Glossary of Factoring, Invoice Discounting, Trade Finance, Asset Finance Terms
Debtor factoring and invoice discounting are complex and specialised subjects around which a whole range of industry specific terms have emerged. This can be very confusing to prospective users of factoring services and so we have put together this glossary of terms and phrases to help you understand the terminology used within the industry.
Definitions of Terms
| Term | Definition |
| Accounts receivable | These are your debtor sales invoices also known as your sales ledger. |
| Asset based lending | Asset based lending refers to a financial service whereby the provider will fund against a range of assets within their customer's business e.g. sales invoices, property, plant and machinery and stock. |
| Asset finance | Asset finance refers to a set of financial product that leverage the assets of a business to raise finance. These products include factoring, invoice discounting, leasing, hire purchase and stock finance. |
| Assignment, assign, assigning | The legal process by which a factoring of invoice discounting company takes ownership of rights to receive payment in respect of their client's sales invoices. This enables the factoring company to provide prepayments against the invoices. |
| Broker | A third party that introduces a customer to a provider. |
| Cash invoice or payment terms | A sales invoice that is required to be paid immediately i.e. without a credit period. |
| Confidential invoice discounting | A facility where the debtors are not aware of the invoice discounter's involvement. |
| Confidential Factoring | Confidential Factoring is a facility where you receive funding and credit control support without your debtors being aware of the providers involvement. |
| Credit period | The amount of time granted to the buyer by the seller before which the buyer must pay the sellers invoice e.g. 30 days net, 60 days net. |
| Credit protection | Protection against debtors not paying due to insolvency or in some cases protracted default. Also known as non recourse. |
| Debt | An amount owed by a debtor to a creditor. Invoices are often evidence of such a debt. |
| Debtors | Parties that owe you money i.e. have sales invoices outstanding to them on credit terms. |
| Disclosed invoice discounting | An invoice discounting facility whereby the client receives early payments against their sales invoices but retains responsibility for telephone and paper based collection of payments from debtors. Payments are banked by the client into a "Trust Account" which is controlled by the discounter. |
| Discount charge | Part of the cost of factoring or invoice discounting. A percentage over base rate charged in respect of the level of the outstanding liability of the client to the factor or discounter. |
| Dunning letters | Chasing letters sent to debtors to encourage payment of outstanding sales invoices. |
| Early payment | Also called "Prepayment". The funds provided to the client against their invoices. Normally expressed as a percentage e.g. 85% of the gross value. |
| Export factoring | Export factoring is a factoring facility in respect of debtors based abroad. This may include a collections (credit control) service, funding against invoices and credit protection also known as bad debt protection (non recourse). |
| Factoring | A facility whereby the client receives early payments against their sales invoices and a collections service to chase in unpaid debts. Bad debt protection ( non recourse) may also be provided. |
| Import factoring | Import factoring is a service offered to clients abroad who have customers within this country. The import factor will undertake the collection of sales invoices locally providing a service to the exporter abroad. |
| Invoice | An invoice is a document detailing the payment required (or in the case of cash or pro-forma invoices already made) in respect of good or services provided. |
| Invoice discounting | Invoice discounting is a facility whereby the client receives early payments against their sales invoices but retains responsibility for telephone and paper based collection of payments from debtors. |
| Letter of credit | Letters of credit are financial instruments, issued by a bank, that undertake to pay a fixed sum to a seller on production of specified documentation. They can be arranged as part of a Trade Finance facility. |
| Non Recourse | Non recourse refers to an invoice finance facility that includes up to 100% protection against bad debts. If your debtor becomes insolvent the invoice finance company will credit the value of the invoice to your account (the remaining balance if a prepayment has already been provided to you). |
| Overpayments (overpayment facility) | An overpayment is an additional amount of funding made available by a factor or invoice discounter in excess of the normal early payment percentage that they provide. Information about overpayments. |
| Phoenix | A business that "rises from the ashes" of a previous business that failed. See Acquisition Factoring & Finance. |
| Prepayment, Early Payment or Initial Payment | Also called "Early Payment" or "Initial Payment". The funds provided to the client against their invoices. Normally expressed as a percentage e.g. 85% of the gross value. |
| Proforma invoice | A sales invoice raised in respect of the supply of goods or services that is required to be paid on cash terms. |
| Purchase ledger | The accounting structure that holds details of all the purchase invoices. |
| Recourse | An invoice finance facility where you have chosen not to take advantage of protection against bad debts. With a recourse factoring or invoice discounting facility, if the debtor fails to pay the factoring company or invoice discounting company will withdraw any prepayment that has been provided against the invoice. |
| Sales invoice | An invoice raised by a seller in respect of the sale of goods or services. |
| Sales ledger | The accounting structure that holds details of all the sales invoices. |
| Stage payments, staged payments or interim payments | Several invoices raised in respect of each stage of a project e.g. 50% after stage 1 is complete and 50% after stage 2. Case Study - Factoring for a Business with Stage Payments |
| Service charge | Service charge is one aspect of the fees levied by a factor or discounter in respect of the service provided. Normally expressed as a percentage of the clients sales turnover although in some cases it can be a fixed fee. |
| Trade finance | Trade Finance refers to a set of financial products that can assist fund the import and export of goods. This can include setting up letters of credit and dealing with documentation and bills of exchange. |
| Trust account | Where a client is using an invoice discounting product a bank account is set up by the provider (discounter) into which the client banks all payments received from debtors. |
| Vendor | Another name for a supplier or seller. |
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