. Often the loan amount is a percentage of the appraised value of the assets that serve as collateral. Many times the business loan is paid back out of regular business cash flow and the assets that serve as the business loan collateral never have to be liquidated to make good on the loan.
A true receivables factoring transaction is not a business loan. In a receivables factoring transaction an asset (each invoice on an invoice by invoice or invoice batch basis) is sold at a discount in return for a large payment of cash up front. A fee is then charged on each invoice or each invoice batch at the time the payment is received. It is a very common error for the untrained eye to confuse a bank lending transaction with a receivables factoring transaction. A bank loan has a very different risk profile than a receivables factoring transaction.
