GLOSSARY

Account:  A collection of claims or invoices against a particular customer for goods or services delivered.

Account Creditor: The factor's or financial institution's client-the company selling its accounts receivable for cash.

Account Debtor: A person, business or organization responsible for paying an invoice. In the case of factoring, the account debtor  is the customer whose name is on the invoice sold to the factor.

Accounts Payable (A/P):  A current liability representing the amount owed by an individual or a business to a creditor for merchandise or services purchased on open account or short-term credit.

Accounts Receivable (A/R, also referred to as Trade Credit or sales on Open Account Terms):  Monies due for products or services that have been already delivered due at a specific time in the future. The terms are included on the seller's invoice to the buyer with no written evidence of debt executed between seller and buyer. These funds due are considered a liquid asset on the balance sheet and are generally expected to be paid in less than ninety days. Accounts receivable in the books of a company goes as accounts payable in the books of customers.

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

Accounts Receivable Aging Schedule: A classification process, as reported on a schedule by time intervals (30 day increments & current), 30 days, 60 days, 90 days, 90+ days, used to analyze the amount of money owed to a business by its customers. Accounts receivable aging schedule is used by credit grantors (such as banks and factors) to determine the probability of collection, as it shows patterns of payment and delinquency.

Account Debtor (Debtor): A customer billed by a client for a product shipped or service rendered.

Accounts Receivable Credits (Dilution): Returns, allowances, discounts, or other offsets to accounts receivable.

Accounts Receivable Debit:  An increase to accounts receivable. A debit may be the result of sales, interest charges, freight charges, or collection costs.

Accounts Receivable Financing: A form of financing which uses accounts receivable as collateral for a loan. Accounts receivable financing is different than factoring in that the party providing the financing does not own the invoice and is not responsible for collecting the debt.

Account Receivable Funding: A short-term financing technique used to generate working capital. Account receivable funding is generally collateralized by a security interest in the company's accounts receivable.

Accounts Receivable Turnover: The ratio of net credit sales to average accounts receivable, which is a measure of how quickly customers pay their bills.

Acknowledgment Form:  A form sent to the client's customer account debtors to confirm that the invoice the client is selling does exist and that they will remit payment directly to factor.

Advance: A drawdown or disbursement of funds according to the terms of an existing loan agreement. Advances are common to revolving credit facilities. The term can also refer to a customer paying its accounts payable prior to the agreed-upon date

Advance Rate: The percentage of an invoice's face value which a lender pays upon its purchase. . Advance Rates usually range from 70-90%. . The advance rate will vary by the type of collateral, terms, age, and perhaps the financial strength of the obligated party.

Aging (Schedule):  A periodic report listing a borrower's accounts receivable or payable balances, by customer or supplier, detailing the current status or delinquency of the balances owed or owing. The report is usually used in determining the borrower's compliance with the borrowing base requirements in the loan agreement.

Airball: The portion of an asset based loan which is not covered by collateral.

Appraisal:  The valuation for collateral purposes of property, such as equipment or inventory, against which a loan is to be made.

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. These two documents then become the Charter of Incorporation.

Asset:  Anything having commercial or exchange value that is owned by a business, government, institution, or individual. Assets are any possessions that have value in an exchange. The primary classifications of assets are: current assets, long-term assets, prepaid and deferred assets, and intangible assets.

Asset Based Lending (ABL): A specialized form of secured lending whereby a company uses its current assets (accounts receivable and inventory) as collateral for a loan. The loan is structured so that the amount of credit is limited in relation to the value of the collateral. The product is differentiated from other types of lending secured by accounts receivable and inventory by the lender's use of controls over the borrower's cash receipts and disbursements and the quality of collateral rather than ownership of the receivables as in factoring.

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

Assignee: A financing institution or individual or company designated by an insured exporter to receive all or part of the policy proceeds.  The assignment must be acknowledged by the insured.  An assignee has no greater rights than the insured under a policy.

Assignment: A transfer of ownership or interest in a payment obligation between two or more parties.

Assignment of Accounts Receivable (Report of Assigned Accounts):  An instrument wherein a client assigns, reports or pledges receivables to the lender to secure a loan.

Assignment Jacket:  A pouch containing all bills and receipts that a borrower assigns to a secured lender.

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

Authorized Signatory: An individual who is authorized to execute a binding document on behalf of a corporation, partnership or other legal entity.

 

Availability: The additional funds that the lender will advance under the terms of the credit facility. The amount is often the difference between the loan commitment amount and the outstanding balance of the credit facility. In most cases, the terms of the credit agreement limit the amount available if the commitment amount is greater than the borrowing base.

Average Collection Period (Turnover):  The average number of days in which cash receipts will liquidate receivables.

Bad Debt: Any delinquent debt written off as not collectible.

Balance Sheet: A financial statement that shows the value of a business at a particular point in time. The Balance Sheet consists of two columns, Assets and Liabilities and net worth. On a balance sheet, assets are equal to liabilities plus net worth.

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.

Bank Overdraft: An alternative to factoring with no credit management service.

Bankruptcy: Statutes and judicial proceedings involving persons or businesses that cannot pay their debts and seek the assistance of the court in getting a fresh start.

Bill and Hold:  Merchandise billed to an account debtor but not shipped. The merchandise may be marked as property of the debtor and is held pending shipping instructions.

Bill of Exchange:  A financial instrument, representing an unconditional order in writing, signed by a drawer such as a buyer, and addressed to the drawee, typically a bank, ordering the drawee to pay a stated sum of money to a payee, often a seller, on demand or at a fixed or determinable future time.

Bill of Lading: A shipping document providing instructions to the freight forwarder or shipper. Bill of lading also indicates who the seller and the buyer are.

Bill of Sale: iA document used to transfer title of goods from the seller to the buyer.

Blanket Assignment: A legal transfer of ownership of all accounts receivable, both present and future as collateral for funding.

Blind Endorsement:  Endorsement of checks collected by clients in favor of the lender by means of a number or symbol, so that the lender's name does not appear.

Borrower's Fatigue: A strained lending relationship that occurs when the borrower tires of a lender, typically for refusing to modify its loan agreement to reflect the borrower's improved financial condition.

Borrowing Base:  A collateral base, agreed to by the borrower and lender, which is used to limit the amount of funds the lender will advance the borrower. The borrowing base specifies the maximum amount that can be borrowed in terms of collateral type, eligibility, and advance rates.

Borrowing Base Certificate:  A form prepared by the borrower that reflects the current status of the collateral. Borrowing base certificates may be due on a daily, weekly, or monthly basis.

Break-Even Point: The level of operation where revenues equal costs.

Broker: An individual in the business of assisting in arranging funding or negotiating contracts for a client buy who does not loan the money himself. Brokers usually charge a fee or receive commission for their service.

Capital Net Worth: The amount by which total assets exceed total liabilities. Also known as shareholder's equity or book value, capital net worth is what would be left over for shareholders if the company were sold and its debt retired.

Cargo Agent:  An agent appointed by an airline or shipping line to solicit and process international air and ocean freight for shipments.  Cargo agents are paid commissions by the airline or shipping line.

Cash flow:  The flow of cash into a business in the form of revenues and cash receipts minus the out flow of cash from a company in the form of expenses and cash outlays.

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.

Chapter 1:  Affords businesses an opportunity to reorganize by restructuring debt and negotiating payment schedules.

Chapter 11:  The part of the U.S. Bankruptcy Code that contains the provisions for Court-supervised reorganization of debtor companies. In a Chapter 11, the debtor proposes a plan, which is then voted on by the creditors.

Charge Back:  An amount of money owed to the factor or "charged back" to the client when the factor is unable to collect the Account Receivable that was factored, based on an agreed upon debtor non-payment clause in the Factoring contract. The factor will typically take this out of a reserve release or an advance.

Circled:  A transaction is said to be hard "circled" when all issues are resolved and participants are committed. Verbal agreement may constitute a soft circle.

Clearance:   Average number of days necessary for deposited checks to pass through a clearing house (decided by contract, usually 3 to 5 days).

Collateral:  An asset (accounts receivable, inventory, machinery, equipment, real estate, etc.) pledged as security to ensure re-payment of an obligation. Collateral is promised to a funding source until funds are repaid. If the obligation is not repaid, the funding source has the right-by law-to seize the collateral.

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

Collection Date:  The date on which a factor receives payment for a debt.

Collection Only: An arrangement in which the factor is required to pay the purchase price on the collection date only (i.e. with no prepayments).

Commensurate Balances (Compensating Balances):  Funds that a borrower is required to keep on deposit with a bank extending a loan.

Commercial Credit Insurance: Insurance against losses from the uncollectability of accounts receivable.

Commercial Financing:  Various types of asset based financial services in which money is loaned by a secured party to a debtor, pursuant to a loan and security agreement which gives the lender a security interest in specified types or items of collateral. Note that commercial financing is different from factoring. In commercial financing, the secured party is entitled in all events to be repaid the money loaned. In accounts receivable factoring, the secured party (the factor) takes a loss if a factored invoice is not collected due to insolvency. If the account debtor becomes insolvent, the factor assumes the credit risk on that particular account debtor or invoice.

Commitment Fee:  A fee from a lending institution as consideration for its undertaking to make a loan to a prospective borrower, charged when the borrower meets the preconditions specified in the commitment. Depending on the terms of the deal, a commitment fee may be non-refundable or it may be credited upon closing the loan.

Compliance Certifications:  The borrower's statement certifying its adherence to the terms of the loan agreement during the stated period. The certificate is usually completed by the company's principal financial officer. If the borrower is in compliance with the terms of loan agreement (no event of default has occurred), the principal financial officer will attest accordingly. Supporting data is usually required to document the assertion.

Concentration:  The amount of one client's accounts receivable due from a single customer, (usually 15% or greater). A large concentration for a single customer is considered high risk.

Concentration (Jumbo Account) Ratio:  The percentage of total receivables billed to single debtor.

Confidential Invoice Discounting:  Relates to a company entering into a factoring arrangement whereby the sales ledger function remains fully with the company. All credit control functions are the company's responsibility and not the factors. The factoring relationship is not disclosed to the client's customers.

Confirmation Procedures (ABL):  The lender customarily executes two basic types of confirmation: (a) Field Examinations with the purpose of confirming collateral and financial information and help the lender evaluate trends in the borrower's business, and (b) Accounts Receivable Verifications

Consignment:  The physical transfer of goods from a seller or vendor to another legal entity that acts as a selling agent for the seller. The seller is known as the "consignor" or the goods, and title to the goods remains with the seller. The receiver of the goods under consignment is known as the "consignee." The consignee acts as agent for the consignor, sells the goods for a commission, and remits the net proceeds to the consignor. The consignor does not recognize revenue until the consignee sells the goods to a third party.

Contra-Accounts:   These arise when a borrower has both accounts receivable and accounts payable with the same entity because the party is both a customer and a supplier of the borrower. These accounts are usually considered ineligible collateral.

Conversion: A client's unauthorized deposit of collections of accounts assigned to a lender.

Correspondent Factor:  A factor that acts as an import factor or export factor under the two factor system.

Covenants:   Promises to conform to specific guidelines as part of a loan agreement, customarily used for asset based loans, also known as performance covenants. The borrower's promise to conform to specified financial ratios for the life of the loan.  This helps the lender monitor and control the loan while providing the borrower with the greatest possible loan.

Credit:  The extending of time in relation to when payment is required in return for product or services provided.

Credit limit/Credit line:  The maximum amount of outstanding debts which a factor is prepared to approve with regard to a specific debtor.

Creditor: Whoever is owed payments on a debt by a debtor.

Credit Analysis:  The process of analyzing information on companies and bond issues in order to estimate the ability of the issuer to live up to its future contractual obligations.

Credit Insurance:  A policy held by a client which protects the client against losses due to bad debts.

Credit Memo:   A detailed memorandum forwarded from one party or firm to another granting credit for returned merchandise, some omission, overpayment, or other cause. It may also refer to the posting medium authorizing the credit to a specific account, including details of the transaction and signature or initials of the party authorizing the credit.

Creditor:  Refers to the party or business, to which money is owed.

Cross-Aging:  The practice of making all of the accounts receivable from a single account party (the obligated party for an account receivable) ineligible to be included in the borrowing base if a specified proportion of the total accounts receivable from that party is delinquent. Also, sometimes referred to as the "10 percent rule" since a common delinquency threshold is 10 percent.

Cross-Collateralized:  In the event of default, the collateral of cross collateralized loans is used to satisfy the debts. In most instances the collateral is shared on a pari passu basis. The terms of the agreement can also specify that only the excess collateral of one loan can be shifted to satisfy another.

Cross Default:  The right to declare a loan in default if an event of default occurs in another loan.

Customer:  Also referred to as the account debtor, this is the party to whom the original products or services were provided and to whom the factor shall then collect monies from under the terms and conditions of the factored invoice.

Datings:  Terms of sale which extend the period within which the debtor is to make payment. Example: Normal terms are Net 30 Days. On a bill for merchandise shipped May 15, a bill is dated "as of June 15" making payment due July 15.

DBA:  Doing Business As. Used to designate the name of a business as it is commonly known rather than its legal name, the name of the owner, etc.

DBT:  An abbreviation for "days beyond terms," indicates how many days past the due date an invoice is late.

Debt Protection:  Insurance or other mechanism designed to recompense you for the losses incurred upon the non-payment of monies owed to you

Debtor-in-Possession Financing (DIP):  Financing provided to a borrower after a Chapter 11 (reorganization) bankruptcy filing). A lender provides the DIP post-petition financing to support its working capital needs while the DIP attempts to rehabilitate its financial condition and emerge from bankruptcy protection. In order to encourage lenders to provide DIP financing, the bankruptcy code grants the DIP lender a priority claim on the DIP's assets. This provides the DIP lender protection in the event the DIP fails to emerge from Chapter 11 and liquidates. Liquidation can be accomplished either in Chapter 11 or by converting the case to a Chapter 7 filing.

Default: The omission or failure to perform or fulfill a legal duty, obligation, or promise (such as paying a debt).

Delivery Evidence:   A document that proves delivery and invoicing of a shipment.

Demand Loan:  A demand loan is repayable on demand rather than on a specified date. In practice, demand for repayment is not generally made unless the borrower's condition deteriorates so much that the lender concludes its risk has become too great to continue the existing account.

Detailing (Ledgering): The posting of all transactions of a client's pledged accounts receivable to the records maintained by the lender. Detailing should agree with client's subsidiary ledger at each periodic examination.

Dilution (Credit):  Offsets against accounts receivable's, including but not limited to returns, allowances, charge-backs , credit losses, discounts and other. Dilution drives the advance rate in a transaction.

DIP Financing:  Financing extended to a Debtor-In-Possession under Chapter 11 of the Bankruptcy Code. In most cases, DIP financing is considered attractive because it is done only under order of the Bankruptcy Court, which is empowered by the Bankruptcy Code to afford the lender a lien on property of the bankruptcy estate and/or a priority position.

Double Assignment:  The assignment of receivables by a subsidiary, parent, or other affiliated company to the borrower, which in turn assigns the receivables to the lender.

Discount Charge:  Charge made by a factor for the provision of funds usually calculated as a percentage of the amounts advanced. This is a UK term. In other countries this charge is generally called the interest charge.

 

Discount Factoring:  An arrangement whereby a factor purchases an account(s) receivable from a business at a discount to the face value of that receivable. The factor earns a fee based on the number of days that the receivable remains unpaid, i.e., the longer the receivable remains unpaid, the larger the fee incurred.

Discount Fee:  The amount earned by a factor on each invoice purchased. Discount fee is based on the period of time the invoice remains outstanding (unpaid) and is set forth and agreed upon by both parties in the Discount Schedule. The fees are usually a flat, fixed percentage of the total invoice, typically calculated in 30-day increments.

Discount Rate:  The percentage of the face value of an invoice that a factor holds as its fee.

Discount terms:  A reduction in price for earlier payment of an invoice; e.g. 2/10 net 30 means a 2% discount of the total amount due if the 30 day invoice is paid within 10 days.

Discount Tolerance Letter:  A letter sent to the factor by the client in which the client agrees to the limits of any settlement discount (dependent on time and amount) which the factor is prepared to allow.

Dispute:  Any cause for nonpayment of accounts receivables, other than the financial inability of the customer; including, without limitation, any alleged defense offset, or counterclaim.

Dispute Notice:  Written notification to the client from the factor informing the client of a dispute.

Domestic Factoring:  The factoring of debts by clients with debtors in the same country.

DOS:  Days of Stock - number of days that stock supplies will cover.

DPO/DP: Days Purchases Outstanding are the number of days accounts payable are outstanding. Accounts Receivable Outstanding/Average Daily Sales for month.

Due Diligence:  The verification of information and its documentation given to a factor in order to facilitate a decision as to whether or not a particular invoice should be purchased. It generally involves credit checks, appraisals, UCC searches, lien searches and/or on-site visits with clients.

Eligible Accounts or Eligible Collateral:  Sometimes called "acceptable accounts" or "prime accounts".  These are receivables which satisfy the criteria specified in the security agreement so that they are acceptable to the secured party and included in the borrowing base as eligible collateral and entitle the debtor to an advance. Receivables which do not meet the criteria are called "ineligible".

Equity:  The percentage due from lender to client upon collection of bill, calculated as the amount collected less the contracted advance.

Excess Availability:  Total availability less the aggregate advances made on the outstanding revolving loan.

Export Factor:  The factoring company in the seller's country who purchases (factors) the export documents.

Face Amount or Face Value: The total amount of an invoice. Face value is the amount that has to be paid to the factor by client's customer, without consideration as to how much was advanced to the client.

Facility: A specific credit arrangement

Factor, as a noun is a company engaged in the buying of accounts receivable. Factor, as a verb is the act of buying or selling accounts receivable (invoices) at a discount.

Factoring is the process of purchasing of debts owed, or accounts receivables invoices in exchange for immediate payment at a discount.

         There are different Types of Factoring that each business owner needs to know, including  

• Non-Recourse Factoring: Non-Recourse is a type of factoring where the factor assumes complete responsibility for collection of debt. If the debt is not collected due to the financial inability of the customer, the factor assumes the loss.

• Recourse Factoring:  A form of factoring where the client is liable for payment in the event the customer does not pay. 

• Discount Factoring: The factor discounts the receivables prior to the maturity date, and

• Maturity Factoring: The factor pays the client the purchase price of the factored accounts at maturity.

          Factors frequently perform all accounting functions in connection with the accounts receivable, in which case purchasers

          are notified to remit payments directly to the factor.

 

Factors Acknowledgment Form:  A form used by factors to send to their client's customers, which verifies that the client's invoice does exist and that the customer will remit payment due under that invoice to the factor.

Factor's Advance: Same as an Advance except expressed as a dollar amount. It is the money the factor sends to the client immediately after invoice verification is complete. The advance is figured by multiplying the advance rate by the face value of the factored invoice. The advance is considered a down payment by the factor for the purchase of the client's accounts receivable.

Factors Chain International (FCI):  A global network of leading factoring companies, whose common aim is to facilitate international trade through factoring and related financial services.

Factors Client:  Refers to the business that is selling its accounts receivable to a factoring agent or organization.

Factors Reserve:  The amount held back from the funding to offset dilution and other perceived risk

Factors Services or Factoring Services:  Services provided by the factoring agent to the client on behalf of the factoring process, such Collection, Credit insurance, Financing.

Factor's Reserve Release, same as Reserve Release:  The amount released from the factor's reserve once account-debtor payments have been received and credited by the factor. The reserve release is generally equal to the invoice amount less the advance amount, any charge-backs, other deductions, any factor fees or other costs associated with the factoring service.

Factor's Verification:  The process by which the factoring company verifies that the client has provided its product or service to the customer. Factors verify that the customer received and accepted the product or service and that the customer intends to pay the factor the money due under the invoice. This process normally takes place before the factor purchases an invoice and advances cash to the client.

Fees: Fees may vary depending on the creditworthiness of the borrower, the type of event being financed, and other factors. Not every borrower pays every fee.

Factors Fee - same as the Discount Fee, refers to the fee the factor charges for providing advance funding of the client's accounts receivables amount.

Fees associated with ABL facilities may include commitment fee, paid in cash upon obtaining the commitment and, the closing fee - generally paid from the proceeds of the initial loan.

Other typical fees may include:

•             an unused line fee which is designed to compensate the lender for its cost to retain the liquidity to lend the borrower the maximum amount of their committed facility as needed,

•            an administrative fee to compensate the lender for ongoing collateralauditing and monitoring,

•            a prepayment fee to compensate the lender if the borrower decides to end the facility (and the lender’s projected income from the loan) prematurely, and

•           an audit fee

•           a field examination fee

Field Audit (Field Examination):  An examination and inspection of a client's books, records, property, and operations, with particular attention being paid to the condition of the collateral. In revolving financing on receivables or inventory, regular field audits are an essential feature of the secured party's monitoring.

Filing: In the UCC context, filing is the act of depositing in a public office a document, usually a financing statement, which gives legal notice of the secured financing transaction. In most secured transactions, filing is an essential step in the process of perfecting the security interest.

Finance Charge:  Represents the interest on funds made available to the client by way of prepayment against purchase of approved invoices.

Financial Supply Chain (FSC):  The monetary component of supply chain management covering transaction execution,  including collections, payments, funding, taxes etc. Falls under the control of the CFO.

Financing Statement:  Generally known as 'Form UCC-1'.  This form is filed in the prescribed public offices for the purpose of perfecting the security interest of a secured party.

Forfaiting: A form of export financing where a financial institution purchases medium to longer-term export receivables.

Full Following:  Describes the process ABL lenders use to closely control credit availability and collateral by means of a borrowing base, control of the cash receipts, and field audits.

Full Recourse Factoring:  In this type of factoring, the factor is protected against customer non-payment. If the customer does not ultimately pay the invoice, the client is responsible for paying back the funds advanced.

Funds In Use:  The total amount of funds advanced to the client prior to collection by the lender.

Funding:  Advancing money (based on the advance rate) to a client.

Funding source:  An individual investor or an investment company that buys income streams, (accounts receivable or liquid assets).

Grid Loan:  A secured but not heavily monitored loan. As long as the borrower's company performs according to the loan agreement, collateral monitoring is minimal.

Guaranteed Sales:  Sales that allow the return of unsold merchandise purchased at the customer's discretion. Title passes to  the debtor.

Guaranty: A document by which a person or corporation (a 'guarantor' or 'surety) promises payment of a debtor’s obligations to a secured party. It is quite customary to require guaranties from the principals of a debtor and from the debtor’s parent, subsidiary, or affiliates.

Haircut:  When a lender wants to end a transaction in advance, it often will accept a reduction in principal or interest accrued (i.e., a haircut) in order to be paid out in cash.

High Debtor:  A debtor whose balance represents 5% or more of a company's total receivables (see Concentration).

Holdback (Reserve): The balance of an invoice in excess of the advance. The holdback becomes equity when the invoice is paid.

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.

Import Factor: The factoring company in the buyer's country who handles collection and credit risks.

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

Indemnification:  A promise to compensate for loss or damage sustained as a result of a stated set of circumstances.

Ineligible Collateral:  Pledged receivables or inventory that does not meet the criteria specified in the loan agreement. Ineligible collateral remains part of the ABL lender's collateral pool, but does not qualify for inclusion in the borrowing base.  Ineligible invoices may be past due according to contractual terms (90 to 120 days from invoice date), contra, employees, affiliates, consignments, memo guaranteed sales, or in excess of limit allowed to the debtor.

Initial Assignment (Original Accounts Receivable; Report of Assigned Accounts):  Instruments used to convey an interest in accounts receivable to the lender in order to secure the initial advance.

Insolvency:  Technically, the financial condition of an enterprise whose liabilities exceed its assets, or which is unable to pay its debts as they mature. Financing an insolvent client requires specialized lending expertise, particularly if insolvency leads to bankruptcy. Bankruptcy tends to be the path followed by insolvent companies, but it may actually open up alternative financing opportunities.

International Factoring: Factoring for cross-border goods and services transactions; also called export or import factoring depending on the location of the factoring customer. The factor either handles the transactions directly, or uses a cooperation partner in the respective country.

Institutional Lenders:  Private, public or institutional organizations engaged in the business of controlling assets and making funds available for others to borrow, among which are banks, insurance companies and investment companies.

Insurance Coverage:  Total amount of insurance carried.

Insurance Policy:  Entire written contract of insurance.

Insurance Premium:  The amount paid to an insurance company for coverage under an insurance policy.

Insurance of receivables:  The lending  company takes out general insurance contracts with accepted insurance companies with which essential conditions are defined. The minimum deductible amount of the client (supplier) is established in consideration of the solvency of the buyers and the contractual conditions of the respective insurance  company.

International Factoring Association (IFA):  An international organization aimed at assisting the Factoring community by providing information, training, purchasing power and a resource for the Factoring community.

Inventory Financing: Sometimes called 'inventory loans'.  Advances made to enable a client to acquire, manufacture, or carry inventory. They are collateralized by a security interest in the inventory and usually in the accounts receivable or other proceeds of sale.

Invoice: A legal debt instrument which indicates the amount due from a customer to pay for delivered goods or services. Invoices may be traded or sold.

Invoice Discounting: Instant cash upon issuing invoices without sales ledger and collection services required.

Invoice Finance:  Another phrase for factoring and invoice discounting. The decision to choose ABL versus Invoice Finance is based on the needs of a company and their financial position. Invoice factoring leaves the balance sheet unchanged, but with asset-based lending, debts are incurred.

Invoice Presentment: Process from Seller submission of invoice to Buyer for payment. Required for Buyer to obtain a Payment Authorization and approval required prior to payment execution.

Involuntary Bankruptcy Filing:  An involuntary bankruptcy filing occurs when a creditor or group of creditors forces a company into bankruptcy. This may severely restrict the ability of the bankrupt company to control its own situation.

Jumbo Account (Concentration):  A debtor having a balance in excess of 5% of a company's total receivables.

Landlord's Lien:  The privilege given by some state statutes to a landlord when a tenant has not paid rent due which allows the landlord to impose a lien for the rent against the tenant's property located in the leased premises. Since the landlord's lien is a potential rival to the UCC security interest, secured lenders often try to obtain a landlord's waiver in advance, before taking on a prospect in a state which recognizes the landlord's lien.

Ledgering (Detailing):  The posting of all transactions to reports maintained by lender of a client's accounts receivable assigned to the lender. Ledgering should agree with the client's subsidiary ledger at each periodic examination.

Lender's Fatigue: industry term used to describe a lender's unwillingness to continue a troubled lending relationship. The lender may, depending upon its rights under the contract, ask or require the borrower to refinance.

Liability: A financial obligation, debt, claim or potential loss. There are two types of liabilities: Current and Long-term. Current are debts that must be paid within one year (such as accounts receivable, dividends, notes payable, bank loans payable, taxes payable, wages and long-term debt due within one year). Long-term liabilities, also called funded debt, are debts that are not due until after a year's time.

Lien: A creditor's claim against property. When the debt is paid or otherwise satisfied, the lien is removed. Liens may also be granted by courts to satisfy judgments.

Lien Search: A search through public records on file,  in both the County Clerk's and Secretary of State's offices, for any claims (pledges) against the property of a business (such as their accounts receivable) or an individual.

Line of Credit: The amount of credit that may be extended to a borrower by a lender during a stated period. This type of arrangement gives a borrower more flexibility in planning for operating expenses

Liquid Asset:  Cash, accounts receivable, or other assets that can be readily converted into cash.

Liquidity:  A company's ability to meet current obligations with cash or other assets that can be quickly converted to cash. Liquidity is one of the most important characteristics of a good market. Liquidity also refers to how easily investors can convert their securities into cash and refers to a corporation's cash position, i.e. how much the value of current assets exceeds current liabilities.

Lock Box:  A cash management product offered by financial institutions that accelerates a client's collection of receivables. The client's customers are directed to make payments to regionally located post office boxes, where they are picked up several times each day and entered into an automated check processing system. By processing checks by region, the client gains faster access to its funds since it speeds their presentment to the bank they are drawn on. Lenders use lock boxes in ABL financing to control cash receipts.

Margin:  The difference between the market value of collateral pledged to secure a loan and the amount the bank will advance against the collateral.

Market Value:  The most likely price an asset will bring if it is sold in a competitive, open market, with reasonable market exposure and willing, informed buyers and sellers.

Minimum Balance:  The amount withheld by the factor net of the advance.

Mechanics Lien:  A lien created by statute for the purpose of securing priority of payment for the price or value of work performed and materials furnished in construction or repair of improvements to land and which attaches to the land as well as the improvements. Usually takes precedence over all other liens.

Negative Cash Flow:  A situation where income is less than expenses. Prolonged negative cash flow can lead to the failure of a business.

Negative Pledge:  A promise not to secure certain assets of a company, such as inventory or receivables.

Net Working Capital:  The difference between a company's current assets and current liabilities.

Non-Notification:  An aspect of confidential factoring where the customers are not notified of the client's arrangement with the factor. They are however, directed to make payment to a lock box controlled by the lender.  Any contact that the lender makes is made under the client company name. The lender may also allow the borrower to collect payments and remit them to the bank for credit against the loan balance.

Non-Prime (Ineligible):  Invoices assigned to the lender, against which no advance is made. Ineligible invoices may be past due according to contractual terms (90 to 120 days from invoice date), contra, employees, affiliates, consignments, memo guaranteed sales, or in excess of limit allowed to the debtor.

Non-Recourse: A type of factoring where the factor assumes complete responsibility for collection of debt. If the debt is not collected due to the financial inability of the customer, the factor assumes the loss.

Note: A written promise to pay a specified amount to a particular company or business by a certain date.

Notification: A process whereby the lender lets an account debtor know that an invoice has been purchased from the client and that the debtor is to pay the lender directly for credit against the loan balance.

On-Account Payments:  Partial payments by a debtor which does not pay a bill or bills in full.

Open Account Sales: An arrangement in which goods/services are sold /supplied by the client to the customer on credit without raising any bill of exchange or promissory note.

Operating Cycle:  The period of time it takes a business to convert purchased and manufactured goods and services into sales, plus the time to collect the cash from the associated sales. If the company has sold receivables through factoring arrangements, the calculation will be distorted.

Order to Cash: Complete collection cycle from input of customer order until payment and cash application/deposit.

Original Assignment (Initial Accounts Receivable; Report of Assigned Accounts):  Instruments used to convey an interest in accounts receivable to the lender in order to secure the initial advance.

Over-Advance:  An advance, which exceeds the percentage normally in effect between a lender and a client.  Example: Where a stipulated advance is 80% and client is extended 85%, the extra 5% is considered an over advance.

Pack and Hold:  Merchandise that is packed and held in inventory against orders. Billing does not occur until merchandise is shipped.

Pari Passu:  Credit facilities in which two or more lenders are accorded equal treatment under a loan agreement. Most frequently applied to collateral, but may also refer to loan structure, documentation, maturity, or any other substantive condition.

Participation:  Occurs when portions of a loan, usually up to 50%, are shared by different lenders.

Pay Statement:  A statement that accompanies a debtor's check and which indicates an item or items being paid as well as any existing dilution.

Performance Covenants: see Covenants

Personal Guarantee: An agreement in which a principal of a corporation assumes personal liability for the obligations of the corporation.

Plan of Reorganization (POR):  The document which outlines the Chapter 11 exit strategy of the Debtor-In-Possession (DIP). It sets forth the new capital structure of the DIP and the treatment of the various classes of creditors and equity holders. The POR must be confirmed by the bankruptcy court before it can become effective. The DIP has the exclusive right to propose a plan within the first 120 days of the Chapter 11 case, subject to extension by the court. Specialized financing is often an integral part of a POR and may be critical to a company's successful emergence from bankruptcy.

Post-Dated Check:  A check drawn in payment of bills, but with the date on the check being some time in the future.

Pre-Billing:  Billing by a client in advance of shipping.

Prime (Eligible):  Invoices assigned to the lender, against which advances are made.

Primed:  A lender is primed when it has lost its collateral position and moves down in the capital structure.

Pre-ship Invoice:  A legal debt instrument which indicates the amount due from a customer to pay for goods or services which have not yet been delivered. Generally, factors would not purchase pre-ship invoices.

Principal: A term used for the owner of a privately held business or one of the main parties (buyer or seller) involved in a transaction.

Pro Forma Invoice: An invoice provided by the exporter/supplier to the importer/buyer, which is used as a preliminary invoice together with a quotation.

Progress Billing:  Billing made on a percentage of completion basis and generally found in service, construction, and other industries.

Purchase Order  (PO): A contractual agreement with a supplier of goods or services that specifies payment terms, delivery dates, item identification, quantities, freight terms and all other obligations and conditions.

Purchase to Pay:  Complete buying cycle from purchase from vendor until payment has been executed.

Purchase Money Security Interest:  A security interest which attaches to specific property in connection with a debtor's acquisition of the property.

Purchase Order Financing: Refers to the assignment of purchase orders to a third party who then assumes the obligation of billing and collecting. Typically, this form of financing is tied to a specific transaction where the company requires cash to be able to acquire the raw materials to manufacture the goods for which it has received the purchase order. Ideal for the business that does not have the ability to buy inventory or purchase raw materials on credit and does not want to show the financing as debt, thereby, not affecting the business's ability to qualify for a bank loan later.

Quantity Discounts: Discounts that are offered to encourage customers to buy in larger amounts.

Rate of Return:  The gain or loss generated from an investment over a specified period of time. Rate of return is also referred to as total return and it includes the change in the value of a security plus all Interest, Dividends and capital gains distributions generated by holding that security.

Re-Assignment (Double Assignment):  The assignment of receivables by a subsidiary or affiliate to a parent company, which in turn assigns the receivables to the lender.

Rebate: The return of funds issued to the client by a lender from the reserve account.

Receivables Discounting: Total amount of receivables for period is given to the Seller (usually by a bank) in advance of due date less an interest rate. The risk/responsibility for actual collection still

lies with the seller (with "recourse"). A form of short term financing.

Recourse: A form of factoring where the client is liable for payment in the event the customer does not pay.

Refactoring Charge:  Additional charge by factor when an unpaid invoice reaches a certain age.

Remittance Report (Collection Report):  Forms used by client to itemize collections sent to the lender each day.

Re-Purchase Period:  The period of time, generally 90 to 120 days beyond invoice date, beyond which a sale becomes ineligible for assignment in accordance with contract terms.

Reserve (also Holdback):  The amount withheld by the factor net of the advance. The reserve becomes equity when the invoice is paid. Can be used as a financial cushion to protect against shortages, disputes between the client and the customer or bad debt losses due to customer non-payment.  The reserve should be released to the client after the customer has paid the factor the total money due on the invoice.

Reserve Account: An account established by the factor to track funds owed to a client as factored invoices are paid. The account amount equals the invoice face value minus the advance, the factor's fees, charge backs and administrative charges.

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

Retention (Retainage):  A minimum credit balance or percentage held by the lender in the client's account to ensure adequate performance.

Reverse Factoring: Financing of the supplier's receivables at the risk of the buyer who is usually represented by a large and solvent company. the buyer allows his suppliers to gain the advantage of short-term financing. Thanks to the deferred maturity obtained fro the lender, the buyer can improve its liquidity and simplify administration.

Revolving Credit Facility:  A loan agreement that allows the borrower to frequently draw down and repay advances. The proceeds are usually used to support the working capital needs of the borrower. A borrowing base requirement in the loan agreement commonly mitigates the lender's credit risk. The lender manages a revolving credit facility and the related collateral in order to offer the borrower the largest possible loan amount at any given time. Versus Term Credit Facility.

Satisfaction: The discharge of an obligation by paying what's due (i.e., the satisfaction of an IRS lien or the satisfaction of a security interest holder).

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

Securitization:  A method by which a company reduces its actual accounts receivable by selling all or a portion of outstanding receivables to a financial group or bank. Basically it is an alternative form of financing which improves the company's balance sheet and reduces their overall exposure to customers (without "recourse").

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.

Schedule of Accounts Receivable (Report of Assigned Accounts): A report given by the client to the lender listing information about the account of each of the client's customers. It is an instrument through which a client may assign, report, or pledge receivables to the lender as security for a loan.

Schedule of Offer:   A list of invoices offered by the client to the factor for purchase.

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

Security: The property, other than real estate, given or pledged to ensure the repayment of a debt by a borrower.

Security Agreement:  A document giving a lender a security interest in assets pledged as collateral. This agreement, signed by the borrower, describes the collateral and its location in sufficient detail so the lender can identify it, and assigns to the lender the right to sell or dispose of the assigned collateral if the borrower is unable to pay the obligation.  The UCC classifies all of these under the category of security agreement.

Security Interest: It's created by execution of a security agreement and one or more financing statements filed pursuant to the Uniform Commercial Code.

Service Charge:  Administration charge.  Normally expressed as a percentage of the clients sales turnover although in some cases it can be a fixed fee.

Set-off (offset): A common law right of a lender to seize deposits owned by a debtor and deposited in the lender's institution for nonpayment of an obligation. It also occurs in settlement of mutual debt between a debtor in bankruptcy and a creditor, through offsetting claims. Instead of receiving cash payment, debtors credit the amount owed against the other party's obligations to them. This allows creditors to collect more than they otherwise would have collected under a debt repayment plan approved by a bankruptcy court.

Shipping Evidence:  A properly executed receipt by a carrier or debtor.

Sign Off:  To legally acknowledge that money is due by a debtor on an invoice.

Single Risk Insurance: A policy obtained by a client to cover either one debtor or one invoice against loss.

Skip (Skipped Invoice): The payment of an invoice by a debtor which leaves the prior invoice unpaid.

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.

Statement: A monthly itemization of all transactions during the month. A statement may be prepared by the lender or by a client for the account debtor.

Sub-limit: A facility with a total advance limit may also specify a sub-limit on maximum loan advances supported by certain types of collateral (e.g., inventory).

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.

Supplier Credit:  The credit granted by suppliers to the company, allowing it to pay for its purchases several days, weeks or in some countries, even several months, after receiving the invoice.

Supply Chain:  Comprises all the companies involved in the manufacturing process, from the raw materials to the end product.

Supply Chain Finance: Category of solutions, processes, and technologies that banks and other financial services providers have designed to provide working capital finance and workflow, and accelerated cash flow to suppliers on the basis of the value of physical or financial supply chain events (for example, the issuance of a purchase order or the approval of an invoice).

T/A (Trade Acceptance): A negotiable instrument for the amount of a specific purchase and bearing debtor's promise to pay.

Terms:  A negotiated amount of time allowed to pay a debt.

• Net 10 - 10 days from invoice to pay for goods.
• Net 30 - 30 days from invoice to pay for goods.
• R.O.G. - Receipt of Goods; Payment due upon receipt of goods.
• Net 10/ROG - Payment due 10 days from receipt of goods.
• 8%/10EOM - Take an 8% discount if paid by the 10th of the following month. 2%/10 - Take a 2% discount if paid with-in 10 days.
• C.O.D. - Cash on Delivery
• C.I.A. - Cash In Advance of Delivery.
• 30/60/90 - Payments due 1/3 in 30 days, 2nd/3 in 60 days and final 3rd in 90 days.

Term Credit Facility: A term loan's outstanding amount is fixed for a period of time, such as a month or a year. A term loan generally provides for an agreed upon payment schedule, and amounts paid on generally cannot be re-borrowed. In contrast, a revolving credit facility allows the borrower to borrow, repay, and re-borrow as needed over the life of the loan facility.

Term Loan: A loan, secured or unsecured, with a maturity usually exceeding one year. On the borrower's financial statement, the portion (if any) of a term loan maturing within one year from the date of the statement is shown as a current liability, and the balance as long-term debt.

Termination Statement: A form, generally known as Form UCC-3, signed by a secured party and filed to terminate the effectiveness of a previously filed financing statement. A secured party is required to sign a termination statement after the secured obligation is paid, in order to clear the record.

Third Party Checks: Checks received by a client from a debtor which are payable to the debtor and endorsed to the client.

363 Asset Sale:  The ability of a company to secure bankruptcy financing may be affected by whether it can raise cash by selling assets in accordance with Section 363(a) of the Bankruptcy Code. Section 363(a) allows a debtor in bankruptcy to use or sell all noncash property in the ordinary course of its business without prior court approval. Use or sale of such property outside the ordinary course of business requires court approval.

Trade Creditors:  Business concerns to which a client is indebted for purchases of goods or services. Since trade creditors are usually unsecured, they provide financing that is a critical part of the capital structure of many companies. If a client experiences financial trouble, maintaining the support of trade creditors can be crucial in developing a workable financing solution.

Trade Cycle Analysis: A method of computing whether working capital is sufficient to support the working investment need of a business. (See 'operating cycle')

Trade Discount: A deduction from the list price of goods provided by a business in return for payment within a specified time frame.

Trade Dispute:  A dispute arising over the quality, price or delivery of services.  

Turnover (Average Collection Period):  The average number of days in which cash receipts will liquidate receivables.

Two factor system:  System whereby a factor uses, by sub-assignment, a factor in another country to take on the credit risk and collect the debt of a client exporting to a customer in that country.

Unapproved: Debts assigned to a factor, but where prepayment is not approved.

UCC:  The Uniform Commercial Code, in particular Article 9 which covers secured transactions.

UCC Search:  A report from a filing officer, obtainable for a fee, which shows what financing statements are on file against a named person or organization. The form of request for such information is widely known as Form UCC-11. Often, one of the first steps taken by a lender or factor when considering a prospect is to obtain a UCC search.

Undisclosed Factoring: Another term for confidential factoring

Uniform Commercial Code (UCC):  A model framework of laws that addresses commercial transactions. Each state may modify or exclude provisions of the model framework when adopting the UCC. While the UCC varies from state to state, the spirit of the state-adopted statutes is basically consistent. The UCC was set forth to stimulate interstate commerce by providing a fair measure of consistency among states' commercial laws.

UCC-1 is the document filed with the Secretary of State and/or the County Clerk's office(s) to perfect a lien on clients' assets. UCC-1 is also called UCC Financing Statement. It establishes priority in case of debtor default or bankruptcy.

UCC-3 is a document that is filed with the Secretary of State and/or the County Clerk's office(s) as evidence of an assignment, release or change in the UCC-1. In the case of factoring, a UCC-3 is filed to terminate a UCC- 1 when all outstanding invoices are paid and the relationship between the client and the factor is severed. UCC-3 is also called 'UCC Statement With Respect To Change'.

Uniform Commercial Code:  A set of standard rules, adopted by states in US, that governs commercial transactions. The Uniform Commercial Code Bureau files and maintains record on financial obligations (including IRS liens) incurred by individuals (in business as a sole proprietor), business entities and corporations.

Value Date: Date when funds are available in a bank account.

Verification: A step during the due diligence process used to determine the validity of receivables pledged as collateral. Generally a mail or telephone request to the debtor confirms the balance on ledgers.

Voluntary Bankruptcy Filing:  Voluntarily filing occurs when a company files a bankruptcy petition before it is forced into bankruptcy by the legal action of creditors. Voluntary filing lets a company choose where the legal proceedings take place and can provide the company with more control over its situation.

Weighted Average Risk Rating:  A statistical measure of the total risk in a portfolio of loans. The weighted average risk rating (WARR) is calculated by multiplying the loan commitment amount (or outstandings) by the risk rating for each loan in the portfolio, aggregating, and dividing by the total portfolio commitment (or outstandings).

Whole Turnover Agreement: An agreement for the assignment of all existing and future debts to a factor by a client.

With Recourse:  The Factor grants a limited amount of time for the Account Debtor to pay. The trade credit is ultimately owed or reverts back to the Client for payment if not paid for within a pre-established time beyond Terms. This is a loan and not an outright purchase of accounts receivable.

Without Recourse:  A phrase utilized to indicate that a holder of a negotiable instrument or receivables disclaims liability for non payment in signing over/selling the instrument/receivables to the subsequent holders.

Working Capital:  Current assets less current liabilities. The amount of money that a business has available to conduct it's day-to-day activities. It includes monies that that the owner or investors have invested in the company, retained earnings and supplier credit.  A company's working capital ratio (also called the current ratio) equals the value of current assets divided by current liabilities. A ratio of 2:1 or higher generally indicates a comfortably liquid working capital position.

Working Investment:  The result of calculating the sum of accounts receivable and inventory, minus the sum of accounts payable and accrued expenses (excluding taxes). It represents the amount of financing and trade support that a company needs to fund its trading assets.

Yield is the return on an investor's capital investment presented as a ratio of income to the total cost over a specified period of time.

Zero Covenant:  an asset based loan with no covenants.  The lender may have to structure the deal as a demand loan to protect its interests.