Account Debtor (Debtor) - The entity that owes for payment on an invoice. In simple terms this is the factoring client's customer.

 

Account Payable - Money owed by a business to a supplier (vendor) for goods or services received from that supplier. A payable is a liability and ultimately results in cash out flow.

Accounts Payable Aging Report (AP aging) - A listing of all amounts owed to others by the company. The report shows the total accounts payable owed to each supplier as well as how long it has been open (in other words how old the AP is). The report is formatted in columns usually a column for 30 days, 60 days 90 days and over 90 days allowing the reader to quickly assess the health of the AP.

Account Receivable (AR) - Money owed to a business by the customer of that a business (account debtor) for goods delivered or services rendered in the normal stream of commerce. A receivable is an asset of the business and when collected turns into cash.

Accounts Receivable Aging Report (AR aging) - A listing of all the receivables currently owed and reasonably expected to be collected by a business from its customers. The report shows the total accounts receivable owed from each customer as well as how long it has been open (in other words how old the AR is). The report is formatted in columns usually a column for 30 days, 60 days 90 days and over 90 days allowing the reader to quickly assess the health of the AR. These reports are usually run from an accounting system in a summary or detail format. The summary format would should totals for each customer. The detail format would show each open invoice.

Advance Rate - This is the percentage that the face value of the invoice is multiplied by to determine how much money a factoring client initially receives. This percentage is usually found in the agreement between a factoring client and the factoring company. This is part of the pricing of a factoring deal and varies according to several facts of each specific deal. Typically advance rates start at 75% advance and adjust upwards or downwards based on the factoring company's determination of risk. In general the less perceived risk the higher the advance rate.

Articles of Incorporation / Organization - The original documents filed with the proper government entity that creates a new legal business entity from which the owners / shareholders / members can conduct business.

Assignee - The entity that has received a certain right of another entity. In the case of factoring the factoring company is the assignee who has received the right from the factoring contract to receive the payments from the client's customer that would otherwise go to the factoring client.

Assignment - The act of giving up a legal right to another.

Assignor - The entity that transfers its rights to another. In the case of factoring, the factoring client gives up its right to receive payment for its invoices from its customers for the benefit of receiving an immediate discounted payment from the factoring company.

Back Office - a term that refers to a variety of administrative functions that a factoring company will take over for a client because they are able to achieve economies of scale and drive down costs by doing so. In the case of a staffing company, the factoring company might do the invoicing, payroll, tax remittances, credit work, provide software to run their business and collect on the invoices. Outsourcing back office functions allows a business owner to stay focused on selling and revenue producing activities that help them grow their bottom line.

Bad Debt - When an invoice is no longer expected to be paid it is considered a bad debt. Bad debts are usually removed from the invoice aging report and written off as uncollectible or sold at a deep discount to a collection agency who then tries to collect some portion of the amount owed.

Balance sheet - one of several statements of financial position that helps both a business and outsiders access the viability of the business. It shows the financial position as a snapshot of a position in time. At that the point in time it is run it shows the companies exact asset liability and equity positions.

Bill Of Lading - A document used in the trucking industry that serves as the official record of what goods were delivered where and who has the legal right to receive payment for the service of delivering the goods.

Broker - a person who helps marketing and set up financing arrangements for companies. The broker usually gets paid a commission based on the revenue the funding source earns on a deal brought to them by the broker. In the factoring industry brokers are common and some can really add value to a transaction for both the factoring client and funding source.

Business Loan - a vehicle by which a bank or other entity gives you money to run your business now in turn for repayment at a later date of the amount they gave you plus some additional interest amount.

Cashflow - The path cash follows as it moves through the business. It starts as cash, gets invested in operations to produce a product or service, turns into an account receivable then eventually turns back into cash when payment is received. Factoring accelerates cashflow by shortening the time it takes the receivable to turn into cash.

Collateral - An asset that serves as security in the event an amount owed to a creditor cannot be paid. Collateral can take many forms. A factoring company relies on the accounts receivable and other assets to serve as security against the money the advance to a factoring customer.

Collection - The process of following up on an account receivable in order to get paid. There are various degrees of collections from a soft friendly status call to turning the account over to an attorney who will take legal action in an effort to collect the account. Factoring companies are often experts as this and act as an outsourced collection department for their clients. As time goes on an account debtor expects to hear from the factoring company regularly and often puts those invoices higher on their priority to pay. Establishing a solid collection process is good for the client and the factor as it speeds up the client's cashflow even more and helps to reduce the factor's risk of nonpayment.

Collection Attorney – An attorney the specializes in the collection of commercial accounts receivables on behalf of small businesses, small business lenders and factoring companies.

Collection Report - A common report available from your factoring company showing all the payments they have received on a client's behalf and how they have been posted.

Credit Approval - The process of researching a company's credit and setting the amount of credit you are willing to extend to that business. This process can include reviewing a variety of third party credit information, payment histories, calling and interviewing credit references, reviewing industry credit risk, economic credit risk etc. The goal of this review is to set a credit limit that is rational and will result in regular payment of extended credit on time.

Credit Limit - the maximum amount of credit a business wishes to extend to a customer. When using a factoring service the factor will work with you to set the credit limit for each customer. They will check the customer's credit using a variety of sources and methods. The credit limits they set are often more conservative than what you would set because they have access to better information and provide an independent analysis of your customer's credit worthiness. A factor makes money by buying as many invoices as possible so it is not in their interest to set low credit limits. On the other hand they are experts at setting realistic credit limits because they understand and carry the risk of loss from a bad credit decision.

Credit Memo - a document given to the factoring company (and client) by an account debtor outlining credits against an invoice. In short it is a formal explanation of why an invoice is not being paid in full. Credit memos can arise from a variety of situations where goods are damaged, not received or incorrect in some fashion. A factoring company is watchful of credit memos because they represent a non payment on an invoice. Frequent credit memos can indicate a client's in ability to properly invoice or deliver quality goods all of which increase the factor's risk.

Credit Report - A 3rd party report that provides credit information on a business. Credit reports are used by the factoring company to set a credit limit (the dollar amount of invoices that they are willing to purchase) for an account debtor. These reports are available from a variety of sources including Experian , Dun & Bradstreet , Bernard Sands , Equifax and many other smaller firms that specialize in Nice Industries such as trucking. Many of these credit reports provide comprehensive information on the business' finances which can help the factor determine and mitigate the credit risk they take.

Creditor - An entity that is owed money.

Debtor Release Letter - A letter that releases an account debtor from paying the assignee. Once the account debtor receives this letter they can now direct payment directly to the business that generated the invoice or another assignee as directed.

Discount Rate - the percentage rate the factoring company charges on an invoice by invoice basis for their service. Generally this rate depends on the length of time the invoice is open on their books. The discount rate usually is tied to buckets of time. Some common time buckets include: First 30 days then every 10 days thereafter, first 30 days then every fifteen days thereafter, first ten days then every fifteen days thereafter, every fifteen days and so on and so forth. These time buckets usually take into consideration how the factoring company is charged for their supply of money as well as when on average the factoring client’s customers make payment.

Doing Business As / Assumed Name / Fictitious Name Document - A document filed with the proper government entity that allows one entity such as an individual, LLC or corporation to operate, do business and bill under a different name than their exact original legal name.

 

Due Diligence - The process of investigative work a factoring company does before purchasing and while holding an invoice. They investigate the prospective client initially as part of the factoring set up process to determine the client's ability to generate valid, legal, quality invoices. They investigate the credit worthiness of the account debtor to make sure they have the ability to pay and a history of doing so. They also investigate the invoice itself and the agreements under which the work was performed or the goods were delivered to make sure they understand anything that can interrupt payment of the invoice. The goal of the process is to determine how much risk an invoice and a factoring client represents and to then structure the factoring deal accordingly.

Due Diligence Searches - searches conducted to determine if anyone has claimed an interest in assets of an entity. The interest can be in the form of a security interest, tax lien, judgment lien mortgage etc. The notice of this interest is on file with a governmental records office. Searches are conducted to attempt to make sure that the assets you plan to rely on as collateral are not already claimed by someone else.

Estoppel letter (also known as a verification letter) - a letter that serves as a side agreement between the factoring company and the account debtor (factoring client's customer). In this letter the factoring company asks the account debtor to verify in writing the invoice is valid and will be paid. These are generally hard to get signed by the account debtor because they obligate the debtor to pay no matter what happens in the future. A signed estoppel letter gives the factoring company a much greater degree of security than other forms of verification. It is usually used in cases where the factoring company perceives higher degrees of risk. Estoppel letters are commonly used when the invoices are for custom goods that have little value to anyone other than the account debtor or when the dollar amounts on an invoice by invoice basis are exceedingly high. These letters can bet hard to get signed and usually work best when the factoring customer is a key supplier to the account debtor or has a very close relationship with them.

Face value - The gross total of the amount owed on the invoice. This is an amount printed on the invoice.

Factoring - The process of selling an invoice to a factoring company to receive immediate cash. The invoice is sold at a discount to its face value recognizing that it does not realize its full value until paid and that the factoring company is taking the risk the invoice will not get paid for a number of reasons.

Factoring agreement (factoring contract, factoring and security agreement) - The legal contract between the factoring company and factoring client. It outlines the terms of purchase including all the conditions and responsibilities of each party. The factoring contract can vary from company to company and will also differ based on fee structure. Many times the contracts are so unique that if you are trying to choose between two or three competing offers it is a good idea to give a copy of the other offers to the factoring company so they can explain where, why and how theirs differs from their competition. It is also a good idea to keep in mind that many points in the contract are there by default but can be negotiated to reach a better deal.

Factoring attorney / factoring attorneys – An attorney that specializes in factoring transactions and related factoring legal issues. In addition to state requirements of becoming an attorney, a factoring attorney needs to have a great deal of knowledge about the Uniform Commercial Code and how it applies to factoring contracts and the factoring transactions.

Factoring blog – A factoring website or part of a factoring website that is a continuing web log on factoring and small business that covers accounts receivable factoring and small business loan topics.

Factoring Buyout - When a factoring client changes from one factoring company to another the new factor has to buyout the open invoices from the current ar funding company.

Factoring Buyout Letter (Factoring Payoff Letter) - A letter used to facilitate the transfer of a factoring client form their current factor to a new factoring company. The buyout letter is usually a three party agreement between the business factoring their invoices, the current factoring company and the incoming new factor funding company.

Factoring Conference - A yearly conference for the banking, factoring and finance industry hosted by the International Factoring Association. This is usually held some beautiful, warm sunny place and features a wide range of topics of interest to factoring companies and their personnel.

Factoring Contract - see Factoring agreement.

Factoring Industry Experts -Professional men and women who have many years experience in the factoring profession and are well respected in the industry. Many now or sometime in the past have run their own factoring company. From this experience they keenly understand the factoring product and also can identify with the business owners cashflow / cash management challenges.

Factoring video – A visual production that covers ar factoring and small business lending topics. Many factoring companies produce factoring videos in an effort to education small businesses about factoring loans.

Features of factoring – Aspects of invoice factoring that make it a beneficial to small business.

Funding Source - this is another name for the factoring company, or the company who finances the deal. The term is often used because factoring brokers may also arrange financing transactions on real estate, equipment and other assets.

Good Standing - A status with the Secretary Of State where the business is registered showing that the entity is in compliance with all the administrative required by that state. Business entities are created at the state level by filing articles with the Secretary of the State's office or some equivalent. Each state usually has some ongoing paperwork that needs to be updated regularly and filed to be considered in good standing. A nominal fee is also generally required to process the paperwork.

Government contract - An agreement to provide goods or services to the federal state or local government. Factoring companies like to work with clients' who have government contracts because they know the government will pay the invoice as long as goods and services are delivered per the contract.

Government Contractor / Prime Government Contractor - When the government needs goods or services on a very large scale (for example: airplanes) they sign a contract with one contractor to oversee and manage the whole procurement process. The prime contractor works with the government to execute the contract and also employs and manages many government subcontractors to supply the "parts & pieces" needed to get the job done.

Government Contractor / Sub to a Prime Government Contractor - a secondary contractor who works on a government contract but does not deal directly with the government itself. Instead this government subcontractor takes direction from a prime government contractor.

International Factoring Association (IFA) - A factoring industry trade group most factoring companies belong to.

International Factoring Association Code Of Ethics - A code of ethics that every member of the International Factoring Association agrees to as a condition of their membership. If you feel a factoring company or factoring professional has not followed this code of ethics you should report them to the IFA.

Invoice - the legal document that requests payment for services rendered and goods delivered. A standard invoices usually includes the date, amount owed, the name of the company sending the invoice, the name of the company being invoiced, terms of payment, a purchase order number and a brief description of the items that were delivered or the services rendered.

Judgment Lien - A claim against assets created when a court awards a judgment to a creditor. This claim is entered in the public record. It is problematic for many reasons but especially if it is filed before a factor files its UCC financing statement because it prevents them from obtaining a free and clear security interest in the assets of the client which is required to successfully purchase the accounts. Sometimes if the amount is small enough the factor can make arrangements to pay it off as part of the initial funding transaction.

Lien - A legal claim against assets awarded by statute or a court.

Medical claims factoring – Medical practices do not have invoices to factor, Instead they have claims billing they bill to insurance companies, Medicare and Medicaid. Medical claims factoring is a specialized form of accounts receivable factoring that makes advances against the claims a medical practice is waiting to be reimbursed for.

Medium Business - A business that would fall into some middle category based on some size metric. Less factoring companies serve medium size businesses for several reasons. The factoring company has to be of a certain size and strength itself to serve this market and often times companies in this size market are financially stable enough to obtain bank credit lines or asset other based lending arrangements which can be less costly than factoring services.

Payroll - A term used to describe the money used to pay employees, employment taxes and related employee benefit expenses. For many businesses, payroll is one of their biggest expenses and often is due to be paid before they are paid by their customers. Cashflow solutions help to bridge this timing gap and keep businesses liquid enough to pay their employees regularly.

Payroll Taxes - Taxes based on the wages, tips and salaries paid to employees. Employers withhold payroll tax amounts from employees pay and are responsible for sending them to the government regularly. They are also required to match a portion of those taxes from their own funds and remit those as well.

Purchase order funding, order financing - the process of using an order from a customer as collateral for financing. This is usually done to get that order delivered to the customer.

Quick Pay Program - a program offered by bigger trucking companies that allows smaller trucking companies who work for them to get paid immediately on an invoice in return for a discount. Similar to factoring it provides a smaller company with immediate cash for their invoice. Unfortunately it usually varies by carrier whereas factoring will work for all credit worthy carriers and gives the trucking company more control over its accounts receivable. A quick pay program works well for a company that does a lot of business with a handful of major freight carriers.

Reserve Account - A bookkeeping account established by a factoring company for the benefit of the factoring client that accumulates the remaining amounts left over once and invoice is paid by the customer and the factoring fees are taken by the factoring company. The money in this account represents a portion of the total AR that the factor has purchased and is released back to the factoring customer on a regular basis in the normal course of AR financing.

Reserve Account Report - A common report available from your factoring company that shows all activity in the reserve account they establish on your behalf. Payments on invoices and non-factored payments increase the reserve account balance. Reserve disbursements, invoice repurchases and fee charges decrease the amount of the reserve account. Generally the reserve account is available to the client at any time unless the factor has a reasonable expectation of needing the money in that account to repurchase an invoice or cover a fee as agreed upon in the factoring and security agreement.

Reserve disbursements – When a factoring invoice payment comes in to the factoring company there is generally an amount that gets booked to a reserve account. The factoring reserve account builds up as more invoice payments come in. The reserve account is generally due back to the factoring client. There can be contractual exceptions that protect the factoring company in certain scenarios. Once the reserve account gets big enough that the factoring client wants it, they request a reserve disbursement. Some small businesses like to let the reserve account build up like a savings account and use it to make big lump sum payments such for expenses such as insurance, business capital investment etc.  Some factoring companies use the best practice of releasing available reserves on a regular basis with a small business' regular invoice funding.

Small Business - term used to describe firms who fall below a certain threshold. These thresholds can include number or employees or annual revenues. The description varies by who is using the term. Most factoring companies are very well versed in helping start up and small businesses that range from a single person to several employees.

Sub Contractor to a Prime Government Contractor - A business that works on a government contract for and at the direction of the prime contractor. The prime contractor usually is responsible for paying the subcontractor when it receives payment from the government.

Supporting documents - any document that could accompany the invoice to help verify that the services were rendered or goods were delivered. These can range from a delivery sign off from a customer to inspection reports by a third party to timecards to bills of lading. A factoring company uses these documents to verify that an invoice is valid and that it will in fact be paid. Should they need to take legal action to collect the payment any and all the documents that support the invoice help them make their case to get paid.

Tax Lien - A claim against assets created when a taxing authority files the correct paperwork. The ability of a taxing authority to lien assets of a business is created by statute and varies from jurisdiction to jurisdiction. This claim is entered in the public record. It is problematic for many reasons but especially if it is filed before a factor files its UCC financing statement because it prevents them from obtaining a free and clear security interest in the assets of the client which is required to successfully purchase the accounts. A federal tax lien is even more problematic because it allows the IRS to take a position in front of a secured party after a certain amount of time.

Time Card - A time card is a source document used in the staffing industry. It can be paper or electronic. It is used to record a temporary employee's time worked on site for a customer and becomes the document used to bill the customer. Many times a supervisor from the customer is required to sign off on the hours worked. This becomes a nearly indisputable record of services rendered and makes collecting payment for time worked a lot easier.

Third Party Payroll Provider - There are many companies that specialize in running payroll on behalf of a business. Since payroll is complex but fairly repetitive many small and medium size businesses prefer to outsource this function. Payroll companies achieve economies of scale by providing payroll and often times other human resource functions. They are usually much more accurate in their calculations and stay abreast of changes in tax law which makes for happier employees and tax collectors.

UCC1 (UCC Lien, UCC 1, UCC filing, UCC 1 financing statement) - A document filed to evidence and perfect a security interest in assets.

Uniform Commercial Code (UCC) - The law that governs commercial business transactions and commerce. The provisions under this law allow factoring companies to purchase accounts receivable.

Verification (Invoice Verification) - the process of determining and documenting the validity of an invoice. Since an invoice represents an intangible claim to receive payment the factor must make sure that the claim is valid and exists. The factor accomplishes this using a variety of methods including phone calls, letters, proof of delivery, signed time cards, electronic data files and many other and continuously evolving means. The process of verification is one of the reasons factoring costs are higher than interest on a bank loan because the factoring company has to continuously "touch" every invoice to make sure it is correct and valid. The verification process ends up being a value added function to the client. If there is an error or misunderstanding between the client and their customer the factoring company finds this early and works with both parties to resolve it. This results in a happier customer for the client and timely payment of the invoice.