Accounts Receivable Factoring
 

Accounts Receivable Factoring for Dummies

Common Terms & Definitions

 

I am always asked who is accounts receivable factoring for, what does it mean, who are the companies involved, what do the words recourse and non recourse mean.

So after having received countless emails on this topic, I have put together this brief Accounts Receivable Factoring for Dummies guide. 

It defines some key terms involved in the industry. 

Hopefully you will no longer be foreign to the terms after reading this brief list.

Factoring – selling of a business’ accounts receivable in exchange for immediate cash payment although at a slightly discounted rate. 

Accounts Receivable – money owed to a business by its customers for goods or services provided.

Cash Flow – the physical cash available.  Cash flow varies from one period to another based on business performance, therefore important to forecast, track and monitor. Most borrowing decisions are based on cash flow (availability of cash on hand).

Discount Rate – the percentage the accounts receivable factoring company charges a business for invoice factoring (typically 1%-5%)

Discount Fee – discount rate times the invoice value. This is the fee accounts receivable factoring companies charge for their services. It is based on the number of invoices and the total amount.

Face Amount or Value – money owed by a business’ customers to the factoring company (after invoice factoring has been executed)

Advance Amount – the amount the accounts receivable factoring company pays the business up front in exchange for rights to the receivable.

Collateral – the underlying asset a business pledges to the factoring company in the event the customer defaults on their payment.  The purpose is to make the factoring company feel secured! 

Notification – when the factoring company factors or buys the receivable from the business and notifies the customer that the receivable has been bought.

Non-Notification – when the factoring company does NOT notify the customer.
Recourse or With Recourse – when the business is “on the hook” to pay the factoring company in the event of customer default.
 
Non-Recourse – the opposite of recourse. If the customer doesn’t pay the factoring company, the business is “on the hook” and has to pay or it gives up its collateral!

Is accounts receivable factoring the right solution for your business? I hope you benefited from the Accounts Receivable Factoring for Dummies guide.

If there is anything I can do to enhance this guide please email me

Help me ensure future visitors are as educated as possible after reading this guide.

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