Factoring Companies Industry Terminology

The customer obligated to pay an invoice that has been sold/assigned to the factor. The account debtor’s creditworthiness drives eligibility and pricing. Examples: 'The account debtor is Walmart on these invoices.'; 'We need the account debtor’s remittance address for the NOA.'; 'This debtor is on credit hold pending updated financials.'

Money owed to a business by its customers for goods/services delivered on credit; the asset that factors purchase. Examples: 'We’re factoring $500,000 of A/R this week.'; 'The A/R aging shows $100,000 over 90 days.'; 'Unpaid A/R from XYZ Co. will be excluded as ineligible.'

The percentage of an invoice’s face value the factor advances upfront (e.g., 80–90%); the remainder is held in reserve until collection. Examples: 'Your advance rate is 85% on eligible freight bills.'; 'We reduced the advance rate due to higher dilution.'; 'We can offer a higher advance rate if you add credit insurance.'

A report that groups receivables by days outstanding (e.g., current, 1–30, 31–60, 61–90, 90+); used to assess eligibility, dilution, and collections risk. Examples: 'Cross-aging excludes invoices when 25% is 90+ days.'; 'Your aging has too much in the 61–90 bucket.'; 'Please upload the month-end A/R aging with the schedule.'

The legal transfer of ownership of receivables from the client to the factor, typically governed by a factoring agreement and secured by a UCC-1 filing. Examples: 'The assignment is perfected upon UCC-1 filing.'; 'Our contract requires exclusive assignment of all receivables.'; 'Without assignment, we can’t enforce collections.'

The amount the client can draw based on eligible receivables times the advance rate minus reserves and outstanding advances. Examples: 'Your current availability is $275,000.'; 'Availability dropped after we applied a dilution reserve.'; 'A large payment posting will increase tomorrow’s availability.'

Receivables deemed uncollectible; in recourse factoring, the client must repurchase them; in non-recourse, the factor may bear the credit loss subject to policy terms. Examples: 'We wrote off $20,000 as bad debt on ABC Corp.'; 'Bad debt reserves are rising due to the sector downturn.'; 'Non-recourse covers bad debt from insolvency only.'

Risk that payments received within a lookback period (typically 90 days) before a debtor’s bankruptcy are clawed back; factors often hold reserves. Examples: 'We increased the reserve for preference exposure.'; 'The trustee is demanding a preference return of $50,000.'; 'Preference risk is excluded under our credit insurance.'

A shipping document evidencing goods shipped, carrier, consignee, and terms; used to verify invoicing accuracy and delivery, especially in freight factoring. Examples: 'Please upload the BOL to clear the funding hold.'; 'The BOL and POD don’t match—invoice is in dispute.'; 'We require signed BOLs for all loads.'

The process of paying off a client’s existing factor or lender to release liens so a new factor can take over the account. Examples: 'We’ll coordinate a buyout with the current factor.'; 'The buyout letter details payoff and per-diem.'; 'Funding will start after the lien release post-buyout.'

Reversal of a previously purchased invoice back to the client due to non-payment, dispute, aging out, or ineligibility; the client must repay or it’s netted from reserves. Examples: 'We charged back two invoices past the recourse period.'; 'Chargebacks will reduce your reserve release.'; 'Disputed items are subject to immediate chargeback.'

The business that sells/assigns its receivables to the factor in exchange for advances. Examples: 'Our new client is a staffing company.'; 'As the seller, you warrant the invoices are valid.'; 'We need the client’s corporate resolutions for onboarding.'

Factoring where the debtor is not notified of the assignment; client often uses a managed lockbox or trust account to remit collections. Examples: 'We can offer non-notification to protect your customer relationships.'; 'The confidential lockbox must remain undisclosed.'; 'Non-notification pricing is 50 bps higher.'

A cap on exposure to a single debtor or group (e.g., 25–40% of the portfolio) to mitigate concentration risk. Examples: 'You’re at the 30% concentration limit for ABC Co.'; 'Excess over the limit is ineligible.'; 'We raised house limits to accommodate seasonality.'

When a debtor is also a supplier and can offset payables against receivables, reducing the net collectible amount; often ineligible or limited. Examples: 'XYZ has a contra relationship—setoff risk applies.'; 'We’ll exclude contra exposure from eligibility.'; 'A waiver of setoff would improve advance rates.'

Insurance that covers receivable losses due to debtor insolvency or protracted default; can support higher limits and advance rates. Examples: 'With insurance, we can open a $500k limit on ABC.'; 'The policy excludes disputes and dilution.'; 'Submit a credit limit application under the TCI policy.'

Maximum exposure the factor will allow on a specific debtor, based on credit underwriting and insurance. Examples: 'We approved a $250k limit on XYZ.'; 'Orders exceed the credit limit—split shipments or prepay.'; 'Increase the limit if Q2 financials check out.'

Vendor-issued reduction to an invoice (e.g., returns, price adjustments); a key component of dilution. Examples: 'Credit memos last quarter were 4% of sales.'; 'We need visibility to credit memos before funding.'; 'Large credit memo will reduce your reserve release.'

Average number of days it takes to collect receivables; a measure of collection efficiency and cash conversion. Examples: 'DSO improved from 56 to 48 days.'; 'High DSO increases your carrying cost.'; 'We price based on expected DSO by debtor.'

The factor’s process of confirming invoice details with the debtor (amount, terms, goods received) before or after purchase. Examples: 'Funding pending debtor verification.'; 'The AP clerk verified the PO and quantities.'; 'We couldn’t verify—invoice moved to ineligible.'

Reductions between gross invoice value and cash collected due to returns, allowances, discounts, chargebacks, and short-pays; measured as a percentage of sales. Examples: 'Average dilution is 3.5%—within covenant.'; 'Promo discounts spiked dilution this month.'; 'We’re holding an extra 2% dilution reserve.'

Additional holdback to cover expected dilution based on historical experience or risk assessment. Examples: 'We added a 1% dilution reserve for seasonal returns.'; 'Reserve will release after collections stabilize.'; 'High credit memo activity triggered a reserve increase.'

Any debtor claim that an invoice is incorrect or payment is not due (quality issues, quantity variance, pricing, POD mismatch). Examples: 'Two invoices are in dispute pending RMA.'; 'We can’t fund disputed receivables.'; 'Resolve disputes within the recourse period.'

Receivables that meet the factor’s criteria (e.g., under 90 days, no disputes, within concentration limits, domestic, non-affiliate, compliant documentation). Examples: 'Only eligible A/R counts toward availability.'; 'Foreign A/R is ineligible without insurance.'; 'Retainage is ineligible beyond 120 days.'

The contract governing the sale of receivables, pricing, reserves, representations, recourse, covenants, and default terms. Examples: 'Please review the representations and warranties section.'; 'The agreement includes a termination fee.'; 'Recourse terms are set at 90 days from invoice date.'

The fee charged by the factor, often as a percentage per period (e.g., 2% for the first 30 days, then 0.5% every 10 days) or flat per invoice. Examples: 'Your fee grid is 2.25% for 30 days.'; 'Effective rate depends on DSO and usage.'; 'We offer a lower fee with higher minimums.'

The maximum size of the factoring program (commitment), often based on projected eligible A/R. Examples: 'We’re approving a $3MM facility.'; 'The line can be upsized after 6 months of performance.'; 'Usage is 60% of the committed facility.'

The factor’s advance of cash when it purchases approved invoices; typically wires same day upon verification. Examples: 'We funded $400,000 against today’s schedule.'; 'Cutoff for funding is 2 p.m. ET.'; 'Funding is pending NOA acknowledgment.'

Receivables owed by U.S. federal agencies, which require specific notices and assignments under the Assignment of Claims Act; many factors restrict or price differently. Examples: 'We can fund government A/R with proper assignment.'; 'NOA must follow FAR requirements.'; 'Absent compliance, federal invoices are ineligible.'

The portion of the invoice price not advanced upfront, held to cover fees, chargebacks, dilution, and other adjustments; released upon collection and reconciliation. Examples: 'Reserve release is scheduled after cash application.'; 'We’re increasing the holdback to 20%.'; 'Chargebacks will be netted from the reserve.'

Invoices excluded from availability due to failing criteria (e.g., aged 90+, disputes, cross-border, affiliates, consignment, contra, progress bills, retainage). Examples: '$120k became ineligible at month-end.'; 'Affiliated sales are ineligible.'; 'Place disputed invoices in the ineligible bucket.'

Selling invoices to a factor at a discount for immediate cash, with or without recourse. Examples: 'We’re moving from PO financing to invoice factoring.'; 'Factoring improved our working capital.'; 'They factor only their large retail invoices.'

Know Your Customer/Anti-Money Laundering compliance processes for onboarding and monitoring clients and beneficial owners. Examples: 'We need KYC docs and IDs for all principals.'; 'AML screening flagged a potential match.'; 'Enhanced due diligence is required for this jurisdiction.'

A search of public records (UCC) to identify existing liens or security interests on a client’s receivables. Examples: 'The UCC search shows an all-assets lien.'; 'We need a lien release to proceed.'; 'File a new UCC after the buyout posts.'

A bank account or remittance address controlled by the factor where debtors send payments; ensures proceeds are captured by the factor. Examples: 'All NOAs must direct payments to the lockbox.'; 'Misdirected payments violate the agreement.'; 'Lockbox sweeps run daily at 3 p.m.'

A debtor payment sent to the client or wrong account instead of the factor’s lockbox; typically must be forwarded immediately. Examples: 'Please overnight the misdirected check to the lockbox.'; 'Repeated misdirects trigger default fees.'; 'The debtor’s AP still has the old remit-to address.'

Factoring where the factor assumes credit risk of debtor insolvency (and sometimes protracted default), but not risks like disputes or dilution. Examples: 'Non-recourse covers bankruptcy, not short-pays.'; 'Pricing is higher for non-recourse.'; 'We need insurance to offer non-recourse on this debtor.'

Formal notice to the account debtor that receivables have been assigned and must be paid to the factor’s lockbox. Examples: 'Send NOAs to all new customers before funding.'; 'We need written acknowledgment of the NOA.'; 'Payment to the client after NOA is a misdirect.'

A debtor’s legal right to reduce what it owes by amounts the seller owes to the debtor (returns, rebates, or separate obligations). Examples: 'Setoff risk reduces our effective collateral.'; 'We structured a carve-out for setoff claims.'; 'Obtain a waiver of setoff from the debtor if possible.'

Funding above formula availability; typically short-term and subject to special approval, fees, and tighter monitoring. Examples: 'We granted a $200k over-advance for payroll.'; 'Over-advances require CFO approval.'; 'Plan to cure the over-advance with next week’s collections.'

An individual’s promise (often an owner’s) to repay obligations to the factor if the company cannot; common in SMB factoring. Examples: 'All principals must sign personal guaranties.'; 'We granted a lower fee with a full guaranty.'; 'Limited guaranty applies to fraud and misrepresentation.'

Documentation (e.g., signed delivery receipt) confirming goods/services were delivered as invoiced; often required for funding. Examples: 'Funding is pending a clean POD.'; 'The POD is illegible—please resubmit.'; 'No POD, no purchase under our policy.'

Short-term financing to pay suppliers for confirmed orders prior to invoicing; often used alongside factoring and repaid from invoice proceeds. Examples: 'PO finance bridges the gap before invoicing.'; 'We’ll roll PO advances into the factor upon shipment.'; 'Supplier requires cash—use PO financing.'

Factoring where the client retains credit risk; invoices not collected within the recourse period must be repurchased or charged back. Examples: 'Standard recourse is 90 days from invoice date.'; 'We charged back uncollected items at recourse.'; 'Recourse pricing is lower than non-recourse.'

A portion of the contract amount withheld by the customer until project completion; often ineligible or subject to lower advance rates. Examples: 'Retainage is 10% and ineligible until released.'; 'We can fund progress bills but not retainage.'; 'Retainage releases in 60 days post-completion.'

The client’s listing of invoices submitted for purchase, typically including invoice number, date, amount, PO, and debtor. Examples: 'Upload today’s schedule by noon.'; 'Two invoices on the schedule are duplicates.'; 'We will verify samples from the schedule.'

An agreement where another lender subordinates its lien on receivables (or proceeds) to the factor’s security interest. Examples: 'We need subordination from the bank’s ABL.'; 'The intercreditor sets waterfall priorities.'; 'No funding until subordination is signed.'

Legal characterization that receivables were sold, not pledged as collateral; protects factors from bankruptcy recharacterization risk. Examples: 'Opinions support true sale treatment.'; 'Without true sale, assets could be clawed back.'; 'Structuring aims to achieve true sale.'

A public filing that perfects the factor’s security interest in receivables (and often proceeds), establishing lien priority. Examples: 'File a UCC-1 on A/R and proceeds.'; 'We’re second position—need a subordination.'; 'Terminate the old UCC to clear title.'

Short-term liquidity available to run the business (current assets minus current liabilities); factoring converts A/R into cash to boost it. Examples: 'Factoring improved working capital for payroll.'; 'We use factoring as a working capital tool.'; 'Working capital tightened as DSO rose.'