The factoring industry, like any business, has its own vocabulary. We have compiled a list of key terms that you should understand before entering into a factoring agreement:
While a bank or traditional lending institution will do a thorough check of your payment history (checking to see if you have missed payments or been late in payments to other businesses) before lending you money, a factoring company will look at the creditworthiness of your customers. They will study how consistently and how quickly your customers pay their bills. The factoring company conducts regular credit checks on your potential customers to protect you from doing work and then not getting paid.
This is the cash that the factoring company will forward to you prior to your invoice due date. How much of the total invoice is sent to you is expressed in a percentage which could range from 70% to 95%. This funding is sent to the factoring company’s client once the invoice has been verified.
This is the fee that the factoring company charges you for the convenience of receiving early payment on your invoices. The factoring company will keep a portion of the total invoice with the percentage rate set in advance, depending on the terms and conditions of your factoring agreement. The factoring rate that you pay can vary, based on the creditworthiness of your clients and the volume of invoices that you factor in a month.
Notice of assignment
This is the letter sent to your customers that advises them to pay the factoring company instead of the client or any other third parties. It is a legally binding notification that your customers will receive when you choose to factor your invoices and “assign” your factoring company to receive the payments due to you.
The reserve is the amount of the invoice that is held back by the factoring company until your customer pays your invoice. That amount, minus the the factoring fee, goes into an account called your reserve account. If for example, the factoring company advances 90% of the invoice, then the 10% balance is known as the reserve and is available to you on a daily basis for deposit to your bank account.
Recourse and Non-Recourse Factoring
With recourse factoring, when a client’s customer does not pay on an invoice within a set time period (90 days, 120 days), the factoring company collects back the amount of the advance from the client. The client assumes the financial risk for non-paying customers.
With non-recourse factoring, the factoring company pays the client the advance on a customer’s invoice, even if the customer does not pay. The factoring company assumes the financial risk for non-paying customers.
The invoices that you submit for factoring will be checked for accuracy and completeness before they are processed and the initial factoring payment is forwarded to you. The factoring company staff will either review supporting documentation such as proof of delivery or verify the invoice by telephone or email.
Interstate Capital’s friendly cash flow specialists can walk you through each these terms and explain what they will mean to you when you decide to factor your invoices. Get an instant factoring rate quote from Interstate Capital today.