Factoring Terms: A Trucking Centric Approach
Common Terms associated with Freight Factoring
To properly understand and communicate factoring concepts, it is best to be familiar with the common terms associated with the funding practice. Following are the terms and definitions used throughout this guide.
Account Debtor: A company that purchases products or services from the client and remits payment of invoices that are factored by the client. Also known as the customer.
Accounts Receivable: Outstanding money that is owed to the client by the client’s customers. This money is usually in the form of an invoice that is due to be paid in a certain period of time.
Accounts Receivable Factoring: Also known as factoring.
Advance: The amount of money that the factoring company advances to the client when they buy their invoice. The advance is usually a percentage of the gross invoice value and is advanced to the client soon after the invoice is purchased.
Advance rate: The percentage of the invoice that will be advanced to the client. This rate often varies between 70% and 95% of the gross invoice value.
Asset Based Loan (ABL): A short term loan where a company’s assets such as inventory, equipment or accounts receivable are secured as collateral.
Audit: A financial review carried out to ensure that the conditions of the factoring agreement are being met.
Bad Debt: Debt that is unlikely to be collected. Bad debt is often payed for out of the clients reserve account and or sold to a collections agency.
Cash Advance: An amount of money advanced to the client before the load has been delivered.
Client: A factoring client who sells their invoices to a factoring company. Do not confuse this with term customer.
Closing costs: Costs involved in becoming a factoring client. Some factoring companies have no closing costs. Other factoring companies could charge the cost as a percentage of the total factoring line amount. The closing costs are also referred to as the setup costs.
Collections: Payments that the factor receives for invoices factored by the client.
Commercial line-of-credit: A pre-approved amount of money issued by a bank to a company that can be accessed by the borrowing company at any time to help meet various financial obligations.
Concentration: The maximum amount for which a factor will fund on a single customer in a client’s portfolio. This is often expressed as a percentage of the factoring volume for a given customer. Concentration is used as a risk management measure to ensure that a large majority of a client’s portfolio is not represented by a single customer.
Confidential Factoring: A type of factoring where the client’s customer is unaware that the client is factoring their invoices.
Construction Factoring: A form of factoring designed specifically for companies in the construction industry.
Contra Account: A client account where two companies are both customers and suppliers of each other. This is often confusing for the factoring company.
Credit Limits: The factoring limit that is placed on each of a client’s customers by a factor. This is usually determined by their credit rating and possible concentration limits.
Credit Protection: A facility that covers the client against potential losses for unpaid invoices. Usually in the form of a credit insurance policy.
Credit Terms: A commercial sale that allows the customer to pay a certain number of days after an invoice is submitted.
Current Account: The total amount of funds paid to a client including any charges at any given time.
Customer: A company that purchases products or services from the client and remits payment of invoices that are factored by the client. Also known as the Account Debtor.
Day sales outstanding: A calculation used by a company to estimate the average time it takes their customers to pay.
Debtor Financing: Another term for factoring. Mainly used in Australia.
Dedicated Account Manager: A client’s main contact with a factoring company and the manager of a client’s factoring account. A dedicated account manager is used by a factoring company in order to build a relationship with the client to better understand their needs.
Disapproval: When the funding of an invoice is not approved.
Dispute: A situation where an invoice is not paid by the customer due to a problem with the product or service.
Export Debt: Debt that is owed to a client from a customer located overseas.
Factoring: A form of business funding where a company sells their invoices to an intermediary called a factoring company in order to finance their accounts receivable.
Factoring Agreement (Factoring Contract): A formal contract issued to the client that states the terms of the factoring agreement.
Factoring Company: A company that provides factoring services.
Factoring Charge: A charge made to the client for administering their invoices, collecting them and processing them.
Factoring Fee: The fee charged by the factoring company to finance a client’s invoices. This fee is usually a percentage of the gross value of an invoice for a certain period of time (e.g. 1.59% for 90 days).
Factoring Line of Credit: A form of factoring where the client only pays fees on funds drawn. This usually includes a small administration fee to manage the client’s accounts receivables. However, the factoring rate is much lower since it is charged by the day. (e.g. 0.022% perday + 0.5% admin fee)
Flat Fee Factoring: A form of factoring in which the client is charged the same flat rate on all invoices aging up to a specific number of days.
Flex Factoring: A form of factoring in which the client is charged a rate per date range increment. (e.g. 0.49% per10 day increment)
Freight Bill Factoring: A form of factoring specifically designed to serve transportation carriers and freight brokers. Also referred to as freight factoring.
Fuel card: A card issued to a trucking company’s drivers that provide a discount on the cost of fuel.
Funding Limit: The maximum amount of money that a factoring company can fund to a client’s account.
Funding Period: The time period from the purchase of the invoice to thecustomerpaying the full invoice amount.
Hard sign off: When the customer signs a document verifying the invoice and committing to full payment without any credits deducted, or contested obligations.
Invoice Discounting: Another term for factoring.
Invoice Factoring: Another term for factoring.
Lockbox: A bank treasury management system designed to receive payments and deposit them into an account as quickly as possible. Most lockbox’s systems also scan documents and provide online systems for viewing and management.
Medical Factoring: A form of factoring designed specifically for medical companies.
Non-Notification: A form of factoring where the customer is not notified that their payments should be paid to a factor. In this situation the customer believes they are paying the client when in fact they are actually sending payments to the factoring company
Non-Recourse: A form of factoring where if a client’s customer doesn’t pay, the factoring company will absorb the cost. Most factoring companies that provide non-recourse factoring are only willing to pay if the client’s customer files for bankruptcy or declares insolvency.
Notice of Assignment: A notice that is sent to customers notifying them that the client’s invoices should be payed to the factor.
Notification: The process where the factor legally notifies a client’s customer that payments for the clients work should be made to the factor. This is usually done through the sending of a Notice of Assignment (NOA).
Purchase Order Financing: A type of funding that finances the supplier costs associated with a purchase order of finished goods.
Rebate: The amount that is paid to the client when the client’s customer pays the invoice. This equates to the reserve amount minus the factoring fee.
Recourse Factoring: A form of factoring where if the client customer doesn’t pay, the client is liable to pay back their factor.
Reserve Account: A client account where a small amount of each factored invoice is deposited. This is usually used as insurance in case one of a client’s customers doesn’t pay.
Reserve Amount: The percentage of the invoice that is deposited into the reserve account.
Same Day Funding: Getting funded on invoices that the client submitted that same day.
Schedule of Accounts: It’s a form that is used by the client to submit their invoices to their factor for funding.
UCC: Stands for Uniform Commercial Code. It is a uniform act that harmonizes the law of sales and commercial transactions in the 50 states.
Verification: The process of checking an invoice’s validity, amount, and payment address. This is usually done through a phone call with a client’s customer.
Working capital: The capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
Copyright 2019, Accutrac Capital Solutions Inc.