Invoice Factoring Glossary
Short definitions of the terms you will see in a factoring agreement, a quote or a funding timeline. Each entry links to the page that covers it in depth, starting with invoice factoring.
A
Account debtor
The account debtor is the client's customer who owes the invoice and, after the Notice of Assignment, pays the factor.
Account setup
Account setup covers signing the factoring agreement, filing the UCC-1 and sending Notices of Assignment before the first advance.
Accounts receivable
Accounts receivable is money customers owe a business for goods or services already delivered on credit terms. See accounts receivable financing.
Accounts receivable aging report
An AR aging report lists unpaid invoices by customer and by how long each has been outstanding.
ACH
ACH is the US electronic bank-to-bank payment network used for advances and reserve releases.
Advance rate
The advance rate is the percentage of an invoice's face value a factor pays upfront. You receive 70%–90% of approved invoices; see pricing.
Annual percentage rate
The annual percentage rate is the yearly cost of credit including fees, used to compare loans. To compare factoring with an APR, see annualized factoring cost.
Annualized factoring cost
Annualized factoring cost is the factoring fee per period multiplied by the number of periods in a year, used to compare factoring with the APR on a loan. See how much invoice factoring costs.
Articles of incorporation
Articles of incorporation are the state filing that creates a corporation, requested once at factoring setup.
Assignee
The assignee is the party that receives the right to collect a receivable; in factoring, the factor.
B
B2B invoice
A B2B invoice is a bill one business issues to another business or a government agency for completed work or delivered goods. The lending partner factors B2B invoices only; see eligibility.
B2C invoice
A B2C invoice bills a consumer. Factors generally do not buy consumer receivables.
Bank line of credit
A bank line of credit is a revolving loan a business can draw and repay, usually requiring strong credit, collateral and covenants. See factoring vs. a loan and factoring vs. a bank line of credit.
Bankruptcy
Bankruptcy is a federal court process for a business that cannot pay its debts; a customer's bankruptcy is the main risk non-recourse factoring covers. Businesses in Chapter 11 can look at DIP financing.
Bankruptcy Code Section 364
Section 364 of the Bankruptcy Code (11 U.S.C. 364) lets a debtor obtain new credit with court approval, including priority and lien protections for the lender. See DIP financing.
Bill of lading
A bill of lading is the shipping document a carrier signs that lists the freight, origin and destination, and is also a receipt for the goods. Used on every freight factoring submission.
Blanket lien
A blanket lien covers all of a business's assets. A specific lien covers only listed items.
Borrowing base
A borrowing base is the formula an asset-based lender uses to set available credit, such as up to 90% of eligible receivables plus up to 50% of inventory. See asset-based lending.
C
Cash conversion cycle
The cash conversion cycle is the number of days between paying for inventory or labor and collecting cash from the customer.
Chargeback
A chargeback is the factor's deduction of an unpaid or disputed invoice's advance from future funding or the reserve, under recourse terms. Recourse terms decide who carries it: recourse vs. non-recourse factoring.
Client
The client is the business that sells its invoices to the factor.
Commercial financing disclosure law
Commercial financing disclosure laws require financing providers, including factors, to disclose cost terms before a business signs. New York, Florida and Georgia apply them to factoring.
Concentration limit
A concentration limit caps how much of a client's factored ledger one customer can represent.
Conditional lien waiver
A conditional lien waiver gives up a contractor's lien rights for a payment only once that payment clears.
Contract term
The contract term is the length of a factoring agreement and the notice and fees required to end it.
Contracting officer
A contracting officer is the government official authorized to sign and administer a federal contract, including acknowledging assignments. See government contract financing.
Credit limit
A credit limit is the maximum amount of a single customer's invoices a factor will hold at one time.
Credit review
A credit review checks the payment history and creditworthiness of the customers whose invoices will be factored.
Customer creditworthiness
Customer creditworthiness is how reliably the business's customers pay their bills, which drives factoring approval and pricing.
D
Daily remittance
Daily remittance is the automatic daily or weekly debit an MCA provider takes from a business's bank account.
Days sales outstanding
Days sales outstanding is the average number of days a business takes to collect payment after a sale.
Debtor-in-possession financing
Debtor-in-possession (DIP) financing is a court-approved loan to a business in Chapter 11 that keeps it running while it reorganizes. See DIP financing.
Disputed invoice
A disputed invoice is one the customer contests over quality, quantity or pricing; factors exclude it until the dispute is settled.
Due diligence
Due diligence is the factor's review of a new client: entity documents, UCC search, tax status, customer credit and invoice validity.
E
Equipment financing
Equipment financing is a loan or lease secured by the equipment it pays for.
Explanation of benefits
An explanation of benefits is the payer's statement showing what it paid on a claim and why.
F
Factor rate
A factor rate is the multiplier an MCA uses to set total repayment, such as 1.3 times the advance. Compare it with a factoring fee in factoring vs. MCA.
Federal Acquisition Regulation
The Federal Acquisition Regulation is the rulebook for federal procurement; subpart 32.8 covers assignment of claims.
First-position lien
A first-position lien is the senior claim on a piece of collateral, paid before any other creditor.
Flat factoring rate
A flat factoring rate charges one fee per invoice regardless of how long the customer takes to pay, within a set window.
Form W-9
IRS Form W-9 gives a payer a business's legal name and taxpayer identification number.
Freight broker
A freight broker matches shippers' loads with carriers and pays the carrier, often on 30-day to 60-day terms.
Fuel card
A fuel card is a payment card for diesel purchases, often paired with a freight factoring account.
G
General contractor
A general contractor manages a construction project and pays subcontractors from owner draws.
H
HIPAA
HIPAA is the federal law that sets privacy and security rules for protected health information, which medical factors must follow.
I
Interim DIP order
An interim DIP order is early court approval that lets a debtor draw part of a DIP facility before the final hearing. See DIP financing.
Inventory financing
Inventory financing is a loan or credit line secured by a business's stock of goods.
Invoice
An invoice is a seller's bill listing goods or services delivered, the amount owed and the payment terms.
Invoice financing
Invoice financing is a loan or credit line secured by your unpaid invoices, where you keep collecting from your customers and repay the lender as they pay. See how it compares in invoice factoring vs. invoice financing.
Invoice verification
Invoice verification is the factor's confirmation with the customer that the work was done and the invoice is valid and payable.
L
Lien priority
Lien priority is the order in which creditors are paid from the same collateral, generally set by who filed or perfected first.
Lien waiver
A lien waiver is a contractor's or supplier's written release of lien rights in exchange for payment.
Load board
A load board is an online marketplace where brokers post loads and carriers find freight.
Lockbox
A lockbox is a bank-managed address or account where customers send payments on factored invoices.
M
Mechanic's lien
A mechanic's lien is a claim a contractor or supplier can file against a property for unpaid work or materials.
Miller act
The Miller Act requires payment and performance bonds on federal construction contracts above a set value, protecting subcontractors who cannot file liens on federal property.
Motor carrier
A motor carrier is a company authorized by the FMCSA to haul freight for hire.
N
Net terms
Net terms are the number of days a customer has to pay an invoice, such as net-30, net-45, net-60 or net-90.
O
Owner-operator
An owner-operator is a truck driver who owns or leases the truck and runs it under their own or a carrier's authority.
P
Pay application
A pay application is a contractor's request for progress payment, often on AIA G702 and G703 forms. Common on construction factoring accounts.
Payer
In healthcare, the payer is the insurer or employer plan that pays a provider's claim. On this site, a payer means a commercial insurer or employer plan; see medical factoring.
Perfection
Perfection is the step, usually filing a UCC-1, that makes a security interest effective against other creditors.
Prime contractor
A prime contractor holds a contract directly with the government agency, as opposed to a subcontractor.
Progress billing
Progress billing invoices a construction customer in stages as work is completed.
Prompt Payment Act
The Prompt Payment Act requires federal agencies to pay contractors on time or owe interest penalties.
Proof of delivery
Proof of delivery is a signed record that goods were received, used to verify a freight or product invoice.
Purchase order
A purchase order is a buyer's written order for goods or services at an agreed price. See purchase order financing.
R
Rate confirmation
A rate confirmation is the broker's signed agreement with a carrier setting the load, rate and terms. Required for truck factoring.
Reserve
The reserve is the share of an invoice a factor holds back until the customer pays: the difference between face value and the advance.
Reserve release
The reserve release is the payment of the held-back balance, minus the factoring fee, after the customer pays the invoice. See how it works on the how it works page.
Retainage
Retainage is a percentage of each progress payment the owner or GC withholds until the project is complete. See subcontractor financing.
Reverse factoring
Reverse factoring is a buyer-led program in which a lender pays the buyer's suppliers early based on the buyer's credit.
S
SBA loan
An SBA loan is a bank loan partly guaranteed by the US Small Business Administration, such as a 7(a) loan.
Schedule of accounts
A schedule of accounts is the list of invoices a client submits to a factor for funding in one batch.
Seasonal cash flow
Seasonal cash flow is the pattern where a business's costs peak before its busy-season receivables are collected.
Secured party
The secured party is the creditor named in a UCC-1 that holds a security interest in the listed collateral.
Security interest
A security interest is a creditor's legal claim on specified collateral if an obligation is not met.
Shipper
A shipper is the business whose goods are being transported.
Specific lien
A specific lien covers only listed collateral, such as receivables or one piece of equipment.
Subcontractor
A subcontractor performs a specific trade on a project under contract to the general contractor.
T
Termination fee
A termination fee is a charge for ending a factoring agreement before its term expires.
Tiered factoring rate
A tiered or variable factoring rate adds fee increments for each period, such as every 10 or 30 days, an invoice stays unpaid.
Timesheet
A client-approved timesheet records hours worked by placed staff and supports a staffing invoice. Supports staffing factoring invoices.
Trade credit insurance
Trade credit insurance pays a seller if a customer fails to pay an invoice because of insolvency or default.
Trade finance
Trade finance covers funding for buying, selling and shipping goods, including purchase order financing and letters of credit.
True sale
A true sale is a transfer of receivables in which the buyer takes ownership, so the receivables leave the seller's balance sheet and fall outside its bankruptcy estate.
U
Unconditional lien waiver
An unconditional lien waiver gives up a contractor's lien rights for a payment immediately, whether or not it has cleared.
Unique entity ID
The Unique Entity ID is the 12-character identifier SAM.gov assigns to every business registered to do federal work.
W
Wire transfer
A wire transfer is a same-day bank transfer, often used for urgent advances.
Working capital
Working capital is a company's current assets minus its current liabilities: the cash available to run day-to-day operations.
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