Accounts receivable factoring is a form of business lending that stands as an alternative to traditional lending methods. The process of factoring invoices is a viable financing option for companies needing immediate cash flow. Therefore, it’s important that you know all that you can about the world of accounts receivable factoring and acquaint yourself with the common terms used in the factoring process. We’ve compiled this list of accounts receivable terminology to make the factoring process easier for you.
Account Creditor– You! The client who provides the goods and services to customers.
Account Debtor– The company who purchased the goods and services from the client
Accounts Payable – Any outstanding debt owed by a company
Accounts Receivable – A company’s outstanding invoices that have not been paid by the customer
Accounts Receivable Aging Report – This shows how long unpaid invoices have been outstanding
Asset Based Lending– Accounts Receivable and inventory are collateralized to maximize borrowing capacity
Bill of Lading – A shipping document often used in freight factoring which acknowledges the receipt of goods
Cash Flow – The money that goes into and out of a business
Discount Fee– The charge given by the factor who purchases the invoices and is dependent upon the invoice size.
Due diligence – The research and background checks conducted by the factor to assess the credit worthiness of a prospective factoring client and their customers. It also includes the necessary documentation the factor needs for client approval.
Factor – The individual or company that provides cash flow by purchasing accounts receivable
Factoring Advance Rate- A percentage of the invoice that is advanced to the client upfront
Factoring Broker- A 3rd party who connects business owners with the best factoring company for the Account Creditor’s business.
Factoring Fee – The fee the factoring charges for funding accounts receivable
Invoice Factoring- The sale of a firm’s invoices to a third party to obtain necessary cash flow
Non-Recourse Factoring- An invoice factoring method through which the factor maintains all risk and is held liable for the invoices if the customer fails to pay what is due. It comes with a higher fee but lower risk.
Purchase Order Finance– Financing provided for companies trying to complete large trade orders
Rebate– This is the amount that remains after the customer fully pays off the invoice.
Recourse Factoring- If the client’s customers are unable to pay the factoring company, the factor has recourse against the client for the money. Essentially, the client assumes the risk of non-payment. Recourse factoring comes with lower fees but higher risk.
Reserve- The amount of the account receivable that is not advanced to the client. This cash deposit is held until the invoices are fully paid to the factor.
Spot Factoring– This is a one-time transaction that gives clients the ability to factor a single invoice without any long term relationship
Working Capital –The funds available for day-to-day business expenses such as payroll, maintenance, operating costs, etc.
