Invoice factoring can use some complex language the the average small business owner does not usually encounter on their day-to-day operation. When communicating with our clients or their customers we strive for transparency and simplicity. Below is a glossary of the common terms used in the invoice factoring process.
Invoice Factoring Terms Defined:
Accounts Payable: Invoices and payment owed by a business to their suppliers
Accounts Receivable: Invoices and payment owed to a business by their customers
Accounts Receivable Financing (A/R Finance): Business funding based on your aging receivables rather than credit score or time in business
ACH (Automated Clearing House): Payments made through bank account withdrawals or deposits using the ACH system
Advance: The amount of money a business receives upon submitting an invoice
Annual Fees: Yearly fees paid to a lender as costs for maintenance of the loan or line of credit
Articles of Incorporation: a public record that establishes the creation of a business
Authorized Signatory: The person with permission to sign for a legal document on behalf of the company
Bill of Lading: Legal document with the terms and goods of a shipment by a carrier
Buyout: Process of switching factoring companies when under contract. The new factor will buy out the remainder of your contract with your existing factor
Concentration: The percentage of invoices issued to just one company
Creditor: The company or person that is owed money
Days Sales Outstanding (DSO): Average length of time between sale and collection of invoice payment
Debtor: The company paying the invoice
Factoring Fee: Typically 2% to 4% of the total invoice amount. This is the money that the factoring company keeps in exchange for immediate payment on your receivables
Lien: the legal claim of collateral by a lender if the financing terms are unmet. Invoice factoring companies file a lien on a company’s receivables
Lockbox: A bank service designed to accept checks and deposit them as soon as possible
Non-Recourse: The factoring company takes liability for unpaid invoices rather than the business
Notice of Assignment (NOA): A document sent to a business’ clients notifying them of a factoring arrangement
Recourse: The business takes liability for unpaid invoices rather than the factoring company
Remittance Address: the address to which a business’ clients should submit payment
Reserve: The amount of money held by the factor until they receive client payment. Typically between 5% and 20% depending on the industry
Revolving Line of Credit: Money available to a company without an end time. Factoring can be seen as a revolving line of credit tied to your receivables
Termination/Payoff Agreement: Document between the client, existing factoring company, and new factoring company with the terms of the factoring buyout. This document ensures the hand off will move smoothly
UCC: Uniform Commercial Code or a federal act that regulates commercial transactions
UCC Lien: Dictates the claim to receivables to a business’ financier or factoring company
Verification: A call to a business’ debtors to verify the amount of an invoice or purchase order
Working Capital: The money available to a business regarding day to day operations (current assets minus current liabilities)
Working Capital Loan: A loan that requires collateral for short-term financing needs. Terms and rates vary based on lender
Factoring Explained:
If your business sells to other businesses, chances are you have arranged credit terms. Large customers with greater control over their markets can set payment terms of over 45 days. Most small businesses cannot afford to wait 30 to 60 to 90 days for client payment in addition to growing their business. This is where factoring comes into play. Invoice factoring solutions advance the invoice amount to a small business less a factoring fee, so that business can continue to sell and grow. The factoring company then waits the duration of the agreed upon payment terms. This form of small business financing grows with financing needs and is debt-free. If you think invoice factoring can help your business grow, give us a call at 855.420.8318.
Eagle Business Credit does NOT charge any annual fees, hidden fees, or extra costs attached to your business financing. We believe in transparency, so there will be nothing shocking in our lending agreement that will nickel and dime you. A factoring company like Eagle Business Credit offers same-day funding for the amount of your invoices or accounts receivable. Eagle advances your company 80% to 95% of the invoice value through whichever payment option you prefer. After the credit terms expire and the debtor pays, Eagle releases the reserves, less the factoring fee to your company.