2. Terms & Vocabulary
-
Getting factoring service quotes can be confusing- there’s a lot to know about before you agree to transaction terms! Here’s a primer on factoring vocabulary that will help you understand a service agreement better- so you’ll be able to negotiate a better deal.
Account – A collection of unpaid or “open” customer invoices.
Accounts Receivable – Money owed to a company for goods or services that it has provided to its customers in advance of payment- either on credit or through some kind of delayed billing procedure.
Advance (business cash advance) – The lump-sum payment a factor will advance to a business, based on the invoices sold.
Cash flow –Amount of that a business gains or looses during a specified accounting period.
Collateral – An asset used to “secure” an advance- the factor may seize the asset if they are not paid back.
Discount Fee – Refers to the amount a factor will “discount” the invoices they purchase- for example, most advance amounts are between 60-90% of the total invoice amount.
Discount Rate – Fee that a factor charges for its services, which is determined by the invoice value (usually 3%-5%).
Face Amount or Face Value – Total invoice amount.
Factoring –Using a business’ unpaid invoices to receive quick funding. Also referred to as accounts receivable loans.
Invoice – The document that indicates the amount owed by a customer. In factoring transactions, invoices can be traded or sold.
Liability – A financial obligation, debt, claim, or potential loss.
Non-Notification – In a factoring context, when a business’ customers are not notified that their invoice has been sold to a factor.
Notification – When customers are notified of the arrangement with a factor, and are instructed to pay their debt to the factor.
Non-Recourse – A type of factoring where the factor is completely responsible for the collection of debt, and assumes all financial loss if no repayment is made.Go to... 1, 2, 3, 4, 5, 6, 7, 8, next page
