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Alternative Financing: A Glossary for Small Businesses

The language of alternative financing can be overwhelming for small business owners—keep this glossary at hand to help keep things simple.

Throughout modern history, traditional bank loans have been the obvious, or even only, choice for small business owners.

But in recent years, with interest rates climbing, credit tightening up, and traditional financing getting more and more restrictive, many small business borrowers have turned to alternative financing options. 

No longer considered a “last resort,” alternative financing offers flexible funding options based on the needs of small business owners. This is evidenced by the recent explosion of the market, projected to grow at a compound annual growth rate (CAGR) of nearly 20% through 2030. 

And yet, for small businesses new to this world, the options and terminology can feel overwhelming.

At Nexi, we believe that everyone should be able to make informed decisions and choose the type of funding that works best for their business.

This glossary decodes the sometimes unfamiliar language of alternative financing, to help you navigate it with ease. You’ll find the terms divided into four sections, as they relate to different forms of financing: revenue-based financing (also known as “merchant cash advance”), reverse consolidation advance, small business line of credit, and invoice factoring. 

Revenue-Based Financing

Revenue-based financing gives business owners a lump-sum payment in exchange for an agreement to repay with a percentage of future sales.

This can be a great solution for business owners who have proven sales volume but don’t have the credit history to apply for a conventional loan. The quick access to cash allows for tremendous flexibility, as it can be used for anything at all, including expanding the business, buying equipment, or paying rent and payroll.

Unlike a bank loan, where the monthly payment is fixed, the payment amount is calculated from ongoing sales activity—if sales slow down, the payment is lower as well. 

The definitions below will provide clarity on terms specific to the world of revenue-based financing. If you’d like to read more, check out this foundational guide to revenue based financing.

Automated Clearinghouse (ACH) Services 

A network used for electronic payments and money transfers. ACH is the way that funders typically withdraw payments from a business owner’s accounts.


The company that provides funding by buying a portion of future receivables from the small business owner, or “seller.”

Cash Flow 

The amount of money that moves in (sales) and out (expenses) of a business. Cash flow is the primary criterion Nexi considers when deciding whether or not to approve funding.


An asset of value that a borrower offers a lender to secure a loan—often a requirement of traditional lenders. Funds via revenue-based financing are typically unsecured, meaning they do not require collateral.

Credit Card Processing Statement 

A document that provides detail on a business’ credit card transactions. Nexi uses these statements to assess credit card sales volume, which forms the base calculation of the funds provided.


Failure to repay the funds provided as agreed in the contract terms. Recourse for the funder and small business owner varies by contract. 

Factor Rate 

A percentage rate, typically between 10 and 50%, which is applied to the funded amount and determines the total repayment amount.

Funders use several criteria to decide on a final factor rate, balancing the risk of default and optimizing for manageable repayments.

High-Risk Industry 

Industries that funders consider more likely to fail or have unstable revenue. A business that operates in a high-risk industry is less likely to get approved for revenue-based financing or receive favorable terms. 


The percentage of daily sales/revenues that the funder takes until the funds provided are paid back in full.

Origination Fee/Finance Fee

A fee charged by funders for processing a new revenue-based financing deal.

Purchase Price 

The amount of funds provided to the borrower.


An adjustment of the repayment or holdback rate if the business’ sales fluctuate significantly.


The daily or weekly repayment amount that is withdrawn from the small business’s bank account. 


The scheduled window for repayment of funds. As opposed to “term,” which is used exclusively for loans. 

Working Capital 

The money that businesses use in their day-to-day operations. A funder provides working capital in exchange for a portion of future sales.

Reverse Consolidation 

If a borrower has gone through a financial rough patch, or they need an awful amount of cash, they may stack up several revenue-based advances at the same time.

The effect of these layered deals can place a lot of strain on operating cash flow—that’s where a reverse consolidation (RC) comes in. This solution allows a business to extend their repayment schedule and reduce weekly repayment obligations by up to 50%. 

Reverse consolidation is directly connected to revenue-based financing: you can’t have a reverse consolidation without having concurrent revenue-based financing deals.

We’ve defined many of the terms specific to RC below. If you’re looking for a deeper dive, take a look at this guide to reverse consolidation.

Cash Flow

The total amount of money that transfers into (sales) and out of (expenses) a business. Improved cash flow is a primary benefit of reverse consolidation.

Consolidation Company  

The company that provides the reverse consolidation advance.

Daily Payment

The regular payment made to the consolidation company, which is typically smaller than the sum of the payments from the revenue-based financing deal.

Lump Sum 

The initial amount that the consolidation company provides to the borrower for paying down their revenue-based financing deals.

Revenue-Based Financing

Revenue-based financing gives business owners a lump-sum payment in exchange for an agreement to repay with a percentage of future sales.

New Financing

The total amount of funds provided to a small business through an RC. This amount is typically sufficient to cover all outstanding repayment obligations.

Repayment Period 

The time frame within which the business is expected to repay the consolidation company.

Total Repayment Amount 

This is the sum total that the borrower is expected to repay over the term of the reverse consolidation. It includes the principal (original amount borrowed) plus any associated fees and interest.

Repayment Schedule 

This indicates how frequently the borrower is expected to make payments towards the reverse consolidation. It could be daily, weekly, monthly, or another pre-agreed time frame.

Repayment Term

This refers to the duration of time over which the borrower is expected to repay the RC. Typically, it ranges from a few months to 1 ½ years.

Weekly Repayment Rate 

In the context of a weekly repayment schedule, this is the amount that the borrower is required to pay each week towards the settlement of the RC

Working Capital

Funds available to a business for everyday operations. RCs help increase working capital by reducing regular payments from a revenue-based financing deal.

Small Business Line of Credit

The small business line of credit (LOC) is the most similar to traditional financing. It’s a short-term funding vehicle that gives you immediate access to a pre-approved sum of money, but you only repay what you use

A small business line of credit functions as a cash reserve that you can draw on whenever you need it—interest only accrues on money that you’ve used.

Your repayments start after withdrawal and are calculated on the money you’ve withdrawn. LOCs are considered loans and will apply to your overall debt load.   

Below, you’ll find a list of definitions for terms used when referring to a small business line of credit. You can also go over this small business LOC overview.

APR (Annual Percentage Rate) 

The annual rate charged for borrowing, which represents the yearly cost of funds over the term of a loan, including any fees or additional costs.


The business or individual who is approved to use funds up to the specified credit limit.

Credit History 

A record of a borrower’s ability to repay debts and demonstrate responsibility in repaying loans.

Credit Limit 

The maximum amount a borrower can use or borrow under a small business line of credit agreement.

Credit Score

A number based on the credit analysis of a business (or individual), used by lenders to assess credit risk and determine interest rates. There are three credit reporting agencies in the U.S. that provide credit scores: Experian, Equifax, and TransUnion.


Failure to meet the terms of the small business line of credit agreement, usually by missing payments.

Draw Period 

The time frame during which a business can withdraw funds from its line of credit.


Extra charges associated with a line of credit, which can include annual fees, late payment fees, and transaction fees.

Fixed Interest Rate

An interest rate that remains the same throughout the term of the small business line of credit.

Interest Rate

The percentage of a loan amount a lender charges for borrowing, expressed as a yearly rate. It isn’t synonymous with APR, but it is part of the APR calculation.

Minimum Payment

The smallest amount a borrower must pay, typically monthly, to keep the account in good standing.


The original amount of money borrowed, excluding interest and fees.

Repayment Period 

The time frame during which a business must repay any funds drawn from the LOC.

Unsecured Line of Credit 

A LOC that does not require collateral but generally has higher interest rates due to the increased risk to the lender.

Variable Interest Rate 

An interest rate that can fluctuate over the term of the LOC, usually tied to an index such as the U.S. prime rate.

Invoice Factoring

In short, invoice factoring allows you to receive the majority (up to 90%) amount of your outstanding invoices upfront, and the collection of those invoices becomes the responsibility of the factoring company. 

The beauty of invoice factoring is that it speeds up payments for work that you’ve already completed and billed to your clients.

If your business relies on invoices for payment, invoice factoring can be extremely helpful, especially if you spend much of your time chasing clients or if you have to wait long periods for payment.

Once the client pays the invoice, the factoring firm subtracts their factoring fee and pays you the remainder.   

When you factor invoices, the money doesn’t count toward your debt load, and you’re free to use the money however you see fit.

Trusting another company to collect your invoices can feel like a big leap, so make sure that you feel comfortable working with that company.

Below, you’ll find a list of definitions for common invoice factoring terms. If you’d like to learn more about how it could help your business, check out this article

Accounts Receivable

Money that customers owe to a company.

Advance Rate 

The percentage of the invoice amount that the factoring company initially gives to the small business. The balance, minus the factor’s fee, is paid when the invoice is paid in full.


The small business that sells their invoices to the factoring company or factor. Not to be confused with “customer” or “debtor.”


The limit that the factoring company sets for funding individual customers/debtors holding your outstanding invoices.

It’s a risk management practice that prevents a single customer from representing too large a percentage of your total funding limit.


The entity that purchased products or services from the small business and is responsible to pay the invoice held by the factor. Synonymous with “debtor.”


The customer who owes payment on an invoice.

Factoring Agreement 

The contract between the factoring company and their client, outlining the terms of service, fees, and responsibilities.

Factoring Company (Factor) 

A financial institution that buys a company’s outstanding invoices at a discount.

Factoring Fee 

The fee charged by the factoring company for its services, usually a percentage of the total invoice amount.

Factored Invoice 

An invoice that has been purchased by a factoring company.

Funding Period

The time it takes for a factoring company to provide funds after the invoice has been received and verified.

Funding Limit

The maximum value that a factor can offer on a given batch of invoices. 

Non-Recourse Factoring 

A type of factoring where the factor assumes the risk of non-payment of invoices.


The remaining funds that the small business receives from the factor once the customer/debtor has fully paid the invoice and the factor has subtracted their fee. 


The difference between the total invoice amount and the advance rate, held by the factoring company until the invoice is paid in full.

Spot Factoring

The process of factoring a single invoice as a one-time transaction, rather than factoring a volume of invoices on an ongoing basis.


The process by which a factoring company confirms that an invoice is accurate and due.

Alternative Financing Gives You Control and Flexibility

Revenue-based financing, reverse consolidation, small business lines of credit, and invoice factoring aren’t what you’ll find at your nearest bank branch.

They’re creative solutions that give small business owners new, transparent ways to manage their cash flow—that’s what alternative financing is all about.

Banks and other traditional lenders are rigid and tend to think inside the box. For some small business owners, lending with a bank is an option. For most, it’s an exercise in frustration and rejection.

Nexi is an alternative financing company that exists to help fill the gap left by conventional lenders. 

We strive to find the alternative financing option that works best for business needs and goals—we want to see you reach them all. After all, if you succeed, so do we.

Contact us today, and let’s get ready to work together.

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