Factoring Terminology

Account is a collection of claims or invoices against a particular customer for goods or services delivered.

Accounts Receivable is the money that is owed to a company for goods and services it has provided to customers on credit. The accounts receivable amount is an asset to the company. Accounts receivable in the books of company goes as accounts payable in the books of customers.

Advance is the percentage of an invoice's face value which a factor pays upon its purchase.

Cash flow is the measurement of cash a company gained or lost during an accounting period and adjusted for any previous accounting for accruals and other non-cash transactions. Since money does not flow in and out at an equal rate, in most businesses, an analysis of cash flow is important as well a debt management program may be needed, especially of businesses that are cyclical in nature, or subject to external forces.

Collateral is 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.

Discount Fee is the amount earned by a factor on each invoice purchased. Discount fee 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 is the percentage of the face value of an invoice that an invoice factoring company holds as its fee.

Face Amount or Face Value is the total amount of an invoice. Face value is the amount that has to be paid to the factor by client's customer, without consideration as to how much was advanced to the client.

Factoring is the process of purchasing of debts owed, or accounts receivable in exchange for immediate payment at a discount.

Invoice is a legal debt instrument which indicates the amount due from a customer to pay for delivered goods or services. Invoices may be traded or sold.

Invoice Discounting is instant cash upon issuing invoices without sales ledger and collection services required

Liability is a financial obligation, debt, claim or potential loss. Usually debt on terms of less than five years is called short-term liabilities and debt for longer than five years in long-term liabilities.

Non-Notification is an aspect of confidential factoring where the customers are not notified of the client's arrangement with the factor.

Non-Recourse is a type of factoring where the factor assumes complete responsibility for collection of debt. If the debt is not collected due to the financial inability of the customer, the factor assumes the loss.

Notification is a process whereby the factoring company lets an account debtor know that an invoice has been purchased from the client and that the debtor is to pay the factor directly.

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