Factoring Terminology

Debtor Finance Terminology Or Factoring Terms for Dummies

FACTORING TERMINOLOGY MEANING
Account Creditor See “Client”
Account Debtor See “Customer”
Accounts Receivable Money that is owed to you by your customers, usually by issuing an invoice that is due to be paid within a certain period of time.
Advance The amount that is advanced against each invoice after the invoice has been submitted and approved by the factor. The advance is usually a percentage of the gross value of the invoice (see “Advance Rate”).
Advance Rate The percentage of your invoice that the factor will deposit in your account when they buy the invoice. The remainder is held in a reserve account.
Client You! In a factoring relationship, the client is the business providing goods or services to a debtor or customer
Confirmation The process where a factoring company 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.
Credit Insurance Also “Bad Debt Insurance”, “Bad Debt Protection” - It provides a level of protection against non-payment by your customers under certain specific circumstances.
 Credit Limit The financial limit that the factor places on each of your customers, often based on their credit rating.
Credit Terms A type of commercial sale which allows the customer to pay within a certain number of days after an invoice is submitted. Terms are noted by preceding the number of days to pay with the word “Net” (i.e. Net 30 Terms). Invoices note their credit terms in the “Terms” field or the “Due by” field.
Customer The business(es) purchasing goods or services from you, the client
Debtor Concentration This term relates to how your customers are distributed across your debtor book in terms of value (and therefore risk). For example, if you had 1 customer, your debtor concentration is 100% which poses a higher risk to a factor; If you have 10 customers of equal value then the Debtor Concentration would be 10%.
Debtor Concentration is important in risk assessment and depending on its composition has varying effects on fees.
Debtor Finance  Also “Invoice Factoring”, “Accounts Receivable Factoring”, “Receivables Factoring”- The process by which a factoring company purchases a business’s accounts receivable.
Debtors Ledger  Also “Debtors Report” - This is a summary report of all outstanding balances for each of your debtors, usually sorted by invoice date.
Discount Also “Discount Fee”, “Factoring Fee” - The discount is a small charge assigned by the factor when they purchase your accounts receivable. Discount fees are determined by the size of the invoice, the debtors’ creditworthiness, and the length of time the invoice remains unpaid.
Dispute  A situation where a customer does not pay an invoice due to a problem with the product or service.
Due Diligence  Background check and research conducted by the factor to assess validity of a prospective factoring client and that client's customers.
Escrow A deposit or fund held in trust or as a security which may be released when a specified condition had been met.
Factor Also “Factoring Company“ - The funding source for the client. A firm that specialises in providing working capital to businesses by advancing cash against unpaid accounts receivable
Factoring Agreement The contract between the factoring company and the client, covering details such as fees, advance rates, and the length of the relationship. Agreements may be amended, extended, or terminated according to provisions included in the agreement.
Factoring Broker A third-party company or individual who connects business owners to the most appropriate factoring company for their funding needs.
Factoring Fee See “Discount”
Funding Period This is the time period that starts when the factor purchases the invoice and finished when the customer pays the invoice in full.
Interest Money paid by a borrower to a lender for a credit or a similar liability – the cost of money over time. In factoring this is usually at a daily rate
Interest Rate The percentage of the principal amount paid over a certain time which is the time cost of using money
Invoice An itemized bill for goods sold or services provided, containing individual prices, the total charge, and the terms.
Invoice Factoring See “Debtor Finance”
Notice of Assignment Also “NOA” - A notice that is sent to customers informing them that the invoice has been factored. The NOA also informs the customer of the new bank account details.
Rebate The invoice remainder, minus fees, that is deposited in your account when your invoices are paid by the customer. This is different from the reserve amount, which includes the factoring fees.
Recourse Factoring A standard factoring arrangement in which the client is responsible for invoices that remain unpaid past their recourse period. The factoring company will not absorb any credit losses that result from a customer defaulting on an invoice.
Recourse Period The amount of time a factoring company will hold an unpaid invoice before requiring the client to close it. Recourse periods vary from 60 to 120 days depending on the factoring agreement.
Reserve Also “Holdback” - The balance of an invoice that is withheld pending payment from the customer. The advance plus the reserve will equal the full amount of the invoice. This is not to be confused with the rebate, which is the final amount the client receives after payment is received and fees are deducted.
Retention See “Reserve”
Schedule of Accounts Also “Schedule” – A form that many client’s use to submit their invoices for funding to the factoring company, listing of all the invoices, showing the customer name, code, amount and date.
Take-On Debts The value of the debtors ledger at the point when the factoring facility commences - these debts will be "taken on" when the facility starts.
Unfactored Receipt Also “Unfactored Invoice” – where payment is received by the factor but the relevant invoice has not been submitted by the client, or where the funds cannot be immediately applied to receipt an invoice due to a discrepancy.
Verification See “Confirmation”