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Factoring is a simple cash flow solution for many businesses. It is often used synonymously with accounts receivable financing. Factoring is a form of commercial finance whereby a business sells its accounts receivable (in the form of invoices) at a discount.
Effectively, the business is no longer dependent on the conversion of accounts receivable to cash from the actual payment from their customers, which takes place on typical 30-to-60-day terms. Businesses benefit from the acceleration of cash flow by obtaining cash from the factor equal to the face value of the sold accounts receivable, less a factor's fee.
Accounts Receivable - An amount owed by a customer by the act of granting short term unsecured credit in lieu of cash for goods or services. Considered a liquid asset on the balance sheet and generally expected to be paid in less than sixty days.
Accounts Receivable Financing - A short-term financing technique to raise working capital. Loans to a 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.
Asset Based Lending - A business loan where the borrower pledges as collateral for the loan any assets used in the conduct of his or her business. Funds are used for business related expenses. All asset-based loans are secured.
Credit - A privilege granted for the purpose of extending time to make payment on a debt.
Customer - The Company owing for the goods and services received. (Also known as the Account Debtor.)
Dilution - The amount of risk associated with the collection of the accounts receivable. It can include returns, charge-backs, trade allowances, concentrations, slow pay, bad debt and other perceived risks.
Discount Fee - The fee the Factor charges for funding a client's A/R. (Also known as the Factoring Fee.)
Due Diligence - Background check and research conducted by the Factor to assess the validity of a prospective client and that client's customers.
Factoring Company - The funding source for the client. The company purchasing accounts receivable (invoices) from the client. (Also known as the Factor.)
Factoring - Factoring is a form of commercial finance whereby a business sells its accounts receivable (in the form of invoices) to a third party at a discount, in order to obtain funding.
Factoring Agreement - The document containing terms and provisions of a factoring relationship.
Factors Acknowledgment Form - A form sent to the client's customer by the Factor, confirming that the client's invoice does exist and that the customer will remit the payment due under that invoice to the Factor.
Factor's Advance - The initial amount of money the Factor sends to a client, after the verification process is complete and before the Factor receives its money from the client's customer. The advance is calculated as a percentage of the face value of the factored invoices.
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 its Accounts Receivable to the Factor.
Factors Reserve - A deposit maintained by the factor to guard against disputes between the client and the customer and to guard against bad debt losses due to customer non-payment. This is the money retained by the factor when the advance is sent to the client. The Reserve is sent to the client after the customer has paid the Factor the money due on the invoice.
Factors Reserve Release - The amount of money released from the Factors Reserve once payment has been received and credited. The Reserve Release may be less any charge-back or fees associated with the services.
Factors Services - Factoring companies normally provide services that include Credit Analysis, and Collection Management.
Factors Verification - Process by which the Factor verifies that the product or service provided by the client was received and accepted by the customer, and that the customer intends to pay the factor the money due under the invoice. This process takes place before the Factor sends the advance to the client.
Notification Letter - A written communication with customers informing them of the assignment of Accounts Receivable of a client to a Factor.
Recourse - In this type of Factoring the risk of customer non-payment remains with the client. If the client's customer is financially unable to pay the money due under the invoice, the Factor has recourse against the client for that money. The Factor is protected against customer non-payment.
Working Capital - Funds available for business expenses such as advertising, wages, rents, and other operational costs. Often these funds are made available by short term loans secured by tangible assets.