“A” credit customers: Consumers with impeccable credit, who can obtain a loan from traditional lenders.
“B” through “D” credit customers: These consumers have less than perfect to bad credit and usually cannot qualify for traditional financing. Also called sub-prime credit customers.
Acceleration Clause: Language in a lease that secures payments for the full term of the lease.
Account Creditor: The Factor’s client- the company selling its accounts receivable for cash.
Account Debtor: The customer of a Factor’s client. The company owing the money due on the invoices; also known as the customer.
Account Receivable Funding: A short-term financing technique to raise working capital. Loans to the 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. (Also known as Accounts Receivable Financing.)
Accounts Payable: The amount a company owes for goods and services it has received, but for which it has not yet paid. Accounts payable are considered a liability on your balance sheet.
Accounts Payable Aging: A report showing how long invoices due to vendors have been outstanding.
Accounts Receivable: The amount owed by a business to your company for goods or services already rendered and invoiced. The amount owed is evidenced by an invoice specifying goods or services provided and agreed-upon payment terms. Accounts receivable are considered an asset on your balance sheet.
Accounts Receivable Aging Report: A report showing how long invoices from each customer have been outstanding.
Advance Rate: The percentage of the factored invoice advanced to a client upon initial invoice funding. The advance rate is typically expressed as a percentage of the total invoice amount. Advance Rates usually range from 70-90%.
Amortization: The gradual, systematic payment of a debt, such as a mortgage or other loan, in installments of principal and interest for a definite time, so that at the end of that time, the debt will have been paid in full.
Articles of Incorporation: A document filed with a U.S. state by the founders of a corporation. After approving the articles, the state issues a Certificate of Incorporation. These two documents then become the Charter of Incorporation.
Asset: Anything owned by a business that has commercial or exchange value. A company’s assets might include real estate, equipment, inventory, intellectual assets (such as copyrights or trademarks) and accounts receivable.
Asset Based Lending/Loan: A form of business loan where the borrower pledges collateral, such as account receivable, equipment and inventory, to a lender as additional repayment security against monies advanced. Funds are used for business related expenses. All asset-based loans are secured.
Assignability: The ability to assign (or sell) an income stream to another individual or business.
Assignee: The person or business entity that is given, obtains, or buys the right to an asset.
Assignment: The transfer of the rights, title or interest of any debt instrument that is properly owned by another party.
Assignor: The person giving or selling an asset, and subsequently, forfeiting rights to that asset.
Bad Debt: Any debt that is delinquent and has been written off as uncollectible.
Balance Sheet: A financial statement that shows a business’ current financial condition. It lists assets, liabilities and net worth. On a balance sheet, assets are equal to liabilities plus net worth.
Balloon Payment: The balance of principal that is due and owing in its entirety at a specified point in time, but in any event, less that the time required to fully amortize the debt.
Bankruptcy: A state of insolvency of an individual or organization. The inability to pay debts.
Beneficiary: The person or party entitled to receive the benefits of an assignment of collateral.
Bill of Lading: A shipping document which gives instructions to the company transporting the goods.
Bill of Sale: A document used to transfer the title of certain goods from seller to buyer.
Broker: An individual who pairs clients in need of cash with appropriate financial entities, including factors.
Cash Flow: The flow of cash through a business or household. In business terms, cash flow involves the flow of cash into a company in the form of revenues, and out of the company in the form of expenses.
Charge Back: An amount of money owed to the factor or “charged back” to the client when the factor is unable to collect the Account Receivable that was factored, based on an agreed upon debtor non-payment clause in the Factoring contract. The factor will typically withhold amount out of a reserve release or an advance.
Chattel mortgage: A mortgage on personal property, given to secure a debt. Typically used in the sale of a business. (Also called a security agreement.)
Client: A business that sells its accounts receivable to the commercial factoring company. (The Factors’ customer)
Collateral: Anything of value (accounts receivable, inventory, machinery, equipment, real estate, etc.) pledged as security to ensure re-payment of an obligation. Collateral is promised to a funding source until funds are repaid. If the obligation is not repaid, the funding source has the right-by-law-to seize the collateral.
Collectibility: Refers to the funding source’s ability to collect future income stream payments once they are purchased.
Commission: Fee paid to a broker for executing or referring a cash flow transaction.
Concentration: When a large percentage (usually 15% or greater) of one client’s accounts receivable are due from a single customer.
Corporation: A legal entity, chartered by a U.S. state or the federal government, and separate and distinct from the persons who own it. It is regarded by the courts as an artificial person; it may own property, incur debts, sue or be sued.
Credit: A privilege granted for the purpose of extending time to make payment on a debt.
Credit Analysis: The process on analyzing the records and financial affairs of a business to determine creditworthiness.
Creditor: Refers to the party or business, to whom money is owed.
Customer: Also known as the Account Debtor. The entity that owes money to the client and will ultimately pay the factoring company for invoices purchased.
Debt instrument: Future payment or series of payments, or a debt that one party owes to another party. (Also known as income streams or cash flow instruments.)
Debtor: One who owes something and makes payments to a creditor.
Default: The omission or failure to perform or fulfill a legal duty, obligation, or promise (i.e. to pay a debt).
Dilution: The amount of risk associated with the collection of accounts receivable due to returns, chargeback’s, trade allowances, or other deductions taken by account debtors. The amount of dilution will affect the advance rate provided by the factor.
Discount Fee: This is the fee charged by the factoring company for performing factoring services. Discount fees are typically time-sensitive and are usually a flat, fixed percentage of the total invoice. This fee can be calculated on a daily basis or in 15 or 30-day increments.
Due Diligence: The background check and research conducted by the factor to assess the validity of a prospective factoring client (and that client’s customers) before officially entering into a commercial factoring agreement. Due diligence generally involves credit checks, appraisals, UCC searches, lien searches and/or on-site visit with clients.
Equity: The value or interest an owner has in property over and above any indebtedness owed on the property.
Escrow: The system by which money documents, personal property, or real property is held in trust for another party by a disinterested third party until the terms and conditions of the escrow instructions are completed or terminated.
Face Value: Value of the asset, invoice or other collateral at time it is pledged.
Factor: A funding source that specializes in funding accounts receivable. The factor is the company or entity purchasing accounts receivable (invoices) from the client.
Factoring: The sale of a company’s accounts receivable invoices to a factor to obtain working capital. Also referred to as receivables factoring, invoice factoring, bill factoring, accounts receivable factoring, accounts receivable funding and invoice discounting.
Factor’s Advance: Same as an Advance except expressed as a dollar amount. It is the money the factor sends to the client immediately after invoice verification is complete. The advance is figured by multiplying the advance rate by the face value of the factored invoice.
Factor’s Charge-Back: An amount of money that is owed to the Factor and is deducted or Charged-Back from the reserve to an agreed upon non-payment clause in the Factoring Agreement.
Factor’s Client: The business which sells Accounts Receivable to the Factor.
Factor’s Fee: Refers to the fee the factor charges for providing advance funding of the client’s accounts receivables amount.
Factor’s Services: Services provided by the factoring agent to the client on behalf of the factoring process, such as credit analysis, credit guarantees or collection management.
Factor’s Verification: Refers to the process whereby a factor verifies that the goods and services represented as provided and invoiced by the client to the customer, were in fact provided and accepted, and that the customer intends to pay the factor the money due under the invoice. This process is performed and satisfied prior to making the advance payment to the client against the invoiced amount.
Fictitious Name: A legal document filed with the appropriate State agency by which an entity uses a name other than their own official corporate name to operate a business.
Foreclosure: A legal proceeding in court to seize property given as security for a debt that is in default.
Full Recourse Factoring: In this type of factoring, the factor is protected against customer non-payment. If the customer does not ultimately pay the invoice, the client is responsible for paying back the invoice advanced.
Funding Source: An individual investor or an investment company that purchases or participates in a lending transaction.
Holdback: Also known as reserve. Amount withheld from the company factoring its accounts receivable until payment has been received. Usually expressed as a percentage of the total invoice amount.
Hypothecation: Borrowing funds from a lender, investing those funds in a debt instrument, and giving the lender a security interest in the debt instrument as the collateral for the loan.
Institutional lenders: Savings and loan associations, local and regional banks, mortgage companies, finance companies, and commercial lenders.
Intangible personal property: Something that has value but is not a tangible asset, for example, a trademark, copyright, patent, or trade secret.
Invoice: A legal debt instrument indicating the amount due from a customer to pay for delivered goods or services.
Leverage: The ratio of debt to total assets.
Loan-to-value-ratio: A measure of how heavily mortgaged a property is and how likely the owner is to default on his or her debts.
Marginal credit customers: Consumers who may have had some slow pay problems, but generally pay their bills.
Market Value: The price at which a ready, willing, and informed person would buy something; the price property would command in the current market.
Mortgage: A written instrument that creates a lien by pledging real property as security for a debt.
Non-Notification: In this type of factoring, the customer or account debtor is unaware of the factor purchasing the client invoice. They are however, directed to make payment to a lock box controlled by the factor. Any contact that the factor makes is made under the client company name.
Non-Recourse Factoring: A type of commercial factoring in which the risk of customer non-payment is borne by the factor. If the client’s customer does not pay, the factor generally does not have recourse against the client for payment of the invoice.
Notice of Pre-lien: A document notifying the owner of real property that materials or services are being furnished to his real property, putting him on notice that the one sending it will look to have a lien against the real property if those materials or services are not paid for.
Notification Letter: A written communication with customers informing them of the assignment of Accounts Receivable of a client to a Factor.
Owner Financing: A type of financing in which the seller of a tangible item accepts a promissory note as a portion of the purchase price.
Partnership: A common form of joint ownership of a business.
Payee: Person or business that has the right to receive a payment or series of payments and is interested in selling that income stream for cash. (Also called the seller or client.)
Payor: The person, company, or government responsible for making payments on an income stream.
Personal Guarantee: A contractual agreement between a funding source and a seller, whereby the seller assumes personal responsibility and liability for the obligations of the income stream.
Portfolio: A group or package of income streams of the same type.
Privately held: Owned by a private individual or business.
Profit and Loss Statement: A financial statement that shows a historical record of a business’ income and expenses.
Promissory Note: A written to pay a specified amount to a specified party over a certain period of time.
Purchase Order Financing: In this type of trade financing, money is advanced against a purchase order for finished goods or value added products to finance the manufacturing of the item. Once the goods ship to the customer and invoiced the transaction is closed out when the factoring company buys the invoice.
Real Property: Real estate.
Replevin: A legal proceeding in court to seize property (other than real estate) given as security for a debt that is in default.
Reserve: An amount withheld by the factor net of the advance. Can be used as a financial cushion to offset against payment shortages, client and the customer disputes, or bad debt losses due to non-payment. The reserve should be released to the client after the customer has paid the factor the total money due on the invoice.
Reserve Release: The process of the factor releasing final monies due the client once the invoice has been totally satisfied less any applicable fees or charge-backs.
Satisfaction: The discharge of an obligation by paying what’s due (i.e. the satisfaction of an IRS lien or the satisfaction of a security interest holder).
Securitization: The bundling and resale of debt instruments to investors; permitted only for parties licensed and regulated by the SEC.
Security Interest: An interest in property, other than real estate, which is given as security for a debt or other obligation. A security interest is created by execution of a security agreement and one or more financing statements under the Uniform Commercial Code.
Seller: A person or company with assets which are legally able to be sold.
Servicing: the collection of payments of interest and principal, and trust fund items such as fire insurance, taxes, etc., on a note by the borrower in accordance with the terms of the note. Servicing by the lender also consists of operational procedures covering accounting, bookkeeping, insurance, tax records, loan payment follow-up and loan analysis.
Sole Proprietorship: A business owned and operated by an individual.
Subordination: The act of a creditor acknowledging in writing that a debt due him or her by a debtor shall be inferior to the debt due another creditor by the same debtor.
Tangible personal property: Personal property other than real estate, such as cars, boats, or other assets.
Title Commitment: A commitment on the part of the insurer, once a title search has been conducted, to provide the proposed insured with a title insurance policy upon closing.
Title Insurance: Title insurance can benefit either the payer or the payee. Should the beneficiary suffer any damages due to clouded or false title to real estate, title insurance recompenses the damaged party to the extent of the damages.
Title Policy: An insurance policy that insures a party against loss due to a defective title.
UCC-1: A Financing Statement (Form UCC1) is filed to perfect a security interest in named collateral and establishes priority in case of debtor default or bankruptcy. UCC (Uniform Commercial Code) refers to the collection of laws dealing with commercial business.
Uniform Commercial Code (UCC): Standardized set of guidelines protected by law that set down how business transactions must be conducted.
Verification: The step during the due diligence process during which the factor confirms the validity of an invoice with the customer.
Working Capital: In general, the funds needed by a business to pay current expenses such as payroll, benefits, rent and other operating costs.