Factoring Terminology 101

It seems every industry has its own insider language.  The invoice factoring industry is no exception.  If you’re a business owner looking for a factoring company to boost your cash flow; knowing the definition of some key words and phrases will help you find the factoring company that is the best fit for your business.  Below are some common factoring terms:

Advance Rate:  This is the percentage that the factoring company will pay you when you sell your invoice.  For example, your factor agrees to buy invoices from you for $50,000.  Your advance rate is 90%, you will be receive $45,000.

Client:  This is you.  In factoring the client provides their goods or services to a debtor and then invoices the debtor.

Credit Limit: The maximum amount of credit that factor will extend to a debtor.

Debtor: This is your customer who owes payment of your invoice. 

Discount fee: Another term for factoring fee.  The discount is a small charge taken by the factor when they purchase your accounts receivable. Discount fees are determined by the size of the invoice, the debtors’ creditworthiness, and the length of time the invoice remains unpaid.

Factoring Agreement: The agreement between the client and factoring company.  This will cover fees, advance rates. 

Invoice: A commercial document issued by the seller to the debtor.  The invoice itemizes the products or services delivered, quantity and agreed upon price.  Payment terms and purchase order number are also referenced.  The invoice should have proper verbiage to protect the client and the factoring company. 

Proof of Delivery: The factoring company will need confirmation that the Debtor has received the goods or services described in your invoice.  This can be provided by email confirmation or signature approval.

Rebate: The invoice remainder, minus fees, that is deposited in your account when your invoices are paid.

Reserve Account: The balance of your invoice that is withheld pending payment from the customer. The Advance plus the Reserve will equal the full amount of the invoice.