Understanding Invoice Factoring Terminology
Invoice factoring is a financial solution that allows businesses to improve cash flow by selling their accounts receivable to a factoring company. Like any industry, invoice factoring comes with specialized terminology. This guide explains the most commonly used factoring terms to help businesses navigate factoring agreements effectively.
Key Factoring Terms & Definitions
The following is a listing of the most commonly used terms and their definitions for ease of understanding.
Accounts Receivable
Accounts receivable refers to the money that a business is owed for services rendered or products delivered but not yet paid for.
Advance Rate
The percentage of the invoice value that a factoring company advances to the client upfront. It typically ranges between 70 and 95 percent of the invoice amount.
Bad Debt
Unpaid invoices that cannot be collected and are written off as a loss.
Cash Flow
The movement of money in and out of a business, essential for daily operations and financial stability.
Client
The business that sells its invoices to a factoring company.
Customer
The party responsible for paying the invoice in an invoice factoring arrangement.
Discount
Also referred to as the factoring fee, this is the cost charged by the factoring company for providing funding.
Factoring
A financial transaction in which a business sells its accounts receivable to a third party (factoring company) to improve cash flow.
Factoring Agreement
A contract outlining the terms of the factoring arrangement, including fees, advance rates, and recourse policies.
Factoring Company
A financial institution that purchases invoices and provides cash advances to businesses.
Factoring Fee
The percentage charged by the factoring company for purchasing invoices. This fee is usually expressed as a percentage of the invoice face value.
Factoring Terminology
A collection of industry-specific terms related to invoice factoring and accounts receivable financing.
Factoring Transaction
The process of selling an invoice to a factoring company in exchange for an immediate cash advance.
Freight Factoring
A specialized form of factoring designed for trucking companies, allowing them to receive immediate payment for freight invoices.
Invoice
A document issued by a business to its customer detailing goods or services provided, along with payment terms.
Invoice Discounting
A form of financing where businesses use unpaid invoices as collateral for short-term funding while retaining responsibility for collections.
Invoice Financing
A broader term that includes both factoring and invoice discounting as methods of leveraging unpaid invoices for cash flow improvements.
Non-Recourse Factoring
A factoring agreement where the factoring company assumes the risk of non-payment, protecting the client from bad debts.
Notice of Assignment (NOA)
A formal notification sent to customers, informing them that the invoice has been assigned to a factoring company and should be paid directly to them.
Recourse Factoring
A factoring arrangement where the client remains liable for unpaid invoices. If the customer fails to pay, the client must repurchase or replace the invoice.
Reserve Account
A portion of the invoice value held back by the factoring company to cover potential risks or unpaid invoices.
Reverse Factoring
A financing arrangement where a buyer initiates factoring to provide suppliers with early payment.
Specialized Factoring
Factoring tailored to specific industries, such as trucking, healthcare, construction, and staffing.
Spot Factoring
A single-invoice factoring transaction, where a business sells invoices on an as-needed basis instead of committing to a long-term contract.
Without Recourse
Another term for non-recourse factoring, where the factoring company absorbs the risk of non-payment.
Why Understanding Factoring Terms Matters
Understanding these key factoring definitions is crucial for businesses looking to improve cash flow through invoice factoring. Whether considering recourse factoring, freight factoring, or invoice discounting, having a clear grasp of factoring terminology ensures businesses make informed financial decisions.
Learn More About Invoice Factoring
If you’re looking for invoice factoring solutions, Integrity Factoring offers tailored factoring solutions to help businesses manage cash flow effectively. Contact us today to explore our factoring options!