Glossary
Accounts Receivable: Money owed to a business for products or services delivered to a business’ customer on credit. This type of transaction is oftentimes documented through the creation of an invoice. Accounts Receivables are typically included as assets on a company’s balance sheet.
Accounts Receivable Factoring or Debt Factoring: This financial strategy allows companies to leverage accounts receivables in order to quickly generate cash. Factoring companies advance businesses money for part of the accounts receivable (the customer invoice). The factoring company then collects the debt and pays the remainder of the invoice back to the business, minus a small factoring fee.
Advance Rate or Advance Percentage: The rate a factoring company pays a business on the invoices it purchases. This rate typically ranges from 70%–90% of an invoice’s value.
Bad Debt/Charge Back: The amount a factoring company writes off if an invoice is not paid. In the case of a “recourse” factoring agreement between the factoring company and the business, if an invoice is not paid, the business must pay the factoring company back. If the factoring company is working through a “non-recourse” agreement, the business does not have to pay the factoring company back.
Client or Account Creditor: This is YOU — the provider of products or services to a customer.
Customer or Account Debtor: Your customers — the purchasers of your products or services.
Due Diligence: A factoring company typically checks the background of a new debtor or the accounts receivable account it buys from its clients. This background check includes a review of the supporting documentation, such as your application and invoices.
Factor: The company that factors invoices or accounts receivables for a client.
Factoring: The process of selling accounts receivables or invoices to a factoring company to generate immediate cash flow.
Factoring Fee: A fee that the client must pay to the factoring company after an invoice or accounts receivable is purchased.
Initial Fee or Discount Fee: The fee a factor charges on each “advanced” invoice. The initial fee or discount fee is based on a fixed percentage of each invoice amount.
Invoice: The invoice represents the documentation of the products or services provided to a business’ customers
Non-Recourse Invoice Factoring: In a non-recourse invoice factoring agreement, the factor assumes the entire credit risk. Should your customer not pay due to ANY “credit” reason (including bankruptcy), then the factor will assume the entire debt, even if it becomes uncollectable. If your customer doesn’t pay the invoice because it is a disputed transaction, then you will be asked to buy back the invoice even with non-recourse factoring.
Recourse Invoice Factoring: Recourse invoice factoring means that after an agreed amount of time (typically 60, 75 or 90 days), if your customer doesn’t pay their invoice, you will be responsible to buy your invoice back from the factor.
Reserve: The amount that is not advanced to the client when the factor purchases the invoice or accounts receivables. The reserve, which is held in escrow during the factoring process, is typically paid to the client (minus any service fees) after the customer pays the invoice to the factor.