Some verbiage is used in the factoring world that is specific to the industry and those outside the industry may not completely understand. We have provided some common terms to help provide clarity for businesses looking to obtain factoring services.
ACCOUNT EXECUTIVE: A dedicated professional who will handle all aspects of Client’s relationship with the Factoring Company including: Due Diligence, Credit Approval and Collections.
ACCOUNTS RECEIVABLE: (See also: INVOICES) Amounts owed by Client’s Customers through the granting of 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.
CHARGEBACK: An amount of money that is owed to the Factor and is deducted from the Client’s Reserve or availability of the line due to an agreed upon non-payment by debtor clause in the Factor’s contract.
CLIENT: A company that has signed a contract with a Factor for the purpose of receiving cash advances against their Accounts Receivable.
CONCENTRATION: When all or most of a Client’s Accounts Receivable are with a single Customer. This increases risk for both Client and Factor.
CREDIT: Confidence in a Customer’s ability to pay and intention to pay, by virtue of delivering goods or services in advance of payment.
CREDIT LIMIT: The maximum amount a Factor is willing to let its Client submit for Factoring for a Customer.
CUSTOMER: A company that owes a Client for product or services rendered.
DILUTION: The amount of risk associated with collection of the Accounts Receivable. It can include returns, Chargebacks, trade allowances, Concentrations, slow payments, bad debt and other risks.
DUE DILIGENCE: The process the Account Executive uses to validate Invoices submitted for Factoring. This may include any or all of the following: review of Invoice and Purchase Order or contract; tracking packages; and calling Customer to confirm receipt of goods or performance of services.
FACTOR: Someone who purchases Accounts Receivable.
FACTORING: The act of selling Accounts Receivable.
FACTOR’S ADVANCE: The initial amount of money a Factor is willing to provide against Accounts Receivable.
FACTOR’S FEE: The amount the Factor charges for the money advanced for factored Invoices. Typically this is a percentage of the face value of the Invoice, and may be structured to meet the Client’s needs.
FACTOR’S RESERVE: The amount held back from the funding to offset dilution and other risk.
FACTOR’S SERVICES: Pre-screening and ongoing monitoring of Customers’ creditworthiness; professional collection of past due Invoices
INVOICE: An itemization of goods purchased or services provided, sent to the Customer by the Client, and including the amount due and Terms.
MAXIMUM ACCOUNT LIMIT: The maximum amount a Client may have open with the Factor. This amount is part of the Security Agreement and may be altered by an amendment at the Factor’s discretion.
NOTICE OF ASSIGNMENT: Notice sent to the Customer by the Factor, notifying the Customer that payments are to be made to the Factor. The Notice of Assignment is a part of the contract, and is signed by both the Client and the Factor.
PROOF OF SHIPMENT/DELIVERY: Confirmation that goods have been shipped (e.g. a tracking number of bill of lading) or delivered (e.g. a signed packing list) to the Account Debtor. An important part of Due Diligence.
PURCHASE ORDER: A request submitted by an Account Debtor to the Client for goods or services. Typically it will include prices, delivery dates and Terms. It must be submitted with the Invoice(s) when Factoring. Sometimes a contract takes the place of a PO.
RESERVE RELEASE: The amount of money released from the Factor’s reserve once payment has been received and credited. The Reserve Release will be less any Chargeback or fees associated with the services.
TERMS: A negotiated amount of time allowed for payment of an Invoice.
• Net 10 – 10 days from invoice to pay for goods.
• Net 30 – 30 days from invoice to pay for goods.
• Net 10/ROG (Receipt of Goods) – Payment due 10 days from receipt of goods.
• Net 10/2% – Customer may take a 2% discount if paid within 10 days.
WITH RECOURSE: The Factor grants a limited amount of time for the Customer to pay. The Credit is ultimately owed or reverts back to the Client for payment if not paid for within a pre-established time beyond Terms.