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FACTORING GLOSSARY OF
TERMS
Account
A collection of claims or invoices against a particular customer for goods
or services delivered.
Account
Debtor
The person, business or organization responsible for paying an invoice.
In the case of factoring, the account debtor is the customer whose name
is on the invoice sold to the factor.
Accounts
Payable
The amount owed by a business to its suppliers or vendors.
Accounts
Receivables
A commercial debt due for repayment usually in 30 - 90 days. In the factoring
industry the accounts receivable is what a company sells to a factor.
Accounts
Receivable Aging Schedule
A classification process, as reported on a schedule by time intervals
(30 day increments & current), 30 days, 60 days, 90 days, 90+ days,
used to analyze the amount of money owed to a business by its customers.
It is used by credit grantors (such as banks and factors) to determine
the probability of collection, as it shows patterns of payment and delinquency.
.
Accounts
Receivable Financing
A form of financing which uses accounts receivable as collateral for a
loan. This is different than factoring in that the party providing the
financing does not own the invoice and is not responsible for collecting
the debt.
Acknowledgment
Form
Form sent to the client's customer account debtors to confirm that the
invoice the client is selling does exist and that they will remit payment
directly to factor.
Advance
The percentage of an invoice's face value which a factor pays upon its
purchase.
Assets
Items which hold commercial or exchange value. .
Asset
based Lending
A form of lending where the factor uses collateral, such as equipment
or inventory, as security against the loan.
Assignment
A transfer of ownership or interest in a payment obligation between two
or more parties.
Authorized
Signatory
An individual who is authorized to execute a binding document on behalf
of a corporation, partnership or other legal entity.
Bad
Debt Reserve
A reserve of funds held back by a finding source, when purchasing an income
stream, to offset its losses due to non-payment of the purchased income
stream. Once the reserve reaches a predetermined size, sufficient to protect
the funding source’s investment, part of the reserve will be funded
back to the client. Most often used when factoring accounts receivables,
purchase orders or contracts.
Balance Sheet
A financial report that shows what an individual, business or other entity
owns (its assets), what it owes (its liabilities), and the amount of its
net worth or equity; as of the date of the statement.
Bankruptcy
A state of insolvency of an individual or organization. The inability
to pay debts.
Bill
of Lading
A shipping document which gives instructions to the company transporting
the goods.
Bill
of Sale
A document used to transfer the title of certain goods from seller to
buyer.
Blanket
Assignment
The pledge to a lender of all present and future income streams as collateral
for a loan. (This is used primarily for invoices, purchase orders and
contracts.).
Borrowing
Power
The maximum loan available to a borrower at a particular time based on
the calculated value of the accounts receivable; the product of a borrower’s
advance rate times eligible accounts receivable.
Break-Even
Point
That level of business operation where total costs equal total revenue.
Capital
Net Worth
The amount of funds remaining in a business after all debts have been
satisfied; i.e. assets over liabilities.
Cash
Flow
An analysis over a period of time revealing the availability, or lack,
of cash. More simply put the difference between cash in (income) vs. cash
out (expenses). Since money does not flow in and out at an equal rate,
in most businesses, an analysis of cash flow is important, especially
of businesses that are cyclical in nature, or subject to external forces.
Chapter
11
A Federal Bankruptcy Act where a debtor can maintain control of its business
and operations, under court supervision, as long as current debts remain
paid.
Chapter
1
Affords businesses an opportunity to reorganize by restructuring debt
and negotiating payment schedules.
Clients
The individual or company that sells its accounts receivables to a factor
or other financial entities.
Commercial
Credit Insurance
Insurance against large losses from the uncollectability of accounts receivable.
Collateral
An asset that is promised or given to a creditor (a factor or a financial
institution) to guarantee the discharge of an obligation by the debtor.
Upon default, the creditor may seize the asset and sell it to pay off
the loan.
Concentration
The amount of one client's accounts receivable due from a single customer.
A large concentration for a single customer is considered high risk.
Confidential
Invoice Discounting
An arrangement between a client and a factor in which the factoring relationship
is not disclosed to the client's customers.
Corporation
A legal entity which can own property, incur debts, sue, and be sued.
Corporations provide for limited liability, easy transfer of ownership
and continuity of existence.
Corporate
Resolution
An action taken by the vote of a corporation.
Credit
Analysis
An analysis of records and financial affairs to determine the creditworthiness
of a business.
Creditor
The party to whom money is owed.
Customer
The business or organization that owes money on an invoice purchased by
the factor; i.e. the client's customers, also known as account debtors.
DBA:
Doing Business As
Used to designate the name of a business as it is commonly known rather
than its legal name, the name of the owner, etc.
DBT
An abbreviation for "days beyond terms," which indicates how
many days past the due date an invoice is late.
Debtor
A person or party which owes payment to a creditor.
Delivery
Evidence
A document that proves delivery and invoicing of a shipment.
Direct
Mail
Mail sent to large numbers of potential customers advertising a product
or service and soliciting orders.
Discount
Factoring
Arrangement whereby a factor purchases an account(s) receivable from a
business (your client) at a discount to the face value of that receivable.
The factor earns a fee based on the number of days that the receivable
remains unpaid, i.e., the longer the receivable remains unpaid, the larger
the fee incurred.
Discount
Fee
The amount earned by a factor on each invoice purchased. It is based on
the period of time the invoice remains outstanding (unpaid) and is set
forth and agreed upon by both parties in the Discount Schedule.
Discount
Rate
The percentage of the face value of an invoice that a factor holds as
its fee.
Due
Diligence
The verification of information and its documentation given to a factor
in order to facilitate a decision as to whether or not a particular invoice
should be purchased. Factors always want to take as little risk as possible
and want to be assured that the money they advance will be paid back.
Face
Amount or Face Value
The total dollar amount of an invoice. This is the amount that has to
be paid to the factor by your client's customer, without consideration
as to how much was advanced to the client. .
Factor
As a verb, to factor is the act of buying or selling accounts receivable
at a discount. As a noun, a factor is a company engaged in the buying
of accounts receivable.
Factoring
Factoring is the process of purchasing commercial accounts receivable
(invoices) from a business at a discount.
Funding
Advancing money (based on the advance rate) to a client.
Guaranteed
Sales
Sales that allow the return of merchandise purchased at the customer's
discretion.
Indemnification
A promise to compensate for loss or damage sustained as a result of a
stated set of circumstances.
Invoice
A legal debt instrument which indicates the amount due from a customer
to pay for delivered goods or services. Invoices may be traded or sold.
Liabilities
The amount owed by a business or an individual, excluding ownership equity.
There are two types of liabilities: Current and Long-term. Current are
debts which must be paid within one year (such as accounts receivable,
dividends, notes payable, bank loans payable, taxes payable, wages and
long-term debt due within one year). Long-term liabilities, also called
funded debt, are debts that are not due until after a year's time.
Lien
A creditor's claim against property. When the debt is paid, the lien is
removed. Courts to satisfy judgments may also grant liens.
Lien
Search
A search through public records on file in both the County Clerk's and
Secretary of State's offices for any claims (pledges) against the property
of a business (such as their accounts receivable) or an individual. An
example would be if a taxing authority has a lien against the accounts
receivable of a business due to taxes owed.
Line
of Credit
The amount of credit that may be extended to a borrower by a lender. This
type of arrangement gives a borrower more flexibility in planning for
operating expenses.
Liquidity
The ability to convert assets into cash (or cash equivalent) without significant
loss. If a business has good liquidity they will be able to meet their
maturing obligations promptly, earn trade discounts, benefit from a good
credit rating, etc.
Mechanic's
Lien
A lien on property (such as a building or an invoice) given by statute
to a worker or contractor who performs work or furnishes materials for
the improvement of that property, until compensation is made for the improvement.
Until that lien is satisfied, it usually takes precedence over all other
liens.
Negative
Cash Flow
A situation where income is less than expenses. Prolonged negative cash
flow can lead to the failure of a business.
Note
A written promise to pay a named amount to a particular company or business
by a certain date.
Notification
Process whereby the factor lets an account debtor (your client's customer)
know that an invoice(s) has been purchased from your client, and that
the debtor is to pay the factor directly.
Non-Notification
An aspect of confidential factoring where the customers are not notified
of the client's arrangement with the factor.
Non-Recourse
A type of factoring where the factor assumes complete responsibility for
collection of debt. If the debt is not collected due to the financial
inability of the customer, the factor assumes the loss.
Overhead
The cost of doing business unrelated to production or sale of goods or
services. Office rent, for instance, is an overhead expense. It remains
unchanged no matter how much a company sells.
Partnership
A contract between two or more people in a joint business venture who
agree to pool their funds and/or talents and share in the profits and
losses of the enterprise. General partners are those who are responsible
for the day-to-day management of activities, whose individual acts, are
binding on all the partners, and who are personally responsible for the
partnership's total liabilities. Limited partners are those who contribute
only money and are not involved in management decisions and whose liability
is limited to the amount of their investment.
Personal
Guarantee
An agreement in which a principal of a corporation assumes personal liability
for the obligations of the corporation.
Pre-ship
Invoice
A legal debt instrument which indicates the amount due from a customer
to pay for goods or services which have NOT yet been delivered. Generally,
factors will not purchase pre-ship invoices.
Principal
The owner of a privately held business or one of the main parties (buyer
or seller) involved in a transaction.
Principal
Generally
A major party to a transaction, acting as either a buyer or seller; or
the owner of a privately held business.
Profit & Loss Statement
An accounting summary of revenues, expenses and costs of a business during
a specific period. This may also be known as an operating statement, income
and expense statement or income statement.
Purchase
Order
A document or form used by a customer to issue an order for goods or services.
Quantity
Discounts
Price reductions experienced as a result of purchasing in larger volume.
Rate
of Return
The yield on equity or invested capital.
Rebate
The return of funds issued to the client by a factor from the reserve
account.
Recourse
A form of factoring where the client is liable for payment in the event
the customer does not pay.
Reserve
Account
An account established by the factor to track funds owed to a client as
factored invoices are paid. The account amount equals the invoice face
value minus the advance, the factor's fees, charge backs and administrative
charges.
Schedule
of Accounts
Report give by the client to the factor. The report lists information
about the account of each of the client's customers.
Security
Property given or pledged to ensure the repayment of a debt by a borrower.
Term
The period of duration of an invoice. The time allowed for payment of
bills.
Trade
Discount
A deduction from the list price of goods provided by a business in return
for payment within a specified time frame.
UCC-1
The document filed with the Secretary of State and/or the County Clerk's
office(s) to perfect a factor's lien on a clients' assets (accounts receivable).
Also called "UCC Financing Statement."
UCC-3/
UCC-2(CA only)
The document that is filed with the Secretary of State and/or the County
Clerk's office(s) as evidence of an assignment, release or change in the
UCC-1. In the case of factoring, a UCC-3 is filed to terminate a UCC-
1 when all outstanding invoices are paid and the relationship between
the client and the factor is severed. Also called "UCC Statement
With Respect To Change."
Uniform
Commercial Code
The State Code which regulates the transfer of and security interests
in personal property.
Verification
A step during the due diligence process in which a factor confirms the
validity of an invoice with the customer.
Yield
The return on an investor's capital investment presented as a ratio of
income to the total cost over a specified period of time.
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