Invoice Factoring FAQ – What are Common Invoice Factoring Terms?
Even though invoice factoring is a centuries-old business finance tool, some of the common terms used in the process of factoring invoices might be unfamiliar to those who have not factored receivables before.
Who are the parties involved in the invoice factoring process?
Factor (or factoring company): An organization who purchases B2B accounts receivable at a discount to expedient the cash flow for their client.
Factoring Client (or Client): the Factor’s customer.
Account Debtor (or Debtor): the Client’s customer.
Here are some common terms related to the process of factoring invoices itself:
Factoring Advance Rate: The percentage of a submitted invoice paid out to the Client at the time the invoice is factored.
Funding: The process of delivering money to the Client for the purchased invoice.
Factoring Fee (or financing fee or discount rate): The percentage of invoice amount or fee that is retained by the Factor, agreed-upon at the time of documentation for invoice factoring.
Opportunity Cost Calculator (or invoice factoring calculator): A calculator providing results that show how much working capital is tied up in customer invoices as well as the fees related to gaining immediate access to the working capital represented in total accounts receivable. The term opportunity cost refers to the opportunities a business loses due to slower cash flow while waiting for customers to pay.
Reserve: The difference between the invoice amount and the Advance + Factoring Fee that is held back by the Factor until an invoice has been paid (by the Debtor).
Reserve Release: The delivery of reserve funds paid to the client when an invoice is paid by a Debtor.
Recourse vs. Nonrecourse factoring companies
Finally, it is also important to distinguish between two types of factoring companies, those that factor invoices without recourse (also known as non-recourse factors) and those that factor with recourse:
Recourse Factoring (or full recourse factoring or factoring with recourse): Recourse Factors do not assume the credit risk for the invoices they factor, and the client will be required to buy back invoices they have factored which have not been paid in a timely manner by the account debtor, and may also incur related collections fees. Most factoring companies factor with full recourse.
Non-recourse Factoring (or non-recourse factoring or factoring without recourse): Non-recourse factoring companies assume the credit risk for the invoices they factor. Organizations that factor with a non-recourse factoring company can reduce their financial risk from bad debt (or even eliminate it entirely).
We would be happy to answer any questions you have about invoice factoring. Request a quote and we’ll reach out to you with more information.