Accounts Receivable Factoring Terms - helpful frequently used terms that allow a potential client the ability to understand the factoring agreement and the invoice factoring process.

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Glossary of Factoring Terms

Account Debtor - The customer of a factor's client. The company owing the money due on the invoices. Also known as the customer.

Accounts 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 days.

Accounts 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.

Acquisition - A loan to assist in acquiring the assets of a business.

Asset 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.

Credit - A privilege granted for the purpose of extending time to make payment on a debt.

Customer - The client's customer. The company which pays the money due under the factored invoice. Also known as the account debtor.

Dilution - 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.

Due Diligence - Background check and research conducted by the factor to assess validity of a prospective factoring client and that client's customers.

Factor - The funding source for the client. The company which purchases the accounts receivable (invoices) from the client.

Factoring - The selling of a company's accounts receivable to a third party, in order to obtain funding.

Factors 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.

Factors 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 invoices.

Factors 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.

Factors Client - The business which sells its accounts receivable to the factor.

Factors Fee - The fee the Factor Charges for funding the clients A/R.

Factors 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.

Factors 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.

Factors Services - Credit Analysis, Credit Guarantees and Collection Management.

Factors 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.

Recourse - 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.

Working 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.

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