Terms and Definitions
A collection of claims or invoices against a particular customer for goods or services delivered.
The person, business, or organization responsible for paying an invoice. In the case of factoring, the account debtor is the customer whose name is on the invoice sold to the factor.
The amount owed by a business to its suppliers or vendors.
A commercial debt due for repayment usually in 30 – 90 days. In the factoring industry the accounts receivable is what a company sells to a factor.
Accounts Receivable Aging Schedule
A classification process, as reported on a schedule by time intervals (30 day increments & current), 30 days, 60 days, 90 days, 90+ days, used to analyze the amount of money owed to a business by its customers. It is used to determine the probability of collection, as it shows patterns of payment and delinquency.
Accounts Receivable Financing
A form of financing, which uses accounts receivable as collateral for a loan. This is different than factoring in that the party providing the financing does not own the invoice and is not responsible for collecting the debt.
Form sent to the client’s customer account debtors to confirm that the invoice the client is selling does exist and that they will remit payment directly to factor.
The percentage of an invoice’s face value that a factor pays upon its purchase.
Items that hold commercial or exchange value.
Asset based Lending
A form of lending where the factor uses collateral, such as equipment or inventory, as security against the loan.
A transfer of ownership or interest in a payment obligation between two or more parties.
An individual who is authorized to execute a binding document on behalf of a corporation, partnership, or other legal entity.
A reserve of funds held back by a finding source, when purchasing an income stream, to offset its losses due to non-payment of the purchased income stream. Once the reserve reaches a predetermined size, sufficient to protect the funding source’s investment, part of the reserve will be funded back to the client. Most often used when factoring accounts receivables, purchase orders, or contracts.
A financial report that shows what an individual, business or other entity owns (its assets), what it owes (its liabilities), and the amount of its net worth or equity; as of the date of the statement.
A state of insolvency of an individual or organization. The inability to pay debts.
Bill of Lading
A shipping document that gives instructions to the company transporting the goods.
Bill of Sale
A document used to transfer the title of certain goods from seller to buyer.
The pledge to a lender of all present and future income streams as collateral for a loan. (This is used primarily for invoices, purchase orders and contracts.).
The maximum loan available to a borrower at a particular time based on the calculated value of the accounts receivable; the product of a borrower’s advance rate times eligible accounts receivable.
That level of business operation where total costs equal total revenue.
The amount of funds remaining in a business after all debts have been satisfied; i.e. assets over liabilities.
An analysis over a period revealing the availability, or lack, of cash. More simply put the difference between cash in (income) vs. cash out (expenses). Since money does not flow in and out at an equal rate, in most businesses, an analysis of cash flow is important, especially of businesses that are cyclical in nature, or subject to external forces.
A Federal Bankruptcy Act where a debtor can maintain control of its business and operations, under court supervision, as long as current debts remain paid. .
Affords businesses an opportunity to reorganize by restructuring debt and negotiating payment schedules.
The individual or company that sells its accounts receivables to a factor or other financial entities.
Commercial Credit Insurance
Insurance against large losses from the uncollectible accounts receivable.
An asset that is promised or given to a creditor (a factor or a financial institution) to guarantee the discharge of an obligation by the debtor. Upon default, the creditor may seize the asset and sell it to pay off the loan.
The amount of one client’s accounts receivable due from a single customer. A large concentration for a single customer is considered high risk.
Confidential Invoice Discounting
An arrangement between a client and a factor in which the factoring relationship is not disclosed to the client’s customers.
A legal entity which can own property, incur debts, sue, and be sued. Corporations provide for limited liability, easy transfer of ownership and continuity of existence.
An action taken by the vote of a corporation.
An analysis of records and financial affairs to determine the creditworthiness of a business.
The party to whom money is owed.
The business or organization that owes money on an invoice purchased by the factor; i.e. the client’s customers, also known as account debtors.
Used to designate the name of a business as it is commonly known rather than its legal name, the name of the owner, etc.
An abbreviation for “days beyond terms,” which indicates how many days past the due date an invoice is late.
A person or party that owes payment to a creditor.
A document that proves delivery and invoicing of a shipment.
Mail sent to large numbers of potential customers advertising a product or service and soliciting orders.
Arrangement whereby a factor purchases an account(s) receivable from a business (your client) at a discount to the face value of that receivable. The factor earns a fee based on the number of days that the receivable remains unpaid, i.e., the longer the receivable remains unpaid, the larger the fee incurred.
The amount earned by a factor on each invoice purchased. It is based on the period of time the invoice remains outstanding (unpaid) and is set forth and agreed upon by both parties in the Discount Schedule.
The percentage of the face value of an invoice that a factor holds as its fee.
The verification of information and its documentation given to a factor in order to facilitate a decision as to whether or not a particular invoice should be purchased. Factors always want to take as little risk as possible and want to be assured that the money they advance will be paid back.
The total dollar amount of an invoice. This amount has to be paid to the factor by your client’s customer, without consideration as to how much was advanced to the client.
As a verb, to factor is the act of buying or selling accounts receivable at a discount. As a noun, a factor is a company engaged in the buying of accounts receivable.
Factoring is the process of purchasing commercial accounts receivable (invoices) from a business at a discount.
Advancing money (based on the advance rate) to a client.
Sales that allow the return of merchandise purchased at the customer’s discretion.
A promise to compensate for loss or damage sustained because of a stated set of circumstances.
A legal debt instrument that indicates the amount due from a customer to pay for delivered goods or services. Invoices may be traded or sold.
The amount owed by a business or an individual, excluding ownership equity. There are two types of liabilities: Current and Long-term. Current are debts that must be paid within one year (such as accounts receivable, dividends, notes payable, bank loans payable, taxes payable, wages and long-term debt due within one year). Long-term liabilities, also called funded debt, are debts that are not due until after a year’s time.
A creditor’s claim against property. It is a public record of security interest attached to assets which shows benefactor, beneficiary, and duration of attachment. When the debt is paid, the lien is removed. To satisfy judgments, Courts may also grant liens.
A search through public records on file in both the County Clerk’s and Secretary of State’s offices for any claims (pledges) against the property of a business (such as their accounts receivable) or an individual. An example would be if a taxing authority has a lien against the accounts receivable of a business due to taxes owed.
Line of Credit
The amount of credit that may be extended to a borrower by a lender. This type of arrangement gives a borrower more flexibility in planning for operating expenses.
The ability to convert assets into cash (or cash equivalent) without significant loss. If a business has good liquidity they will be able to meet their maturing obligations promptly, earn trade discounts, benefit from a good credit rating, etc.
A lien on property (such as a building or an invoice) given by statute to a worker or contractor who performs work or furnishes materials for the improvement of that property, until compensation is made for the improvement. Until that lien is satisfied, it usually takes precedence over all other liens.
A situation where income is less than expenses. Prolonged negative cash flow can lead to the failure of a business.
A written promise to pay a named amount to a particular company or business by a certain date.
Process whereby the factor lets an account debtor (your client’s customer) knows that an invoice(s) has been purchased from your client, and that the debtor is to pay the factor directly.
An aspect of confidential factoring where the customers are not notified of the client’s arrangement with the factor.
A type of factoring where the factor assumes completes responsibility for collection of debt. If the debt is not collected due to the financial inability of the customer, the factor assumes the loss.
The cost of doing business unrelated to production or sale of goods or services. Office rent, for instance, is an overhead expense. It remains unchanged no matter how much a company sells.
A contract between two or more people in a joint business ventures who agree to pool their funds and/or talents and share in the profits and losses of the enterprise. General partners are those who are responsible for the day-to-day management of activities, whose individual acts, are binding on all the partners, and who are personally responsible for the partnership’s total liabilities. Limited partners are those who contribute only money and are not involved in management decisions and whose liability is limited to the amount of their investment.
An agreement in which a principal of a corporation assumes personal liability for the obligations of the corporation.
Legal debt instruments that indicates the amount due from a customer to pay for goods or services which have NOT yet been delivered. Generally, factors will not purchase pre-ship invoices.
The owner of a privately held business or one of the main parties (buyer or seller) involved in a transaction.
A major party to a transaction, acting as either a buyer or seller; or the owner of a privately held business.
Profit & Loss Statement
An accounting summary of revenues, expenses and costs of a business during a specific period. This may also be known as an operating statement, income and expense statement, or income statement.
A document or form used by a customer to issue an order for goods or services.
Price reductions experienced because of purchasing in larger volume.
The yield on equity or invested capital.
The return of funds issued to the client by a factor from the reserve account.
A form of factoring where the client is liable for payment in the event the customer does not pay.
An account established by the factor to track funds owed to a client as factored invoices are paid. The account amount equals the invoice face value minus the advance, the factor’s fees, charge backs and administrative charges.
Report given by the client to the factor. The report lists information about the account of each of the client’s customers.
Property given or pledged to ensure the repayment of a debt by a borrower.
The period of duration of an invoice. The time allowed for payment of bills.
A deduction from the list price of goods provided by a business in return for payment within a specified period.
The document filed with the Secretary of State and/or the County Clerk’s office(s) to perfect a factor’s lien on a client’s assets (accounts receivable). Also called “UCC Financing Statement.”
UCC-3/ UCC-2 (CA only)
The document that is filed with the Secretary of State and/or the County Clerk’s office(s) as evidence of an assignment, release or change in the UCC-1. In the case of factoring, a UCC-3 is filed to terminate a UCC- 1 when all outstanding invoices are paid and the relationship between the client and the factor is severed. Also called “UCC Statement With Respect To Change.”
Uniform Commercial Code
The State Code, which regulates the transfer of and security interests in personal property.
A step during the due diligence process in which a factor confirms the validity of an invoice with the customer.
The return on an investor’s capital investment presented as a ratio of income to the total cost over a specified period.