Factoring Glossary

Account Debtor - The customer of a factoring client that owes money on an invoice.

Accounts Receivable - Money currently owed to a business for products and services rendered. Accounts Receivables are listed as an asset on a company's balance sheet.

Accounts Receivable Factoring - This is a financing strategy that allows a business to leverage their current accounts receivable for quick cash. A factoring company will advance the business capital for a portion of their accounts receivable, then assuming the responsibility of collecting on the purchased invoices. When the full invoice has been paid to the factoring company, the remainder of the invoice minus any applicable fees will be paid to the original company.

Advance Rate - This is the rate that the factoring company will pay on the invoices or assets that they are purchasing; most commonly ranging from 70-90%.

Bad Debt/ Charge Back - This is the amount that a factoring company will write off in the event that an account does not pay their invoices. In some factoring relationships the business who sold the invoice is responsible for paying the factoring company back (recourse), while other financial arrangements do not require this re-payment (non-recourse).

Creditor - The business or party in which money is currently owed to.

Debtor - The party that owes something to a creditor.

Dilution - The term that refers to the amount of risk associated with the transaction to the factoring company. This risk includes non-payment, returns, slow pay and charge backs.

Due Diligence - The background process that is typically performed by a factoring company on a new debtor or on the accounts receivable account that is being sold to the factoring company.

Factor - Refers to the company factoring invoices, accounts receivable or purchase orders for a client.

Factoring - The general term describing the process of selling invoices or accounts receivable to a third party company or organization for a discount in exchange for capital funding.

Factoring Fee - The total fee charged for purchasing the invoices or accounts receivable.

Factoring Verification - The process that a factoring company enables to verify that products and services were in fact delivered to the company being charged an invoice to prior to purchasing the asset.

Full Recourse Factoring - The factor is protected in the event that a customer does not pay their invoice. If this occurs, the customer is responsible for full re-payment of the advanced funds to the factoring company.

Non-Notification - In this type of factoring relationship, the customer paying the invoice to the client is not notified of the factoring relationship.

Non-Recourse Factoring - This type of factoring relationship requires the factoring company to assume the financial risk of non-payment. In the event that a client does not pay the purchased invoice, the client is not responsible for repaying the funds that were advanced by the factoring company.

Purchase Order Financing - This refers to the process of purchasing a company's or client's purchase orders at a discount. Companies often leverage this financial service when they need capital to complete a large sales order or large manufacturing order for a client.

Reserve - This refers to the amount that is not advanced to the client when the invoice or accounts receivables are purchased. This amount is often paid to the client minus any applicable fees once the customer has paid the invoice to the factoring company.

Reserve Release - When the factoring company releases the funds held in reserve to their client upon payment of the respective invoice.