Flex Business Capital has a mission to provide clear, transparent funding solutions to our customers, with no hidden fees! Below is a quick reference list going over the most common terms in the factoring industry:
Asset Based Loan (ABL): It is a short term financing that is secured by the company’s assets predominately on accounts receivable and inventory and in some cases real estate or equipment. An asset based lenders focus is the collateral, cash flow and covenants are not as material.
Account Creditor: A company who provides the goods or services and bills the invoices to customers.
Account Debtor: The customer who owes the balance of an account to company after receiving a service or good.
Accounts Receivable (A/R): Money that is owed to you by your customers, usually by issuing an invoice that is due to be paid within a certain period of time.
Advance: the amount of money that the factoring company advances to your company when they buy the invoice. The advance is a percentage of the gross value of the invoice and is sent after the invoice is purchased.
Advance Rate: The percentage of the invoice that will be advanced. On average, invoices will be about 80% – 95%.
A/R Aging: An accounts receivable report listing all unpaid customers invoices by date ranges, usually from 1-30 days, 31-60 days, and 61-90 days.
Collateral: Governed by the Uniform Commercial Code (see UCC), certain company assets are pledged to the finance company via a security interest.
Collateral Management Fee: A fee charged to administer your invoices, collect them and pro- cess them.
Collections: Payments that the factoring company receives for factored and non-factored invoices. This can be payments received via wire, ACH (automated clearing house) or lock-box.
Concentration: When a client has a larger percentage of their business with an account debtor. As it is inherently more risky, the factoring company monitor and set parameters accordingly.
Contra Account: This occurs when a client’s customer is also a supplier.
Credit Limits: The funding limit the factor places on each of your customers. It is often based on their financial strength, credit rating, concentration, A/R aging, etc.
Dip Finance (Debtor in Possession): Financing provided for companies in chapter 11 bankruptcy process.
Factored Invoice: An invoice sold to the factor.
Non-Factored Invoices: An invoice not sold to the factor.
Factoring: A form of business funding where a company finances their accounts receivable by selling their invoices to third party factoring company.
Facility Limit: The maximum amount a client can fund.
Funding Period: The time period starting when the factor purchases the invoice and finishing when the customer pays the invoice in full.
Lockbox: A bank treasury management system. It is designed to receive payments by mail and deposit them to an account.
Notice of Assignment (NOA): A notice that is sent to an account debtor informing them the invoice has been factored/purchased and pledged as collateral. The NOA also informs the customer of the new payment address.
Reserve: Often expressed as a percentage of the funding line, it is used to cover bad debt expenses and payment shortages. Once invoices are paid by your account debtor, reserves are usually released to the client. The reserve is often calculated by subtracting the factoring fees and the advance from the customer payment.
UCC (Uniform Commercial Code): A nationwide uniform act that merges the law of sales and commercial transactions in the 50 states.
UCC Lien: It is a security interest given by the owner of property to secure debt. Factoring companies use liens that are governed by the UCC.
Working Capital: The amount of current assets minus the amount of current liabilities. These assets, such as cash or accounts receivables, are used to fund the business’ daily operations.
Verification: The process where a factoring company verifies the validity of value of a client’s invoice directly with the account debtor.
If you have any questions, please feel free to contact us!