of Factoring Terms
- The customer of a factor's client. The company owing the money
due on the invoices. Also known as the customer.
Receivable - Trade credits; an amount owed by an account
debtor by the act of granting short term unsecured credit in lieu
of cash for goods or services. Considered a liquid asset on the
balance sheet and generally expected to be paid in less than ninety
Receivable Financing - A short-term financing technique
for working capital purposes, loans to a company are collateralized
by a security interest in a company's account receivables. Account
receivables serve as collateral, and loans are made on a percentage
of eligible assets pledged.
- A loan to assist in acquiring the assets of a business.
Based - A business loan where the borrower pledges as
collateral for the loan any assets used in the conduct of his
or her business. Funds are used for business related expenses.
All asset-based loans are secured.
- A privilege granted for the purpose of extending time to make
payment on a debt.
- The client's customer. The company which pays the money due
under the factored invoice. Also known as the account debtor.
- The amount of risk associated with collection of the accounts
receivable. It can include returns, charge-backs, trade allowances,
concentrations, slow pay, bad debt and other perceived risk.
Diligence - Background check and research conducted by
the factor to assess validity of a prospective factoring client
and that client's customers.
- The funding source for the client. The company which purchases
the accounts receivable (invoices) from the client.
- The selling of a company's accounts receivable to a third party,
in order to obtain funding.
Acknowledgment Form - A form sent to the client's customer
by the factor, confirming that the client's invoice does exist
and that the customer will remit the payment due under that invoice
to the factor.
Advance - The money the factor sends to the client up
front, after the verification process is complete, and before
the factor receives its money from the client's customer. The
advance is figured as a percentage of the face value of the factored
Charge-Back - An amount of money that is owed to the
factor and is deducted or Charged-Back from the reserve or availability
of the line due to an agreed upon non-payment by debtor clause
in the Factors contract.
Client - The business which sells its accounts receivable
to the factor.
Fee - The fee the Factor Charges for funding the clients
Reserve - A deposit maintained by the factor, to guard
against disputes between the client and the customer, and to guard
against bad debt losses due to customer non-payment. This is the
money retained by the factor when the advance is sent to the client.
The Reserve is sent to the client after the customer has paid
the factor the money due on the invoice.
Reserve Release - The amount of money released from the
Factors Reserve once payment has been received and credited. The
Reserve Release may be less any charge-back or fees associated
with the services.
Services - Credit Analysis, Credit Guarantees and Collection
Verification - Process by which the factor verifies that
the product or service provided by the client was received and
accepted by the customer, and that the customer intends to pay
the factor the money due under the invoice. This process takes
place before the factor sends the advance to the client.
Purchase Order Financing - In this type of trade financing, money is advanced against a purchase order for finished goods or value added products to finance the manufacturing of the item. Once the goods ship to the customer and invoiced the transaction is closed out when the factoring company buys the invoice.
- In this type of factoring, the risk of customer non-payment
remains with the client. If the client's customer is financially
unable to pay the money due under the invoice, the factor has
recourse against the client for that money. The factor is protected
against customer non-payment.
Capital - Loans for business expenses such as, advertising,
wages, rents, and other operational costs. Often these loans are
secured by tangible assets or, in the case of long-standing good
credit, by the "full faith and credit" of the company.