UNDERSTANDING FACTORING TERMS
In case you’re new to factoring, we thought an explanation of some common terms might come in handy:
Account Debtor: Also known as the customer. A company that purchases products or services from the factoring client and who will pay the invoice that is factored.
Accounts Receivable: Money owed to a business by its clients, usually by issuing an invoice that is due to be paid within a certain period of time.
Accounts Receivable Factoring: Another term for factoring.
Advance: This is the amount of money that the factoring company advances to your company when it buys the invoice. The advance is often a percentage of the total amount of the invoice and is paid shortly after the invoice is purchased.
Advance rate: The percentage of the invoice that will be advanced. Many factors advance between 80% and 90% of the total amount of the invoice.
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 collection agency.
BOL (Bill of Lading): A shipping document used in the transportation of goods, often issued by the shipper.
Client: A factoring client who sells their invoices to a factor.
Collections: Payments that the factor receives for invoices that were factored.
Credit Limits: The financial limit that the factor places on each of your customers. This is normally based on their credit rating and payment history.
Customer: A company that purchases products or services from the factoring client and who will pay the invoice that is factored by the client.
Debtor: An entity that owes a debt to another entity.
Dispute: A situation where a customer does not pay an invoice due to a problem with the product or service.
Factoring: A type of business funding where a company expedites payment for its accounts receivable by selling its invoices to an intermediary called a factoring company.
Factoring Company: A company that provides factoring services and purchases accounts receivable.
Factoring Fee: The fee that the factoring company charges to finance your invoices. The fee is often a discount on the total amount of the invoice and is expressed as a percentage.
Freight Broker: An intermediary between a shipper and a carrier that manages and coordinates shipments of freight.
Freight Factoring: A specialized form of factoring that is offered to motor carriers and freight brokers.
Funding Limit: This is the maximum amount of money that a factor can provide for your account.
Invoice Factoring: Another term for factoring.
Non-Recourse Factoring: A form of factoring where the factoring company may absorb credit losses that result from a customer defaulting on an invoice. The types of credit losses that are absorbed vary by the factoring company. The most common type of credit loss that is covered is due to bankruptcy or declared insolvency.
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 factoring company’s payment address.
Proof of Delivery (POD): A document that shows goods were received.
Rebate: Fund amounts that are paid 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.
Recourse Factoring: A form of factoring where the factoring company does not absorb any credit losses that result from a customer defaulting on an invoice. The client assumes credit risk on invoices that aren’t collected within a certain number of days.
Reserves: A specified amount of funds, often expressed as a percentage of the funding line that is used to cover possible bad debt expenses and payment shortages.
UCC: The Uniform Commercial Code is a set of standardized legal guidelines defining how sales and commercial transactions are to be carried out in the U.S.
UCC Lien: It is a security interest given by the owner of the property to secure debt. Factoring companies use liens that are defined in the UCC.
Verification: The process where a factoring company verifies the validity value of a client’s invoice with the customer.
Working Capital: A financial term measuring liquidity available in a business.