Invoice Factoring Company Terminology
Factoring is the process whereby a company sells its accounts receivable to a factor at a discount and receives cash.
IMPORTANT FACTORING TERMS:
Many words and phrases commonly found in the world of commercial factoring are not common in day-to-day business. Below is a list of common commercial finance terms and their respective definitions:
ACCOUNT CREDITOR: The factor's client-the company selling its accounts receivable for cash.
ACCOUNT DEBTOR: This is the customer of our client or the Account Creditor's customer. The account debtor is the company that has purchased a product or service from the factor's client-and owes money to the client per an invoice.
ACCOUNTS PAYABLE: The amount a company owes for goods and services it has received-but for which it has not yet paid.
ACCOUNTS RECEIVABLE: The amount owed by a business to your company for goods or services already rendered and invoiced. The amount owed is evidenced by an invoice specifying goods or services provided and agreed-upon payment terms. Accounts receivable are considered an asset on your balance sheet.
ACCOUNTS RECEIVABLE AGING REPORT: A report showing how long invoices from each customer have been outstanding.
ACCOUNT RECEIVABLE FUNDING: A short-term financing technique used to generate working capital. Account receivable funding is generally collateralized by a security interest in the company's accounts receivable.
ADVANCE RATE: The percentage of the factored invoice advanced to a client upon initial invoice funding. The advance rate is typically expressed as a percentage of the total invoice amount. Advance Rates usually range from 70-90%.
ARTICLES OF INCORPORATION: A document filed with a U.S. state by the founders of a corporation. After approving the articles, the state issues a Certificate of Incorporation. These two documents then become the Charter of Incorporation.
ASSET: Anything owned by a business that has commercial or exchange value. A company's assets might include real estate, equipment, inventory, intellectual assets (such as copyrights or trademarks) and accounts receivable.
ASSET BASED LOAN: A business loan in which the borrower pledges as loan collateral any assets used in the conduct of his or her business. Funds are used for business-related expenses. All asset-based loans are secured.
BAD DEBT: Any delinquent debt written off as not collectible.
BALANCE SHEET: A financial statement showing a business's current financial condition. It lists assets, liabilities and net worth. On a balance sheet, assets are equal to liabilities plus net worth.
BILL OF LADING: A shipping document giving instructions to the company transporting the goods.
BILL OF SALE: A document used to transfer the title of certain goods from seller to buyer.
BROKER: An individual who pairs clients in need of cash with appropriate financial entities, including factors.
CASH FLOW: The flow of cash into a business in the form of revenues and cash receipts minus the out flow of cash from a company in the form of expenses and cash outlays.
CLIENT: A business that sells its accounts receivable to the commercial factoring company.
COLLATERAL: Anything of value (accounts receivable, inventory, machinery, equipment, real estate, etc.) pledged as security to ensure re-payment of an obligation. Collateral is promised to a funding source until funds are repaid. If the obligation is not repaid, the funding source has the right-by law-to seize the collateral.
CONCENTRATION: When a large percentage (usually 15% or greater) of one client's accounts receivable are due from a single customer.
CORPORATION: A legal entity, chartered by a U.S. state or the federal government, separate and distinct from the persons who own it. Regarded by the courts as an "artificial person," it may own property, incur debts, sue or be sued.
CREDIT: The privilege of extending time allowed to make payment on a debt by a vendor to its customer. Credit also includes the amount of dollars covered by the privilege. The fact that companies provide goods and services to other companies on credit is the reason the factoring business exists.
CREDITOR: Whoever is owed payments on a debt by a debtor.
CUSTOMER: Also known as the account debtor. The entity that owes money to our client and that will ultimately pay the factoring company for invoices purchased.
DEBTOR: Whoever owes something and makes payments to a creditor.
DEFAULT: The omission or failure to perform or fulfill a legal duty, obligation, or promise (such as paying a debt).
DISCOUNT FEE: This is the fee charged by the factoring company for performing factoring services. Discount fees are typically time-sensitive and are usually a flat, fixed percentage of the total invoice, typically calculated in 30-day increments.
DILUTION: The amount of risk associated with the collection of accounts receivable due to returns, charge-backs, trade allowances or other deductions taken by account debtors. The amount of dilution will affect the advance rate provided by the factor.
DUE DILIGENCE: The background check and research conducted by the factor to assess the validity of a prospective factoring client (and that client's customers) before officially entering into a commercial factoring agreement. Due diligence generally involves credit checks, appraisals, UCC searches, lien searches and/or on-site visits with clients.
FACTOR: The accounts receivable funding source for the factoring client. The factor is the company that purchases the accounts receivable (invoices) from the client.
FACTORING: The sale of a company's accounts receivable invoices to a factor to obtain working capital. Also referred to as receivables factoring, invoice factoring, bill factoring, accounts receivable factoring, account receivable funding and invoice discounting.
FACTOR'S ADVANCE: Same as an Advance except expressed as a dollar amount. It is the money the factor sends to the client immediately after invoice verification is complete. The advance is figured by multiplying the advance rate by the face value of the factored invoice. The advance is considered a down payment by the factor for the purchase of the client's accounts receivable.
FACTOR'S FEE: Same as the Discount Fee. The fee the factor charges for funding the client's accounts receivable. The fee includes an assortment of services performed by the factor including; advancing funds, credit work, collection and other accounts-receivable management services.
FACTOR'S RESERVE: Same as the Reserve. The difference between the face amount of a factored invoice and the amount advanced to the client by the factor. The reserve balance is sent to the client periodically after the customer has paid the invoice and after the reserve account has been reconciled to reflect all factor charges, including the factor's fee.
FACTOR'S RESERVE RELEASE: The amount released from the factor's reserve once account-debtor payments have been received and credited by the factor. The reserve release is generally equal to the invoice amount less the advance amount, any charge-backs, other deductions, any factor fees or other costs associated with the factoring service.
FACTORING SERVICES: Factoring services include: funding advances, account debtor credit analysis, credit insurance, collection management and accounts receivable management.
FACTOR'S VERIFICATION: The process by which the factoring company verifies that the client has provided its product or service to the customer. Factors verify that the customer received and accepted the product or service and that the customer intends to pay the factor the money due under the invoice. This process normally takes place before the factor purchases an invoice and advances cash to the client.
FICTITIOUS NAME: A legal document filed with the appropriate State agency when an entity uses a name other than their own official corporate name to operate a business.
INVOICE: A legal debt instrument indicating the amount due from a customer to pay for delivered goods or services.
NON-RECOURSE FACTORING: A type of commercial factoring in which the risk of customer non-payment is borne by the factor. If the client's customer does not pay, the factor generally does not have recourse against the client for payment of the invoice. UCVC offers both non-recourse and recourse products.
PROFIT AND LOSS STATEMENT: A financial statement showing a record of a business' income and expenses.
RESERVE OR HOLDBACK: Amount not immediately provided to the company factoring its accounts receivable. Usually expressed as a percentage of the total invoice amount. Since the reserve and the advance equal 100% of the invoice (Advance Rate + Reserve = 100% or Total Invoice Amount), the reserve can be calculated by subtracting the advance rate from 1. If a company has an 80% advance rate, the reserve or holdback is 20% of the invoice's face amount, which is transferred to the client (less the factors fees and other expenses) once payment is received by the factor from the account debtor.
RECOURSE FACTORING: A type of commercial factoring in which the risk of customer non-payment remains with the client. If the client's customer is financially unable to pay, the factor has recourse against the client's assets for that money.
SATISFACTION: The discharge of an obligation by paying what's due (i.e., the satisfaction of an IRS lien or the satisfaction of a security interest holder).
SECURITY INTEREST: An interest in property other than real estate, given as security for a debt or other obligation. A security interest is created by execution of a security agreement and one or more financing statements filed pursuant to the Uniform Commercial Code.
SOLE PROPRIETORSHIP: A business owned and operated by an individual.
SUBORDINATION: The act of a creditor acknowledging in writing that a debt due him or her by a debtor shall be inferior to the debt due another creditor by the same debtor.
UNIFORM COMMERCIAL CODE (UCC): A standardized set of guidelines protected by law outlining how business transactions must be conducted.
VERIFICATION: The step during the due diligence process during which the factor confirms the validity of an invoice with the customer.
WORKING CAPITAL: In general, the funds needed by a business to pay current expenses such as payroll, benefits, rent and other operating costs.
Toll Free (English): 1 800 988 0023
317 W.Main St . Suite 101, Alhambra, CA 91801
Processing Dept. Fax Lines: (800) 628 9760
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