An educational illustration of the Right to Receive in a merchant cash advance, showing $100,000 funded and a $139,000 RTR at a 1.39 purchase multiple. Educational example only.
In commercial finance, a merchant cash advance is structured as the purchase of future business receivables rather than a traditional loan. The central term in this structure is RTR, which stands for Right to Receive.
What the Right to Receive Means in a Merchant Cash Advance
In a merchant cash advance transaction, the buyer is not lending money. The buyer is purchasing the contractual Right to Receive a specified dollar amount of the business's future receivables. The seller transfers that right in exchange for an upfront purchase price. Because the transaction is a purchase, it is defined by two figures: the purchase price, which is the capital funded, and the Right to Receive, which is the total receivables acquired.
How the Right to Receive Works: $100,000 Funded and $139,000 RTR
Assume a commercial finance provider funds $100,000 to a business. In exchange, the provider purchases $139,000 of the business's future receivables. The purchase price is $100,000 funded, and the Right to Receive is $139,000 RTR. The $139,000 RTR represents the total fixed dollar amount the buyer is contractually entitled to collect from the business's future revenue. The relationship between the funded amount and the RTR reflects a 1.39 purchase multiple applied to the receivables acquired.
Why the Right to Receive Is Not an Interest Rate
The 1.39 purchase multiple is a pricing term for the purchase of receivables, not an interest rate, and the transaction does not create a debt obligation. For accounting, compliance, and due diligence purposes, tracking the Right to Receive allows commercial finance entities and auditors to monitor the lifecycle of the purchased receivables and measure remaining exposure on the asset.
Equipment finance turns machinery and vehicles into working capital by lending against the asset itself.
What Is Equipment Finance? The Short Answer
Equipment finance is lending secured by the asset it funds. A business acquires a machine, truck, or device, and the lender holds a first position lien on that specific asset, identified by serial number. If the business fails to pay, the lender repossesses and sells the asset. The collateral is not a promise. It is iron.
Two arrangements cover the market. A term loan where the business owns the asset and the lender holds the lien. And a lease where the lender owns the asset and the business pays for the right to use it.
Why Banks Left Small Ticket Equipment
The same economics that pushed banks out of merchant cash advances and factoring pushed them out of small ticket equipment. A 75,000 dollar machine requires the same title work, lien search, and asset tracking as a 7 million dollar fleet. The revenue is a fraction. The work is not. Banks kept the large fleet deals and left the single asset deals to nonbank lenders.
How a Lender Underwrites the Asset
Equipment underwriting asks two questions. Can the borrower pay, and what is the asset worth if it must be sold. Lenders size exposure against orderly liquidation value, not replacement cost or book value. Advance rates typically land between 70 and 85 percent of that value for strong asset classes.
The asset class matters more than the price tag. A standard skid steer from a major manufacturer has a deep resale market. A custom built packaging line has almost none. Lenders price the depth of the secondary market, because that market is the exit.
Term must fit useful life. A lender will not write a 7 year term against an asset that wears out in 4.
Lease Types That Change the Risk
Lease type decides who carries residual risk. In a finance lease, the business effectively buys the asset over time, and the lender's exposure behaves like a loan. In a true lease, the lender takes back the asset at term end and must remarket it. The lender now carries the residual value risk, the bet that the asset will be worth what was assumed.
That residual bet is why true lease underwriting includes a view of the future secondary market, not just today's value.
Where Equipment Finance Sits Inside Specialty Finance
Equipment finance is the hard asset side of specialty finance. Where a merchant cash advance underwrites future receipts and factoring underwrites existing invoices, equipment finance underwrites tangible value with a serial number and a resale market. Duration is longer, tied to useful life, and the exit runs through remarketing rather than collection.
Wrapping Up the Series
Read together, the four parts of this series cover the specialty finance market. Part 1 defined the umbrella: nonbank capital underwriting what banks stopped pricing. Part 2 covered future receipts. Part 3 covered existing invoices. Part 4 covers hard assets. The common thread is the same in every segment: underwrite the asset or the cash flow itself, keep the ticket small, keep the duration honest, and let live data do the monitoring.
The Bottom Line
So what is equipment finance? It is lending secured by the asset it funds, sized against orderly liquidation value, and priced on the depth of the resale market. The details that matter are the ones on the file: the serial number, the lien position, the advance rate, and the lease type.
Disclaimer. This post is for informational purposes only and is not financial or legal advice. Consult a professional before making financial decisions.
Invoice factoring converts unpaid invoices into immediate working capital by selling existing receivables at a discount.
What Is Invoice Factoring? The Short Answer
Invoice factoring is the sale of existing accounts receivable at a discount. A business that has already delivered goods or services sells its unpaid invoices to a factor. The factor advances a percentage of the face value today, collects directly from the customer when the invoice matures, and remits the remaining reserve minus a fee.
It is a purchase, not a loan. And it is the other half of the receivables story. A merchant cash advance buys future receipts. Invoice factoring buys invoices that already exist.
Why Invoice Factoring Exists
The interesting part of factoring is who gets underwritten. A bank looks at the seller. A factor looks at the party that pays the invoice, called the account debtor. If the seller is a small staffing company with a weak balance sheet but its invoices are owed by a national hospital system, the factor is underwriting the hospital system.
That shift in focus is why factoring exists. Strong customers and weak sellers produce strong receivables, and strong receivables are the collateral.
How a Factor Underwrites the Receivables File
Factors read the aging report the way an MCA provider reads a bank statement. Three items matter most.
Dilution. Credits, returns, disputes, and write offs shrink the face value of the pool. A pool with high historical dilution gets a lower advance rate or a rejection.
Concentration. If one account debtor makes up more than 20 to 25 percent of the pool, the factor is effectively underwriting a single credit. Limits are set per debtor.
Age. Invoices past 60 or 90 days rarely qualify. The longer an invoice sits unpaid, the lower the probability it pays in full.
Verification and notice of assignment complete the file. The factor confirms the invoice is real and undisputed, then notifies the account debtor to pay into a control account. From that point, collection runs through the factor, not the seller.
Recourse Versus Non Recourse in Invoice Factoring
Recourse and non recourse define who carries the risk of non payment.
Under recourse factoring, if the account debtor fails to pay within the agreed window, typically 60 to 90 days, the seller must buy the invoice back. The factor carries dilution and fraud risk. The seller keeps the credit risk.
Under non recourse factoring, the factor assumes the insolvency risk of the account debtor. Note the precision. Non recourse usually covers insolvency only. A customer that disputes the invoice or simply pays slow still leaves the seller on the hook. That distinction is where most misunderstandings of the product live.
Where Factoring Sits Inside Specialty Finance
Invoice factoring sits between the merchant cash advance and equipment finance. It is existing receivables rather than future receipts, and self liquidating collateral rather than hard assets. Duration is short, tied to the payment terms of the invoice, and the collateral converts to cash on a known date.
Together with Part 1 and Part 2, factoring shows the rest of the receivables business. It covers future receipts, existing invoices, and the underwriting rules that price each one.
The Bottom Line
So what is invoice factoring? It is the purchase of existing receivables, underwritten on the strength of the party that pays, not the party that sells. The details that matter are the ones inside the aging report: dilution, concentration, age, and the recourse line.
Disclaimer. This post is for informational purposes only and is not financial or legal advice. Consult a professional before making financial decisions.
