Glossary

Factoring Finance Terms Defined

A

B

C

D

E

F

G

H

I

J

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M

N

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P

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U

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"A" Rated Credits:
Consumers or Businesses with immaculate credit, who can obtain a loan from conventional lenders. 

Acceleration Clause:
Language in a loan/lease document that secures payments for the full term of the instrument.

Account Debtor:
The customer of a factor's client. The company owing the money due on the factored invoices. Also known as the customer.

Accounts Payable:
The amount of money a company owes for goods and services it has purchsed on credit; any outstanding debt that a company has.

Accounts Receivable:
A company's outstanding invoices (invoices which have not yet been paid by the company's customers).

Accounts Receivable Aging Report:
A report that shows how long unpaid invoices from each customer have been outstanding.

Accounts Receivable Financing:
A short-term financing technique for working capital purposes, credit extensions to a company are collateralized by a security interest in a company's account receivables. Account receivables serve as collateral, and loans are made on a percentage of eligible receivables pledged.

Acquisition Loan:
A loan to assist in acquiring the assets of a business.

Advance Rate:
The percentage of the face amount of an income stream or account receivable that a funding source will advance to a client.

Amortization:
The gradual, systematic payment of a debt, such as a mortgage or other loan, in installments of principal and interest for a definite time, so that at the end of that time, the debt will have been paid in full.

Articles of Incorporation:
A document filed with a U.S. state by the founders of a corporation. After approving the articles, the state issues a Certificate of Incorporation; the two documents together become the Charter of Incorporation.

Asset:
Anything having commercial or exchange value that is owned by a business, institution or individual. A business' assets might include its real estate, equipment inventory, intellectual assets such as copyrights or trademarks, and accounts receivable.

Asset Based:
A business loan where the borrower pledges as collateral for the loan any assets used in the conduct of his or her business. Funds are used for business related expenses. All asset-based loans are secured.

Assignability:
The ability to assign (or sell) an income stream to another individual or business.

Assignee:
The person or business entity who is given, obtains, or buys the right to an asset.

Assignment:
The transfer of the rights, title or interest of any debt instrument that is properly owned by another party.

Assignor:
The person giving or selling an asset, and subsequently, forfeiting rights to that asset.

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"B" through "D" Rated Credit customers:
These consumers have less than perfect to bad credit and usually cannot qualify for traditional financing. Also called sub-prime credit customers.

Bad Debt:
Any debt that is delinquent and has been written off as noncollectable.

Balance sheet:
A financial statement that shows a business' current financial condition, with assets on the left side and liabilities and net worth on the right side.

Balloon:
The balance of principal that is due and owing in its entirety at a specified point in time, but in any event, less than the time required to fully amortize the debt.

Bankruptcy:
A state of insolvency of an individual or organization. The inability to pay debts.

Beneficiary:
The person or party entitled to receive the benefits, or proceeds, of the life insurance policy upon the death of the insured person.

Bill of Lading:
A shipping document which gives instructions to the company transporting the goods.

Bill of Sale:
A document used to transfer the title of certain goods from a seller to a buyer.

Business-based income streams:
Cash flow instruments that are paid to a business by another business or government.

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Cash flow:
The flow of cash through a business or household. In business terms, cash flow involves the flow of cash into a company in the form of revenues, and out of the company in the form of expenses. >>learn the basics of cash flow

Cash flow broker:
Professional whose primary purpose is to unite income stream sellers with funding sources. They may operate as referral sources or as the primary liaison for cash flow transactions.

Cash flow industry:
The buying, selling, and brokering of privately held debt in the secondary marketplace; the marketplace where businesses and individuals get help managing their cash flow needs.

Cash flow instrument:
Future payment or series of payments. Also called a debt instrument or income stream.

Cash flow specialist:
A cash flow professional who brokers cash flow transactions or buys cash flow instruments.

Cash flow transaction:
Occurs whenever a funding source pays cash to an individual or business in exchange for an income stream.

Chattel mortgage:
A mortgage on personal property, given to secure a debt. Typically used in the sale of a business. Also called a security agreement.

Collateral:
Something of value (land, a home, a car, etc.) that is pledged as security to ensure the payment of a debt. Collateral is promised to a lender until a loan is repaid. If the borrower defaults, the lender has the right, by law, to seize the collateral.

Collateral-based income streams:
Cash flow instruments that are secured by collateral.

Collectibility:
Refers to the funding source's ability to collect future income stream payments once they are purchased.

Commission:
Fee paid to a broker for executing or referring a cash flow transaction.

Consumer-based income streams:
Cash flows in which the party that owes payments is a consumer, a private individual.

Contingency-based income streams:
Cash flows in which the recipient is not necessarily legally entitled to receive payments, or in which the amount of the payment is uncertain or contingent upon outside factors.

Conversion:
The process of converting a qualified prospect into an active client.

Corporation:
A legal entity, chartered by a U.S. state or the federal government, and separate and distinct from the persons who own it. It is regarded by the courts as an artificial person; it may own property, incur debts, sue or be sued.

Credit:
A privilege granted for the purpose of extending time to make payment on a debt.

Creditor:
One who is owed payments on a debt by a debtor.

Customer:
The client's customer. The company which pays the money due under the factored invoice. Also known as the account debtor.

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Debt instrument:
Future payment or series of payments, or a debt that one party owes to another party. Also known as income streams or cash flow instruments.

Debtor:
One who owes something and makes payments to a creditor.

Default:
The omission or failure to perform or fulfill a legal duty, obligation, or promise (i.e. to pay a debt).

Dilution:
The amount of risk associated with collection of the accounts receivable. It can include returns, charge-backs, trade allowances, concentrations, slow pay, bad debt and other perceived risk.

Due diligence:
Background check and research conducted by the factor to assess validity of a prospective factoring client and that client's customers.

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Equity:
The value or interest an owner has in property over and above any indebtedness owed on the property.

Escrow:
The system by which money documents, personal property, or real property is held in trust for another party by a disinterested third party until the terms and conditions of the escrow instructions are completed or terminated.

Face value:
The current principal balance on an income stream.

Factor:
The funding source for the client. The company which purchases the accounts receivable (invoices) from the client.

Factoring:
The selling of a company's accounts receivable to a third party, in order to obtain funding.

Factoring Line of Credit:
A Line of Credit can be the the type of funding vehicle that can be set up for the factoring financing in lieu of cash.

Factors Acknowledgment Form:
A form sent to the client's customer by the factor, confirming that the client's invoice does exist and that the customer will remit the payment due under that invoice to the factor.

Factors Advance:
The money the factor sends to the client up front, after the verification process is complete, and before the factor receives its money from the client's customer. The advance is figured as a percentage of the face value of the factored invoices.

Factors Charge-Back:
An amount of money that is owed to the factor and is deducted or Charged-Back from the reserve or availability of the line due to an agreed upon non-payment by debtor clause in the Factors contract.

Factors Client:
The business which sells its accounts receivable to the factor.

Factors Fee:
The fee the Factor Charges for funding the clients A/R.

Factors Reserve:
A deposit maintained by the factor, to guard against disputes between the client and the customer, and to guard against bad debt losses due to customer non-payment. This is the money retained by the factor when the advance is sent to the client. The Reserve is sent to the client after the customer has paid the factor the money due on the invoice.

Factors Reserve Release:
The amount of money released from the Factors Reserve once payment has been received and credited. The Reserve Release may be less any charge-back or fees associated with the services.

Factors Services:
Credit Analysis, Credit Guarantees and Collection Management.

Factors Verification:
Process by which the factor verifies that the product or service provided by the client was received and accepted by the customer, and that the customer intends to pay the factor the money due under the invoice. This process takes place before the factor sends the advance to the client.

Fictitious name:
A legal statement filed when a person uses a name other than his or her own to operate a business.

Foreclosure:
A legal proceeding in court to seize property given as security for a debt that is in default.

Funding source:
An individual investor or an investment company that buys income streams.

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Government-based income streams:
Cash flows paid by a government entity, either directly or through an insurance company.

Hypothecation:
Borrowing funds from a lender, investing those funds in a debt instrument, and giving the lender a security interest in the debt instrument as the collateral for the loan.

Income stream:
A future payment or series of payments, or a debt that one party owes to another party. Also known as a debt instrument or cash flow instrument.

Institutional lenders:
Savings and loan associations, local and regional banks, mortgage companies, finance companies, and commercial lenders.

Insurance-based income streams:
Cash flows stemming from insurance companies and paid to individuals or businesses.

Intangible personal property:
Something that has value but is not a tangible asset, for example, a trademark, copyright, patent, or trade secret.

Investment-to-value ratio:
A measure of how secure a creditor's position is and how likely the creditor is to recoup all of his or her money in the event of a foreclosure.

Invoice factoring:
The sale of invoices for immediate cash.

Joint venture:
A business entity established, usually by two or more interest groups, for a specific task, operation, or goal.

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Lead:
A piece of information of possible use in the search for a prospective client.

Leverage:
The ratio of debt to total assets.

Limited liability company:
A form of business structure designed to combine the best of corporate and partnership attributes into one entity.

Loan-to-value ratio:
A measure of how heavily mortgaged a property is and how likely the owner is to default on his or her debts.

Marginal credit customers:
Consumers who may have had some slow pay problems, but generally pay their bills.

Market value:
The price at which a ready, willing, and informed person would buy something; the price property would command in the current market.

Marketing:
The process of identifying and communicating with qualified prospects.

Master Broker:
Individual who has been certified and designated by the American Cash Flow Association to work with Diversified Cash Flow Specialists.

Mortgage:
A written instrument that creates a lien by pledging real property as security for a debt.

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Notice of Pre-lien:
A document notifying the owner of real property that materials or services are being furnished to his real property, putting him on notice that the one sending it will look to have a lien against the real property if those materials or services are not paid for.

Owner financing:
A type of financing in which the seller of a tangible item accepts a promissory note as a portion of the purchase price. Also called seller financing.

Partnership:
A common form of joint ownership of a business.

Payee:
Person or business that has the right to receive a payment or series of payments and is interested in selling that income stream for cash. (Also called the seller or client.)

Payor:
The person, company, or government responsible for making payments on an income stream.

Partial:
Any part of a payment stream that is less than the full amount due.

Personal guaranty:
A contractual agreement between a funding source and a seller, whereby the seller assumes personal responsibility and liability for the obligations of the income stream.

Portfolio:
A group or package of income streams of the same type.

Privately held:
Owed to a private individual or business rather than to a bank or other financial institution.

Profit and loss statement:
A financial statement that shows a historical record of a business' income and expenses.

Promissory note:
A written promise to pay a specified amount to a specified party over a certain period of time.

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Real property:
Real estate.

Recourse:
In this type of factoring, the risk of customer non-payment remains with the client. If the client's customer is financially unable to pay the money due under the invoice, the factor has recourse against the client for that money. The factor is protected against customer non-payment.

Replevin:
A legal proceeding in court to seize property (other than real estate) given as security for a debt that is in default.

Reserve:
An amount a funding source holds in its account to cover potential payment defaults. After a certain time period has passed, the funding source rebates the reserve to the client less any fees or charges for delinquency. Also called a bad debt reserve.

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Satisfaction:
The discharge of an obligation by paying a party what is due (i.e., the satisfaction of an IRS lien or the satisfaction of a mortgage).

Seasoning:
The length of time payments have been made on a note or other debt instrument.

Secondary market:
The marketplace where individuals and businesses can sell privately held income streams to funding sources for cash.

Securitization:
The bundling and resale of debt instruments to investors; permitted only for parties licensed and regulated by the SEC.

Security interest:
An interest in property, other than real estate, which is given as security for a debt or other obligation. A security interest is created by execution of a security agreement and one or more financing statements under the Uniform Commercial Code.

Seller:
The person or company that is holding a debt instrument and wants to sell it.

Servicing:
The collection of payments of interest and principal, and trust fund items such as fire insurance, taxes, etc., on a note by the borrower in accordance with the terms of the note. Servicing by the lender also consists of operational procedures covering accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquent loan follow-up and loan analysis.

Sole proprietorship:
A business owned and operated by an individual.

Subordination:
The act of a creditor acknowledging in writing that a debt due him or her by a debtor shall be inferior to the debt due another creditor by the same debtor.

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Tail:
The payment stream and/or balloon payment of an income stream subsequent to another party's right and interest in the income stream. Usually the back half of the payment stream when another party has purchased the front half.

Tangible personal property:
Personal property other than real estate, such as cars, boats, or other assets.

Time value of money:
Concept that addresses the way the value of money changes over a period of time.

Title commitment:
A commitment on the part of the insurer, once a title search has been conducted, to provide the proposed insured with a title insurance policy upon closing.

Title insurance:
Title insurance can benefit either the payor or the payee. Should the beneficiary suffer any damages due to clouded or false title to real estate, title insurance recompenses the damaged party to the extent of the damages.

Title policy:
An insurance policy that insures a party against loss due to a defective title.

Trial balance printout:
A spreadsheet that lists all loans in a portfolio and their payment schedule. Usually required for a portfolio transaction.

Uniform Commercial Code (UCC):
Standardized set of guidelines protected by law that set down how business transactions must be conducted.

Unseasoned:
A lease or note that has had few, if any, payments made.

Venture Capital:
Money used for investment in enterprises that involve high risk, but offer the possibility of large profits.
 

Working Capital:
Loans for business expenses such as, advertising, wages, rents, and other operational costs. Often these loans are secured by tangible assets or, in the case of long-standing good credit, by the "full faith and credit" of the company.

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