Terminology and Concepts of Freight Factoring
In order to have a complete understanding of how freight factoring works, it is very important to understand the basic terminology and the principle concepts of factoring. With this understanding you will be able to ask better questions and make an informed decision when choosing the best invoice factoring company for a trucking business.
Here is an overview of some common terms used in this guide:
Factoring: A form of business funding where a company sells their invoices to third party called a factoring company in order to acquire advance funding.
Factoring Company: A company that provides factoring services. Also known as the Factor.
Client: The Trucking Company who sells their invoices to a factoring company. Also known as the Client Company.
Customer: a business that utilizes the services of the Client and remits invoice payment to the client’s factoring company. Also known as the Debtor.
Figure I: The Relationship Between Factoring Participants
The Funding Elements
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.
Reserve: The percentage of the invoice that is held by the factor until full payment of the invoice is received from the Debtor, at which time this amount is remitted to the Client.
Fee: The service charge for financing an invoice. This fee is usually a percentage of the gross value of the invoice, typically deducted either from the Advance or from the Reserve.
Copyright 2019, Accutrac Capital Solutions Inc.