Important Factoring Terminology
It seems every industry has its own insider language and the invoice factoring industry is no exception. Whether you’re a business owner looking for a factoring company to boost your cash flow or an industry broker seeking a suitable factor for placing your deal, knowing the definition of some key words and phrases will help you find the factoring company that is the best fit for your business.
Brokers new to the industry are naturally a little apprehensive when submitting their first deal to a factor or a factor’s BDO. Although they shouldn’t be, a new broker still does not really want to be seen as an industry neophyte. We can assure you, any factor or BDO will be appreciative of your submission but it will help when speaking with a member of the factoring community about your deal if you can speak their “factorese” language.
Below are some common factoring terms you should know:
- Advance Rate: This is the percentage that the factoring company will pay your client when it sells it’s invoices. For example, a factor agrees to buy invoices from your client for $50,000. Your advance rate is 90%. Your client will be receive $45,000 in the initial advance
- Client: This is the business that wants to sell it’s invoices. In factoring the client provides their goods or services to a debtor and then invoices the debtor for payment.
- Credit Limit: The maximum amount of credit that factor will extend to a debtor.
- Debtor: This is the customer who owes payment upon the client’s invoice. The debtor is often referred to simply as the customer.
- Discount fee: Another term for factoring fee. The discount is a small charge taken by the factor when they purchase your client’s accounts receivable. Discount fees are determined by the size of the invoices, the debtors’ creditworthiness, and the length of time the invoice remains unpaid.
- Factoring Agreement: The agreement between the client and factoring company. This will cover fees, advance rates, and other particulars about the agreement between these two parties.
- Invoice: A commercial document issued by the seller to the debtor. The invoice itemizes the products or services delivered, quantity and agreed upon price. Payment terms and purchase order number are also referenced. The invoice should have proper verbiage to protect the client and the factoring company.
- Proof of Delivery: The factoring company will need confirmation that the debtor has received the goods or services described in your client’s invoice. This can be provided by email confirmation or signature approval.
- Rebate: The invoice remainder, minus fees, that is deposited in your account when your invoices are paid. The reserve (see below) is typically the amount of the invoice not advanced during the initial purchase. For example, if 90% of the invoice face amount is advanced, the reserve is a bookkeeping entry that would represent the 10% not advanced. The net reserve is periodically disbursed to the client as a rebate, which represents the net reserve available for distribution after deducting the factor’s fee for services and any short payments by customers on the purchased invoices.
- Reserve Account: The balance of your client’s invoice that is withheld pending payment from the customer. The advance plus the reserve will equal the full face amount of the invoice.
- Schedule: A spreadsheet that your client will list its invoices on that it wished to sell to the factoring company.
One of your first tasks as a new consultant is to begin exploring the industry and this typically means visiting the websites of various factors and viewing their particular services. Meeting factors and their business development officers is very easy by connecting with them on LinkedIn. All factors and their BDOs want to build their network of productive independent brokers will welcome you with open arms. The key word here, however, is “productive”. As an independent broker / consultant, your value to your prospective clients is your knowledge and your value to the factors you choose to work with is your ability to submit quality deals and SQL (Sales Qualified Leads). Make certain you develop and expand your industry knowledge at every chance you get.
Find Out More About Factoring
Factoring is a fascinating industry which presents incredible opportunities for those entrepreneurs “in-the-know”. You can learn this industry and build the knowledge necessary to success with training from the International Association of Commercial Finance Brokers, or IACFB. Visit their site now.