Definitions and explanations of invoice factoring terminology.
Account Debtor: the company to which goods or services were provided that is responsible for payment of associated invoices. Also known as the customer.
Accounts Receivable: amounts owed to a company by its customers for goods delivered or services provided. Classified as a current asset on the balance sheet and generally expected to be collected within 90 days.
Accounts Receivable Factoring: another term for invoice factoring.
Accounts Receivable Financing: a financing solution in which a company’s accounts receivables serve as collateral. Loans are typically made on an agreed upon percentage of the accounts receivable balance, also referred to as the borrowing base.
Advance: the cash amount initially provided by an invoice factoring company upon an invoice purchase. This amount is typically calculated by multiplying the contractual advance rate times the gross invoice value.
Advance Rate: The agreed upon percentage that is used to determine the dollar amount of the invoice that will be advanced. Advance rates can range anywhere from 70% – 100%.
Aging: a detailed accounts receivable report by customer, showing the age of outstanding invoices. The report is typically broken into 30 day increments such as 0-30, 31-60, 61-90, and 91+ days outstanding.
Asset Based Loan (ABL): a secured business loan that is collateralized by an organization’s assets.
Bad Debt: accounts receivables that have minimal chance of being collected and are often written off.
Bill of Lading (BOL): a legal document between a shipper and carrier which serves as proof of delivery and details the type, quantity, and destination of the shipment. The bill of lading requires 3 signatures: that of the shipper, the carrier, and the receiver which serve as proof that the shipper released the goods, the carrier took possession of them, and the receiver ultimately received the goods.
Broker: a third party that can be used by companies to help them locate a suitable funding source.
Charge Back: a term used to describe a client’s obligation resulting from when a factoring company advances funds against an invoice that is later determined to be uncollectible. The result is that the client must reimburse the factoring company for the amount of the obligation.
Client: a company under contract to sell and assign their invoices to a factoring company.
Collateral: any asset that serves as security for a debt or obligation.
Collections: payments received by a factoring company for factored invoices.
Concentration: often expressed as a percentage, it refers to the extent to which a single account debtor contributes to a client’s total portfolio. Factoring companies utilize concentration limits for individual account debtors as a risk management tool.
Confidential Factoring: also known as non-notification factoring in which a client’s customers are not notified that the client is factoring.
Credit Limits: the financing dollar limit placed on each of a client’s customers by an invoice factoring company. These limits are determined with consideration towards a customer’s credit rating and concentration risk.
Customer: the company to which goods or services were provided that is responsible for payment of associated invoices. Also known as the account debtor.
Dilution: often expressed as a percentage, this is the rate of non-collected payments for a client’s entire factoring portfolio. A higher rate of dilution equates to an elevated perception of risk by the factoring company.
Disapproval: a notification that an invoice cannot be funded.
Dispute: when a customer does not remit payment on a factored invoice because of a purported problem with the service or goods.
Due Diligence: work performed by a factoring company to assess the risk and eligibility of a potential client and their customers. Includes items such as background checks, credit reports, and UCC searches.
Factor: the funding source which purchases a client’s invoices. Also know as a factoring company.
Factoring: a commonly used method of financing that entails the selling of accounts receivable, or invoices, by a business to a finance organization in exchange for immediate cash.
Factoring Company: the funding source which purchases a client’s invoices. Also known as a factor.
Factoring Fee: the charge that a factoring company assesses to purchase a client’s invoice. This charge represents the discount at which the invoice is being purchased in relation to its gross value and is usually expressed as a percentage. For example, a 2% factoring fee would indicate that the factoring company is purchasing the invoice at a 2% discount, or 98% of the gross invoice value.
Financial Statements: a company’s income statement and balance sheet showing revenues, expenses, assets, liabilities, and owner’s equity.
Fraud: any illegal or otherwise dishonest scheme whereby a client or customer attempts to mislead or steal from a lender.
Funding: a common term primarily used to refer to an advance made by a factor.
Funding Limit: the maximum dollar amount that an invoice factoring company will have uncollected with a single client.
Invoice Factoring: a commonly used method of financing that entails the selling of accounts receivable, or invoices, by a business to a finance organization in exchange for immediate cash. Also known simply as factoring.
Letter of Intent (LOI): another name for a proposal or term sheet that includes the basic terms offered by a factoring company.
Net Funds Employed: the outstanding (uncollected) balance on an individual client at any given time.
Non-Recourse Factoring: a variation of factoring where the factor assumes the credit risk relating to collection of the invoice. Uncollectable invoices that are covered vary by factoring company but often include defaults due to bankruptcy or insolvency.
Notice of Assignment: a legal notification informing a client’s customer that payment of the client’s invoices must be made to the factoring company at the specified address.
Notification: the act of informing a customer of their legal obligation to pay the factoring company which is evidenced by the issuance of a Notice of Assignment.
Personal Guaranty: a contract by the owners to accept personally liability for any debts or obligations of the client company with respect to the factoring company.
Proof of Delivery: documentation used by a factor during the verification process to verify receipt of goods or services by a customer.
Purchase Order Financing: a form of financing whereby funds are advanced to a client against an existing purchase to assist the client in fulfilling that very same purchase order.
Rebate: The amount remitted to a client once their factored invoices are paid in full by their customers. It typically consists of amounts that were not initially advanced less any factoring fees.
Recourse Factoring: a variant of factoring in which the client assumes the risk relating to non-payment of the invoice by their customer.
Recourse Period: the length of time in a recourse factoring arrangement after which a client is obligated to reimburse a factoring company for their customer’s non-payment. Typical recourse periods are 60 days, 90 days, or even longer in some cases.
Reserve: a deposit held by the factoring company to protect against disputes and bad debt losses. The reserve amount is typically the difference between the gross invoice value and the initial advance amount.
Reserve Release: payment of the reserve amount to a client after collection has been made in full by the factor.
Schedule of Accounts: a form used by clients to submit their customer invoices for funding.
Trade Credit: the privilege that companies grant their customers when they allow them to pay for goods or services at a future time. Trade credit is what gives rise to accounts receivable balances and payment terms such as “net 30”.
Uniform Commercial Code (UCC): the uniform set of laws concerning commercial transactions in the United States.
UCC Lien: the result of a lender filing public notice of their security interest in a client’s assets.
Underwriting: the performance of due diligence and theprocess of structuring the contractual terms for new factoring clients.
Verification: a process performed by phone, email, or review of supporting documentation by factoring company personnel to ensure the validity of a client’s invoice with the customer.