Factoring Glossary (A to Z)

The client or customer obligated to pay the factored invoice. In invoice factoring, the underwriting evaluation is predominantly focused on the credit rating and payment history of the account debtor rather than the business submitting the invoice.

The percentage of the total invoice face value wired to the client immediately upon approval. Typical advance rates range from 80% to 90% in general commercial B2B sectors and up to 98% in transportation.

A periodic financial report categorizing a company's accounts receivable according to the length of time an invoice has been outstanding (e.g. Current, 1–30 days, 31–60 days, 61–90 days, and 90+ days past due).

A risk management covenant enforced by factoring companies that caps the percentage of total funding allocated to a single customer (often 20% to 35% of total ledger volume) to avoid catastrophic loss if one debtor defaults.

Any non-cash reduction in the collectible value of an accounts receivable ledger due to customer returns, trade allowances, early-pay prompt discounts, or billing adjustments.

The percentage charge deducted by the factoring company for advancing capital and servicing the invoice. Typically benchmarked between 1.0% and 3.5% per 30-day period.

A dedicated, secure bank depository account controlled by the factor into which customers remit payment via check, wire, or ACH. Lockbox remittances automatically trigger reserve rebate releases.

A formal legal document delivered to the customer notifying them that the invoice has been sold to the factoring company and instructing their accounts payable department to remit payment directly to the factor's lockbox.

A structure where the factoring company absorbs bad debt loss if the customer fails to remit payment due to verified bankruptcy or insolvency. Does not cover disputes or defective performance.

The most common and affordable form of factoring, wherein the client business agrees to repurchase any invoice that remains unpaid beyond a predetermined period (typically 90 days).

The unadvanced portion of an invoice retained by the factor (e.g. 10%–15%) as security against dilution, disputes, or late payment. Released to the client once the invoice is paid in full minus the factoring fee.

The practice of factoring a single standalone invoice rather than committing an entire accounts receivable ledger under a long-term master contract.

A legal accord where an existing senior lender (such as a commercial bank) agrees to subordinate its security claim on accounts receivable to allow a specialized factoring company to fund the business.

A public legal notice filed by the factor with the Secretary of State asserting a senior security interest in the client's accounts receivable assets under Uniform Commercial Code regulations.

A contract requirement stipulating that the business must factor all of its customer invoices through the factor, usually rewarded with significantly lower discount fees.