GlossaryFinance Terms & Definitions

Whether you are completely new to factoring or want to take your knowledge to the next level, use this resource to familiarize yourself with key factoring terms and definitions.

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Our glossary is one of the best ways to make an educated decision on the right financial route for your business.

We understand that steering your company through the world of funding can be confusing if you don’t know where to start or aren’t fully familiar with the terminology. To make it easier, we’ve compiled these important factoring terms and organized them in alphabetical order. But if you find you still need assistance after reading through our list, we encourage you to reach out. We are happy to help and can connect toll free during regular business hours at 866-245-0020.

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glossary a

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 Receivable

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 reported on a schedule by time intervals (30-day increments) that is used to analyze the amount of money owed to a business by its customers and determine the probability of collection, as it shows patterns of payment and delinquency.

Accounts Receivable Financing

A form of financing that 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

A 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 the factor.

Advance

The percentage of an invoice’s face value that a factor pays upon its purchase.

Assets

Items that 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.

glossary c

Capital Net Worth

The amount of funds remaining in a business after all debts have been satisfied; when assets exceed liabilities.

Cash Flow

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 with businesses that are cyclical in nature or subject to external forces).

Chapter 1

Affords businesses an opportunity to reorganize by restructuring debt and negotiating payment schedules.

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.

Clients

The individual or company that sells its accounts receivables to a factor or other financial entity.

Commercial Credit Insurance

Insurance against large losses from uncollectible 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 that can own property, incur debts, sue, and be sued. Corporations have 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; the client’s customers, also known as account debtors.

glossary d

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 that 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.

Discount Schedule

The apportioned time at which a discount or fee is applied.

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 be assured that the money they advance will be paid back.

glossary l

Liabilities

The amount owed by a business or an individual, excluding ownership equity. There are two types of liabilities: current and long-term.
Current liabilities are debts that 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; a public record of security interest attached to assets which shows the benefactor, beneficiary, and duration of attachment. When the debt is paid, the lien is removed. To satisfy judgments, courts 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, and benefit from a good credit rating.