Definitions

These Account Receivable Definitions will help you understand the terms that you need to find and select Receivable Financing. Once you have a good understanding of these terms conduct a search and select the best option for you.
Account Debtor
This is the party that owes money against debt. In traditional lending this falls on the party that has taken out a loan; in Accounts Receivable Finance this falls to your customer that owes money for either a product provided or services rendered. They are responsible for making payments directly to the Receivables Finance Company within the terms stated. In this case your credit limit per customer is dependent on their credit ratings. While the term Account Debtor does not change, the responsibility may shift upon the customer’s agreement.
Accounts Payable
Your business’s debts. Any amount owed by you for goods or services your business purchased.Monies owed by your company to other for providing goods or a service on terms. In Invoice Financing the time in which these are paid will affect the rate of the customer. The prompter the payable s the lower the fee. This is generally regulated by Accounts Payables Department or directly by the business owner.
Accounts Receivable
Payables due to you from your Account Debtors. Invoices generated by your business to your customers for completed goods or service your business provided.

This is another word for invoice or what is owed to your company for product or services rendered. This is generally paid on predetermined terms.

Advance Rate
The rate or percentage of your invoice that will be advanced to you.

This is the percentage of the face value of the invoice. This typically is determined by the industry. Other contributing variables are dilution, and additional services outside of the scope of defined or agreed upon work. Sales taxes are typically not advanced against.

Chargeback
In Recourse Factoring this is the amount of money owed to the Factor for unpaid invoices (in part or as a whole) that the Factor purchased. There is a predetermined time period in which this occurs and is generally deducted from available reserves or future funding. In Non-Recourse factoring this is the amount of money owed to the Factor for unpaid invoices due to a disputed invoice in part or as a whole.

The money owed is shifted from the Account Debtor back to the Accounts Receivables Finance Client. The typical causes are the invoice has hit the pre-determined recourse date set up in the contract, or because there has been some form of dispute that needs to be resolved between the customer/client relationship rather than the finance company.

Collateral
The assets your company pledges to the factoring company to secure against the advanced funds. These assets are subject to forfeiture if the debts cannot be paid or you default the contract.

This is the main security for the Receivables Finance Company. While it can take many forms it is typically the invoices or the invoices and the unencumbered assets of the company. Example a home loan is secured by the property the loan is against.

Credit Limits
A monetary limit of exposure that a Factor places on a client’s Factoring Account as a whole and a separate monetary limit of exposure that a Factor places on each individual Account Debtor.
Due Diligence
The investigative process that a Factor takes prior to entering into business with a company. The process used by a factoring company before entering into an agreement. This usually includes background check on both the business and its owners as well as credit checks on account debtors. These searches include any tax liens, judgements, or other collateral filings on both a state and county level.
Face Value
Total dollar amount of an invoice owed by an Account Debtor. The invoice amount that a factoring company will advance upon. This does not include any state or local sales tax that you may have.
Factoring
Selling your open Accounts Receivables or Invoices to a third party at a discounted rate in order to receive working capital for your business. This third party is generally known as the Factor or Funder.
Lien
A legal claim against an asset or property. This is a legal claim that is filed by the factoring company, usually called a UCC-1 filing, that encumbers either your receivables only or receivables as well as assets, depending on your contract terms. This lien is released when the contract is terminated and all financial obligations are fulfilled.
Non Recourse
A type of factoring where the Factor retains the credit risk. Non-Recourse does not include accounts that are disputed or remain unpaid outside of bankruptcy, liquidation or debtor proof on financial insolvency.
Notice of Assignment
A notice sent to Accounts Debtors that states that invoices have been assigned and sold to the Factor and is now payable to the factor.

This is a letter sent to your customers’ accounts payable departments to notify them of the sale of your invoices as well as the change in address to mail payments. This notice is terminated once the contract between you and your factoring company is terminated and all financial obligations are fulfilled.

Recourse
A type of factoring where your business retains the risk. Should the invoice not be paid in a predetermined time period, the money advanced to your business must be returned to the Factor.
Reserve
The difference between the face value of the invoice and the funds advanced by the Factoring Company until purchased invoices are paid. These funds are held by the Factor to protect against disputes between you and your Account Debtors, short pays or against non-payment of the invoice.
Terms of Sale
A predetermined time period in which an Account Debtor is to pay on invoices from your business. The agreement between you and your customers as to the terms of sale.
Verification
The process by which a Factoring Company confirms the paperwork on the invoice is in order, the product or services are reflected properly and the factors credit is secured. This is generally done verbally or in writing via fax or email.
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