Invoice financing uses its own terminology which is not widely known outside of the industry. As a current or prospective client it’s important to learn some key terms to navigate your relationship with an invoice financing company. We know there is a learning curve, so let us help you navigate it. Below are some of the key terms you will encounter while leveraging invoice finance to optimize the flow of business capital.
A Guide to Invoice Finance Terms
First things first: What is Invoice Finance?
AKA: factoring or A/R financing
Invoice Financing is the process of purchasing commercial accounts receivable (invoices) from a business at a discount; the client then uses the funds advanced by an invoice financing company to support their working capital needs.
Money owed to a company by its debtors (customers) for goods or services rendered.
The percentage of an invoice that a factor will advance upfront, typically between 70-90%.
Asset Based Lending (ABL)
A loan that is secured by collateral, such as accounts receivable, equipment, or purchase orders. These types of loans are usually repaid when the asset that secures the loan is converted into cash.
The transfer of ownership or interest in a payment obligation between two or more parties.
The total amount of money available to a client by the factor. Clients can transfer these funds into their company bank account at any time.
Typically, back-up documentation is used to validate invoices and is necessary to enable the collection of invoices, absent the clients’ involvement. Examples may consist of contracts, time cards, and bills of lading.
Bank ACH (Automated Clearing House)
The Automated Clearing House (ACH) system is a Bank-managed electronic system designed to allow corporations and consumers to reduce or eliminate the use of paper checks to make routine payments.
Bill of Lading
A shipping document providing instructions to the freight forwarder or shipper and also identifies both the seller and the buyer.
Bill of Sale
A document used to transfer the title of goods from the seller to the buyer.
Cash Conversion Cycle
The amount of time it takes for a business to convert inventory and other assets into cash flow from sales.
The money transferred into and out of a business through sales and operations.
Chargebacks are invoices that have been removed from LSQ’s unpaid invoices due to a lack of payment. Commonly, invoices are “charged back” due to non-payment, a dispute by your customer, or partial payments.
The company or entity that sells its account receivable to a factoring company.
The percentage of accounts receivables owed by individual debtors. Large concentrations of AR being owed by a single or few debtors is considered higher risk.
Customer / Account Debtor
A business or organization that owes money on an invoice purchased by the Factor (i.e., the client’s customers, also known as Account Debtors.)
Delivery Evidence / Proof of Delivery
Third-party documentation evidencing delivery of product or service.
The difference between gross and net sales as calculated on the income statement and is used to establish advance rates. Typically caused by an invoice discount or deduction after the invoice is issued.
Face Amount or Face Value
The total dollar amount of an invoice, i.e., the amount indicated on the invoice.
Factoring allows companies to receive an early payment advance on their open invoices, unlocking cash flow trapped in invoices that customers haven’t paid yet. Improved liquidity means not having to choose between tackling new opportunities and making ends meet.
Also known as a “factor”, is a company that specializes in providing working capital to other companies by advancing cash against unpaid accounts receivable.
Is a fee, charged by the factoring company, that is discounted from your invoice to pay for the factoring service. Rates are calculated based on the period of time an invoice remains unpaid. The rate tends to vary among factoring companies and are dependent on different criteria such as industry, credit worthiness and invoice amount.
The amount advanced to the client upfront which is determined by the advance rate.
Invoices that a factor will not fund against. An invoice may become ineligible because it is: missing verification, past due, over credit limit, in dispute, etc.
A legal debt instrument evidencing goods or services delivered or rendered, the agreed-upon value of those goods or services, the parties involved in the transaction, and the payment terms relative to the transaction.
Invoice Purchase Agreement / Factoring Agreement
The contractual agreement that describes the terms (duration, advance rate, fees, etc.) under which a factor provides factoring services to its clients.
Payments received from your customer for invoices that were not purchased by a factor. These payments will be added to your Available Funds.
A less common form of factoring where the client is not liable for payment in the event a customer does not pay an invoice.
Notification (Notice of Assignment)
Process whereby the factor informs an account debtor that all open and future invoices have been assigned and sold to the factor and are due and payable to the factor directly.
An agreement with a factor to provide excess capital that exceeds the standard availability. Overadvances are also known as Reserve Shortfalls.
Payment (Sales) Terms
Terms of payment noted on invoice, usually in 30 day intervals such as net 30 or net 60.
A document or form used by a client’s customer to issue an order for goods or services.
Purchase Order Financing
A funding solution for companies to receive an advance on purchase orders, similar to invoice financing.
The common form of factoring where the client is liable for payment, in the event the customer does not meet its obligation to pay an invoice.
The amount (typically 10-30%) that is held back from the initial advance to the client until the invoices are collected and fees paid. This is held in an account established by the factor and released to the client when the invoice is paid by the client’s customer.
A group of invoices and required supporting documentation submitted to a factor for purchase.
UCC Filings or Liens
Legal notice filed by creditors to claim rights to collateral pledged by the debtor to secure financing.
The process of confirming the accuracy and acceptance of invoices.
The money and credit available to a company to produce goods, services, and maintain operations
LSQ helps businesses better manage their cash flow to make the most of whatever they’ve earned. Offering invoice financing and supply chain finance solutions, LSQ provides clients with a simple, secure, and honest funding experience. LSQ blends human insights with the analytical power of technology to develop products that give customers the means to accelerate the flow of business. LSQ, headquartered in Orlando, Florida, has helped 1,000s of companies access $25 billion in its 20+ years in business. Learn more about our solutions at www.lsq.com/