Entering into the world of accounts receivable factoring can seem overwhelming if you are not familiar with factoring industry jargon. We’ve identified and defined some of the more common factoring terms for our readers below:
Account Creditor – You, the Client and provider of goods or services.
Account Debtor – The purchaser of goods or services; responsible for the paying invoice.
Advance Rate – Money provided immediately to the company factoring its accounts receivable–expressed as a percentage of the total invoice amount.
Discount Fee – A fee assessed by a factor that purchases accounts receivable. The discount fee is determined by the size of the invoice, the length of time it takes to collect the funds and the creditworthiness of the customer, not the company selling the receivable.
Factor – A company that provides operating capital to businesses by purchasing their accounts receivable.
Factoring – The business of purchasing and collecting accounts receivable.
Non-Recourse – Generally, a period in which accounts purchased by the factor remain the factor’s accounts and do not revert to the account creditor if unpaid due to an insolvency event. The factor accepts full credit risk for any and all accounts that it purchases during this period.
Recourse – Generally, a period in which accounts purchased by the factor are able to revert to the account creditor if unpaid due to an insolvency event. The client accepts full credit risk for any and all accounts that it sells to the factor during this period.
Reserve – Amount of money that is not immediately provided to the company factoring its accounts receivable when the account is purchased by the factor, expressed as a percentage of the total invoice amount.
Reserve Release – A bonus paid back to you as a result of prompt paying of receivables by your customer. (Advance Rate + Reserve = 100% of Total Invoice) The Reserve, minus the discount fee, is transferred to the client once payment is received by the factor.
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