of Factoring Terms
Debtor - The customer of a factor's client. The
company owing the money due on the invoices. Also known
as the customer.
Accounts Receivable - Trade
credits; an amount owed by an account debtor by the act
of granting short term unsecured credit in lieu of cash
for goods or services. Considered a liquid asset on the
balance sheet and generally expected to be paid in less
than ninety days.
Receivable Financing - A short-term
financing technique for working capital purposes, loans
to a company are collateralized by a security interest
in a company's account receivables. Account receivables
serve as collateral, and loans are made on a percentage
of eligible assets pledged.
Acquisition - A loan to assist in acquiring
the assets of a business.
Asset Based - A business loan where the
borrower pledges as collateral for the loan any assets
used in the conduct of his or her business. Funds are
used for business related expenses. All asset-based loans
Credit - A privilege granted for the
purpose of extending time to make payment on a debt.
Customer - The client's customer. The
company which pays the money due under the factored invoice.
Also known as the account debtor.
Dilution - The amount of risk associated
with collection of the accounts receivable. It can include
returns, charge-backs, trade allowances, concentrations,
slow pay, bad debt and other perceived risk.
Due Diligence - Background check and
research conducted by the factor to assess validity of
a prospective factoring client and that client's customers.
Factor - The funding source for the client.
The company which purchases the accounts receivable (invoices)
from the client.
Factoring - The selling of a company's
accounts receivable to a third party, in order to obtain
Factors Acknowledgment Form - A form
sent to the client's customer by the factor, confirming
that the client's invoice does exist and that the customer
will remit the payment due under that invoice to the factor.
Factors Advance - The money the factor
sends to the client up front, after the verification process
is complete, and before the factor receives its money
from the client's customer. The advance is figured as
a percentage of the face value of the factored invoices.
Factors Charge-Back - An amount of money
that is owed to the factor and is deducted or Charged-Back
from the reserve or availability of the line due to an
agreed upon non-payment by debtor clause in the Factors
Factors Client - The business which sells
its accounts receivable to the factor.
Factors Fee - The fee the Factor Charges
for funding the clients A/R.
Factors Reserve - A deposit maintained
by the factor, to guard against disputes between the client
and the customer, and to guard against bad debt losses
due to customer non-payment. This is the money retained
by the factor when the advance is sent to the client.
The Reserve is sent to the client after the customer has
paid the factor the money due on the invoice.
Factors Reserve Release - The amount
of money released from the Factors Reserve once payment
has been received and credited. The Reserve Release may
be less any charge-back or fees associated with the services.
Factors Services - Credit Analysis, Credit
Guarantees and Collection Management.
Factors Verification - Process by which
the factor 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.
Recourse - In this type of factoring,
the risk of customer non-payment remains with the client.
If the client's customer is financially unable to pay
the money due under the invoice, the factor has recourse
against the client for that money. The factor is protected
against customer non-payment.
Working Capital - Loans for business
expenses such as, advertising, wages, rents, and other
operational costs. Often these loans are secured by tangible
assets or, in the case of long-standing good credit, by
the "full faith and credit" of the company.