Here are some important terms to help you better understand the factoring process:
Amount of money advanced (percentage %) upon receipt of qualified paperwork to the company factoring its accounts receivable (invoices). Advance Rates can range anywhere from 65-95% of the invoice amount. The remainder is held in a reserve (see Reserve) until the invoice pays.
The primary tool used by collections personnel to determine which invoices are overdue for payment. An aging report categorizes a company’s accounts receivable according to the length of time an invoice has been outstanding.
The Client is the company that sells its accounts receivable to the Factor.
A service the factoring company offers on factored invoices, where as they send statements, and make calls to your customer’s A/P on invoices not paid within terms to induce payment.
A check performed on your customers credit, to ensures they have the means to cover their financial transactions you plan to factor.
The amount of money a financial firm is willing to grant on terms to your customer after performing a credit check.
The Debtor is the Client's customer, the company that is being billed on the invoice (party responsibly to pay).
Fee percentage made by the Factoring company. The discount is a small charge assigned by the factor when they purchase your accounts receivable. Discount fees can be determined by several factors; recourse or non-recourse contacts, your debtors’ creditworthiness and terms, your monthly/annual sales volume, average size of the invoice, and the administration involved to service your account. Some Fees can be set on a flat fee, yet most are tiered (variable) and based on the length of time the invoice takes to pay to the factor.
The Factor is a financial firm that specializes in providing working capital to businesses by purchases their unpaid accounts receivable at a discount.
To sell one’s accounts receivable debts (invoices) to a factoring company at a discount.
The actual written Security Agreement signed by the factoring company and the client setting forth the terms of the factoring arrangement. Examples of some of the things covered in a factoring agreement would be reserve percentage, factoring rates, warranties or fitness requirements of invoices sold, recourse or non-recourse factoring, what constitutes breaches of the agreement, how long the agreement term is, and how to terminate the agreement.
A third-party company or individual who connects business owners to the most appropriate factoring company for their funding needs. Commercial Insurance Agents, Accountants, Freight Agents, and Small businesses owners make great Factoring Brokers.
A clause in the agreement that the client is acknowledging the liability of buying back any receivables that the factor is unable to collect payment on with a specific amount of days noted as a Recourse period of time.
The amount of time noted in the Factoring Agreement that the Client is responsibly to pay back any unpaid receivable to close it out. Recourse periods vary from 60 to 90 days depending on the factoring arrangement.
A clause in the agreement that the factoring company assumes all risk of credit insolvency of the Debtor. With non-recourse, clients you helping protect their bottom line, since there is no recourse to them. A better way to help plan for a successful business.
The amount of money (a percentage) that is not immediately paid to the Client upon the purchase of its accounts receivable. A percentage held back in accordance with the factoring agreement.
RESERVE (Cash Reserve)
An amount of money out of the paid accounts receivable (invoices) held in an account for the Client at their request. It can be taken out at the client’s discretion, or left to build up over time to pay for large annual expenses.
The total amount of remaining funds due Client after an invoice pays.
A charge levied when a party wants to break the term of an agreement or long-term contract. They are stipulated in the contract or agreement itself and provide an incentive for the party subject to them to abide by the agreement.
This filing establishes a public record of a lien on certain specified assets. UCC-1s are filed with the Secretary of State in whichever state the factoring client’s business identity is filed. Factoring companies will list all present and future accounts receivable as the collateral on this filing. Some factoring companies will also list other assets, depending on the terms of their agreement. UCC-1 filings are prioritized based on the date they are filed and will remain until terminated or expired. All factoring companies must have a first priority position on present and future accounts receivable in order to have a valid factoring agreement.
Learn more about invoice factoring and the importance of choosing a factor that is a good fit for your business here: