Factoring finance companies use terms which may seem unfamiliar. We explain the key terminology below.
Account Debtor / Customer
The business or businesses purchasing goods and services from you, the client.
Dollar amount that the factoring company advances to your company when they buy the requested invoice. The advance is a percentage of the gross value of the invoice (Advance Rate) and is wired immediately after the invoice is verified and purchased.
The amount of the face value of the invoice the factoring company will advance the borrower. For instance, on a $100,000 invoice with an 80% advance rate, $80,000 will be advanced to the borrower immediately.
The borrower / recipient of the factoring advance. In a factoring transaction, the account creditor is the company providing the goods or services to a debtor or customer, and a client / borrower of the factoring company.
The contract between the factoring company and you, the client. It covers terms of the relationship including as fees, advance rates, and the length of the relationship. Factoring finance agreements can be changed, extended, or terminated according to provisions included within it.
A percentage fee charged by the factoring company, usually on a monthly basis. Used to describe how much is charged on an invoice’s face value for a period it’s outstanding. For instance, a 5% monthly factoring fee on a $100,000 factored invoices means that $5,000 is owed to the factoring company every 30 days that the invoice is outstanding. Also known as a Discount Fee in the factoring financing lexicon.
A type of factoring where the factoring company assumes all risk of nonpayment from the account debtor / customer. With non-recourse, clients receive a lower advance rate but will not be responsible for the invoice once the factoring company purchases it.
The remaining amount of the invoice, minus factoring fees, that is deposited in your account when factored invoices are paid.
A standard factoring arrangement in which the client is responsible for invoices that remain unpaid past their recourse period.
The length of time a factoring company will hold an unpaid invoice before requiring the client to collect on it. Recourse periods can vary from 60 to 120 days depending on the agreement between client and factoring company.
The remaining balance of an invoice that is withheld, awaiting payment from the customer. The advance plus the reserve will equal the full amount of the invoice. Not to be confused with the Rebate, which is the final amount the client receives after payment is received and factoring fees are deducted.