Factoring glossary
79 terms used in invoice factoring and receivables finance, defined in plain English.
A
- Accounts ReceivableMoney owed to a business by customers who received goods or services on credit and have not yet paid.
- Advance RateThe percentage of an invoice's value that a factor pays the seller immediately, with the balance held back as a reserve.
- Aging ReportA report listing unpaid invoices grouped by age, such as 0-30, 31-60 and 61-90 days, to show how quickly customers are paying.
- Anti-Assignment (Medicare)Federal rules that generally prevent Medicare from paying a provider's claims to a third party, such as a factor, with limited exceptions.
- AR Days OutstandingA measure of the average number of days between billing a customer and collecting payment on the invoice.
- Asset-Based LendingBusiness financing secured by assets such as receivables, inventory or equipment, with available credit tied to the value of eligible collateral.
- AssignmentThe legal transfer of a right, such as the right to collect payment on an invoice, from the seller to another party like a factor.
- Assignment of Claims ActA federal law setting the conditions under which a contractor can assign payments under a federal contract to a financing institution, including required notices.
B
C
- Cash FlowThe movement of cash into and out of a business over a given period, showing its ability to pay obligations as they come due.
- ChargebackThe factor's act of charging an unpaid, disputed or short-paid invoice back to the seller, typically by deducting it from reserves or future fundings.
- CollateralAssets pledged to secure financing, which the lender or factor may take or sell if the business does not meet its obligations.
- Collection AgencyA firm hired to collect overdue debts on a creditor's behalf, usually paid a percentage of what it recovers.
- Collection PeriodThe average length of time between invoicing a customer and receiving payment, a gauge of how fast receivables become cash.
- Commercial Credit LimitThe highest balance a seller or factor is willing to let a business customer owe at any one time.
- Concentration LimitA cap on how much of a business's funded receivables may be owed by a single customer, to limit dependence on that customer.
- Credit FacilityA standing arrangement that allows a business to borrow or draw funds as needed, up to an agreed maximum, under set terms.
- Credit MemoA document issued by a seller that lowers the amount a customer owes on an invoice, for example after a return or billing error.
- Credit TermsThe payment conditions a seller offers a customer, such as how many days until payment is due and any discounts for paying early.
- CreditworthinessAn assessment of how likely a business or person is to pay its debts as agreed, based on payment history, finances and other factors.
D
- Days Sales Outstanding (DSO)The average number of days it takes a business to collect payment after a sale made on credit.
- Debtor (Account Debtor)The customer obligated to pay a receivable; in factoring, the party whose payment the factor is relying on.
- Debtor ApprovalA factor's decision to accept a specific customer as an account debtor whose invoices it will buy, usually up to a set limit.
- Deposit Account Control Agreement (DACA)An agreement among a business, its bank and a lender or factor that lets the financier direct funds in the business's deposit account.
- DilutionThe share of invoiced amounts that is never collected because of returns, credits, discounts, disputes or other adjustments.
- Due DiligenceThe checks a factor performs before funding, including the seller's records, owners, customers, existing liens and tax status.
- Dun & Bradstreet (D&B)A commercial data company that issues D-U-N-S identification numbers and publishes credit and payment information on businesses.
E
- Early Termination / BuyoutEnding a factoring relationship before term, often by having a new factor or lender pay off the old one and take over the receivables.
- Estoppel LetterA signed statement confirming specific facts, like balances or no known disputes, that the signing party cannot later deny against someone who relied on it.
F
- Factoring AgreementThe contract governing a factoring relationship, covering which invoices are sold, pricing, advances, recourse, reporting and how the deal ends.
- Factoring BrokerAn intermediary who refers businesses seeking invoice financing to factoring companies, usually earning a commission from the factor.
- Factoring FeeThe charge a factor takes for purchasing an invoice, typically a percentage of its face value, sometimes increasing with the time until payment.
- Factoring LineThe maximum total value of a client's invoices a factor is willing to have purchased and outstanding at any one time.
- Factoring ReserveThe portion of a factored invoice a factor holds back until the customer pays, used to cover fees, deductions and disputes.
- Freight FactoringFactoring designed for motor carriers, advancing cash on delivered-load invoices so trucking companies can cover fuel, payroll and repairs right away.
- Fuel AdvanceAn advance paid to a trucking company at pickup, before the load is delivered, to cover fuel and trip expenses.
- Full-Service FactoringA factoring arrangement where the factor provides funding plus credit checks, receivables bookkeeping and collection of customer payments.
G
I
- Intercreditor / Subordination AgreementAn agreement among creditors, or between a creditor and the business, setting which party has first claim on particular assets.
- InvoiceA seller's bill to a customer that itemizes goods or services delivered, the amount owed and when payment is due.
- Invoice DiscountingFinancing advanced against outstanding invoices where the business keeps collecting from customers itself, typically without notifying them.
- Invoice FactoringSelling unpaid business invoices to a finance company for an immediate advance, with the balance, less a fee, paid when the customer pays.
- Invoice VerificationThe process a factor uses to confirm an invoice is real, the work was delivered and the customer accepts the amount owed.
- IRS Form 8821An IRS form that authorizes a named third party to view or receive a taxpayer's confidential tax information, without the power to represent it.
L
- Letter of CreditA bank's written promise to pay a seller a set amount, on behalf of the buyer, once the seller presents documents that comply with stated terms.
- Line of CreditA revolving loan that lets a business draw funds up to a set limit, repay them and draw again, paying interest only on balances used.
- LockboxA bank-managed address or account that receives customer payments and processes them on behalf of the factor or account owner.
M
- MC NumberA federal docket number tied to a trucking company's or freight broker's interstate operating authority, which factors verify before funding.
- Merchant Cash AdvanceA lump sum provided in exchange for a share of a business's future sales, collected through frequent automatic withdrawals, unlike factoring of existing invoices.
- Minimum Volume RequirementA contract term requiring a client to factor at least a set dollar amount of invoices per period, or pay fees on the shortfall.
- Misdirected PaymentA customer payment on a factored invoice that goes to the seller rather than the factor; the seller usually must forward it immediately.
N
- Net Terms (Net 30/60/90)Payment terms that give the customer a set number of days, such as 30, 60 or 90, to pay the full invoice amount.
- Non-Notification FactoringFactoring where customers are not told about the assignment and continue paying the seller, who then passes collections to the factor.
- Non-Recourse FactoringFactoring in which the factor absorbs the loss if an approved customer cannot pay for credit reasons, such as insolvency, as defined in the contract.
- Notice of AssignmentA written notice telling a customer that invoices were assigned to a factor and that future payments must go to the factor.
- Notification FactoringFactoring in which customers receive notice that invoices have been assigned and must send payment directly to the factor.
P
- Payoff LetterA creditor's written statement of the exact amount required to pay off an obligation by a certain date, and what it will release once paid.
- Personal GuaranteeAn owner's written promise to be personally responsible for a business's obligations if the business fails to meet them.
- Progress BillingBilling a customer in stages based on how much of a project has been completed, instead of a single invoice at the end.
- Purchase Order FinancingFinancing that pays a supplier to produce or deliver goods for a confirmed customer order, repaid when the customer pays the invoice.
Q
R
- Recourse FactoringA factoring arrangement where the seller remains responsible for invoices the customer does not pay, usually by repurchasing or replacing them.
- Recourse PeriodThe length of time a factor allows for a customer to pay a purchased invoice before charging it back to the seller under a recourse agreement.
- Reserve Release (Rebate)The payment of the remaining reserve, minus fees and deductions, that a factor sends a seller after the customer pays an invoice.
- RetainageA percentage of each progress payment withheld on a construction project until the work is finished and accepted, then paid out.
S
- SBA CAPLinesA Small Business Administration 7(a) program of guaranteed revolving or non-revolving lines of credit for short-term and seasonal working capital needs.
- Schedule of AccountsA signed list of invoices that a business submits to its factor for purchase, confirming they are assigned and valid.
- Spot FactoringFactoring one invoice, or a small set chosen by the seller, without a long-term contract or minimum volume commitment.
- Supply Chain Finance (Reverse Factoring)A buyer-sponsored program where a financier pays suppliers' approved invoices early, priced on the buyer's credit, and the buyer pays the financier later.
T
- Termination FeeA charge a client must pay to end a factoring agreement before the end of its term or without giving the required notice.
- Tiered FeeA factoring fee structure that charges a base percentage for an initial period, then adds more for each further period the invoice remains unpaid.
- Trade CreditCredit a supplier extends to a business customer by delivering goods or services now and accepting payment later on agreed terms.
- Trade Credit InsuranceInsurance that reimburses a seller for a share of unpaid invoices when an insured customer becomes insolvent or defaults for a covered reason.
U
- UCC LienA creditor's legal claim on business assets, made public through a UCC financing statement filed with a state office.
- UCC-1 Financing StatementThe standard public filing a creditor or factor makes to record its security interest in a business's assets, such as receivables.
- UCC-3 TerminationA filing that removes a creditor's UCC-1 lien from the public record, usually after the financing relationship has been paid off and closed.