Invoice Factoring Terminology
If you have only recently ventured into the world of factoring, the gamut of complex terminologies may have you feeling somewhat bewildered. This confusion rings true not only in the factoring industry, but in all finance-related fields. However, you can rest assured that half the battle is won if you simply master the terminology. In all financial sectors, the strength of the deal you’re able to secure may depend largely on how well you know the terminologies and their connotations. To that end, here is a look at some of the most common verbiage used in the factoring industry:
Of course, “factoring” should be the first term defined. Invoice factor is the sale of outstanding invoices to a factoring company in exchange for a sum of cash, which is a discounted amount of the face value of the invoice. In other words, if the value of your invoices is $1000, you will get $900, because 90% is the maximum cash advance offered by factoring companies.
Another important term is “advance request,” which refers quite simply to the invoices that you want to sell or factor. These are usually provided to the factoring firm, along with other supporting documents.
The two parties involved in the factoring transaction are the “factor,” a company that purchases the account receivables, and the “account creditor,” the business that sells the A/R invoices.
Similarly, the fee structure in the invoice factor process also has its own unique terminology, including:
Invoice: The account receivable that is sold
Initial Fee: The percentage of the invoice charged by the factor for the factoring services
Initial Period: Usually set at 30 days, this is the time allowed for the receipt of dues
Late fee: This is the fee charged when the invoice remains unpaid after the initial period. Basically, the longer an invoice is past due, the higher the late fee will be.
As far as the receipt of the payment is concerned, the term “lock box” refers to a facility, like a post box, where the purchasers will be able to forward the payments.
“Reserve” is another important term that you need to understand. The reserve is usually set at 20%, which means that even if the company agrees to pay you 90% of the invoice amount, you will not get the entire amount immediately. Instead, 20% will be placed in an escrow account until the invoice is paid by the client.
It is vital to familiarize yourself with these terminologies before opting for an invoice factor. If you do not understand certain terms, ask your factoring company for clarification so you can fully understand what you are getting into.
