The following page has a glossary of factoring terms. If you want to understand how a factoring transaction works, please refer to this example.
Asset Based Loan (ABL): It is a short term loan that is secured by the company’s assets such as inventory, real estate, equipment or accounts receivable. Most are paid back when the asset that secures the loan is converted to cash through normal operations.
Account Debtor: Please see customer.
Accounts Receivable: Money that is owed to you by your customers, usually by issuing an invoice that is due to be paid within a certain period of time. A/R appears in the balance sheet as an asset since it’s considered to be near cash (i.e. due in 90 days or less).
Accounts Receivable Factoring: Another term for factoring. See factoring.
Advance: This is the amount of money that the factoring company advances to your company when they buy the invoice. The advance is often a percentage of the gross value of the invoice and is wired shortly after the invoice is purchased.
Advance rate: The percentage of the invoice that will be advanced. On average, most factors advance between 70% and 85% of the gross value of the invoice.
Audit: A review carried out by to ensure that the conditions of the factoring agreement are being met.
Bad Debt: Bad debt is debt that has a minimal or limited chance of being collected. Bad debt is often written off or sold to a collections agency.
Client: A factoring client who sells their invoices to the factor. Not to be confused with the term customer.
Collections: Payments that the factor receives for invoices that were factored or by invoices that flow through their lock-box system.
Concentration: The level for which a factor will fund a single customer in your portfolio. This is usually expressed as a percentage. Done as a risk management measure to ensure that a single account does not represent a large majority of your portfolio.
Contra Account: This occurs when two companies are customers and suppliers of each other. Financing these types of accounts are difficult.
Credit Limits: The financial limit that the factor places on each of your customers. This is often based on their credit rating and possible concentration issues.
Credit Protection: A facility that covers the client against the potential loss due to the non payment of an invoice. Often, this protection is provided by a credit insurance policy.
Credit Terms: A type of commercial sale which allows the customer to pay 30 to 60 days after an invoice is submitted. Terms are noted by preceding the number of days to pay with the word “Net” (i.e. Net 30 Terms). Invoices note their credit terms in the “Terms” field or the “Due by” field.
Construction Factoring: A specialized form of factoring that is designed to work with companies in the construction industry, usually construction subcontractors.
Confidential Factoring: A factoring facility where the customer is not notified that the client is factoring their invoices.
Current Account: The total amount of funds paid to you including any charges at any given time.
Customer: A company that purchases products or services from the factoring client and who will pay the invoice that is factored by the client.
Disapproval: An invoice that is not approved for funding.
Dispute: A situation where a customer does not pay an invoice due to a problem with the product or service.
Export Debt: Money that is owed to a client from a customer that is located overseas.
Factoring Company: A company that provides factoring services and purchases accounts receivable.
Factoring Charge: A charge made to administer your invoices, collect them and process them.
Factoring Fee: The fee that the factoring company charges to finance your invoices. The fee is often a discount on the gross value of the invoice and is expressed as a percentage that increases over time (e.g. 1.5% per 30 days).
Freight Bill Factoring: Also called freight factoring. Is a specialized form of factoring that is offered to transportation carriers and freight brokers.
Funding Limit: This is the maximum amount of money that a factor can provide to your account.
Funding Period: This is the time period that starts when the factor purchases the invoice and finished when the customer pays the invoice in full.
Invoice Discounting: Another term for factoring. See factoring.
Invoice Factoring: Another term for factoring. See factoring.
Lockbox: A bank treasury management system. It is desgined to receieve payments by mail and deposit them to an account as quickly as possible. Most bank lockbox systems also scan invoices and documents and provide online viewing and management systems.
Mechanics Lien: A security interest in the legal title of a property by subcontractors and suppliers who have provided labor/products to improve the property.
Medical Factoring: A specialized form of factoring that is designed to work with medical companies that bill third party private insurance companies, Medicare or Medicaid.
Non Recourse Factoring: A form of factoring where the factoring company will absorb any credit losses that result from a customer defaulting on an invoice. The types of credit losses that are absorbed vary by factoring company. The most common type of credit loss that is covered is due to bankruptcy or declared insolvency. See recourse factoring.
Notice of Assignment: A notice that is sent to customers informing them that the invoice has been factored and pledged as collateral. The NOA also informs the customer of the new payment address.
Purchase Order Financing: A type of funding that finaces the supplier costs associated with a purchase order. This type of funding can only be used when the PO is for purchasing finished goods. PO financing transactions are often settled using factoring financing.
Rebate: The funds that are wired to your account once your customer pays the invoice in full. These are funds that were not initially advanced. The rebate is often calculated by subtracting the factoring fees and the advance from the customer payment. See advance.
Reserve: A specified amount of funds, often expressed as a percentage of the funding line that is used to cover bad debt expenses and payment shortages.
Recourse Factoring: A form of factoring where the factoring company will not absorb any credit losses that result from a customer defaulting on an invoice. See non recourse factoring.
Reverse Factoring: A form of factoring where a (usually larger) company finances its receivables through an intermediary, to pay suppliers faster. This is done to favor suppliers and allow them to benefit from the credit of the larger clients. The intermediary finance company handles supplier payments on behalf of the client.
Schedule of Accounts: It’s a form that many client’s use to submit their invoices for funding to the factoring company.
UCC: Stands for Uniform Commercial Code. It is a uniform act that harmonizes the law of sales and commercial transactions in the 50 states.
UCC Lien: It is a security interest given by the owner of property to secure debt. Factoring companies use liens that are defined in the UCC.
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