Factoring terminology and frequently used terms
Below are a number of terms and expressions used in factoring that you might find useful. They are not in any particular order.
Factoring - A financial arrangement whereby a business assigns invoices to a factoring company in return for a monetary advance against the invoices and a sales ledger service.
Re-Course Factoring- A factoring arrangement where the financial risk of customer failure stays with Client rather than the factoring company.
Non-Recourse Factoring- A factoring arrangement where the factoring company will carry the risk when there is customer failure. It is important to note that the factoring company will not offer risk cover on every customer, only those who are credit worthy.
Credit Insurance - An insurance policy that covers the risk of bad debt failure on your customers, Credit insurance companies will generally cover between 85% and 90% of the outstanding balance excluding the VAT element of the debt.
Disclosed Invoice Discounting - A similar arrangement to factoring apart from the fact that the factoring company does not manage the sales ledger.
Client - Technical name for the customer of the factoring company.
Debtor - A debtor is a business that owes money as opposed to a creditor who is a business that you owe money to.
Confidential Invoice Discounting - A facility where the factoring company has no involvement in managing the ledger and the customers have no knowledge of the involvement of the factor.
Discount Charge - The interest charge levied by the factoring company on monies advanced by the factor. Rates are normally quoted as a percentage over base rate. As with Banks there will often be a minimum rate charged.
Advance Rate or Initial Payment - The percentage advanced against assigned invoices. This percentage is against the gross value (including VAT).
Factoring Charge - The service charge normally represented as a percentage of gross annual sales for operating a factoring arrangement. The service charge is levied monthly in arrears as a percentage of the invoices raised in the previous month.
Re-Factoring Charge - An additional charge when an invoice becomes of a certain age. Not all factoring companies levy a re-factoring charge.
Minimum Annual Charge - A factor will always impose a minimum charge that will cover any shortfall should the factoring charge not cover their basic costs. In general the greater the turnover the lower the percentage factoring charge (it has been known that a prospect will inflate projected sales in order to get a better rate).
Personal Guarantee - A document signed by a director of the client company confirming that in the event of the factor losing any money for whatever reason that director will make good that loss. Some guarantees are for fixed amounts.
Corporate Guarantee - As above but signed by a corporate body such as a limited company or a limited liability partnership.
Warranty - An undertaking that the person signing the warranty will repay the factor any loss as a result of breaching material clauses, such as raising false invoices or not passing customer payments to the factor. This is often called an anti-fraud warranty.
Concentration - A factor will impose a restriction on a single customer who represents a large proportion of the outstanding ledger. For example if one customer owed £60,000 out of a total ledger of £100,000 and the factor had a concentration limit of 50% then £10,000 would not be funded.
Factoring Agreement - The formal document setting out the terms of the facility. These documents are generally of a standard type, with extra clauses being inserted to cover additional circumstances
Debenture - A charge registered against a company showing that a lender has taken security over certain assets. This charge is registered at Companies House.
Waiver - Also known as a deed of priority. If there is more than one debenture this document sets out who has a charge over what assets and the order of priority.
CHAPS - An electronic transfer of money from the factor to the client. This method will deliver cleared funds to your account on the day of the transfer. The charge for this transfer varies between companies but expect to pay in the region of £30 plus VAT for each transfer.
BACS - Similar to the above, however it normally takes three or four days to receive the transfer. Normally BACS transfers are free of charge.
Working Capital is equal to Current Assets minus Current Liabilities
Corporate Voluntary Arrangement (CVA) An insolvent company can enter into a company voluntary arrangement (CVA). The CVA is a form of arrangement, where an insolvency procedure allows a company with debt problems or that is insolvent to reach a voluntary agreement with its business creditors regarding repayment of all, or part of its corporate debts over an agreed period of time. A CVA can be applied for by; the agreement of all directors of the company, the legal administrators of the company, or the appointed company liquidator. A company voluntary arrangement can only be implemented by an insolvency practitioner who will draft a proposal for the creditors. A meeting of creditors is held to see if the CVA is accepted. As long as 75% (by debt value) of the creditors who vote agree then the CVA is accepted. All the company creditors are then bound to the terms of the proposal whether or not they voted. Creditors are also unable to take further legal actions as long as the terms are adhered to, and existing legal action such as a winding-up order ceases.
During the CVA, payments are made in a single monthly amount paid to the insolvency practitioner. The fees charged by the insolvency practitioner will be deducted from these payments. The company is not required to fund any further costs. Factoring Companies are comfortable financing companies who have entered into such arrangements as the company is protected from any action by the creditors who are bound by the CVA.
Factoring - A financial arrangement whereby a business assigns invoices to a factoring company in return for a monetary advance against the invoices and a sales ledger service.
Re-Course Factoring- A factoring arrangement where the financial risk of customer failure stays with Client rather than the factoring company.
Non-Recourse Factoring- A factoring arrangement where the factoring company will carry the risk when there is customer failure. It is important to note that the factoring company will not offer risk cover on every customer, only those who are credit worthy.
Credit Insurance - An insurance policy that covers the risk of bad debt failure on your customers, Credit insurance companies will generally cover between 85% and 90% of the outstanding balance excluding the VAT element of the debt.
Disclosed Invoice Discounting - A similar arrangement to factoring apart from the fact that the factoring company does not manage the sales ledger.
Client - Technical name for the customer of the factoring company.
Debtor - A debtor is a business that owes money as opposed to a creditor who is a business that you owe money to.
Confidential Invoice Discounting - A facility where the factoring company has no involvement in managing the ledger and the customers have no knowledge of the involvement of the factor.
Discount Charge - The interest charge levied by the factoring company on monies advanced by the factor. Rates are normally quoted as a percentage over base rate. As with Banks there will often be a minimum rate charged.
Advance Rate or Initial Payment - The percentage advanced against assigned invoices. This percentage is against the gross value (including VAT).
Factoring Charge - The service charge normally represented as a percentage of gross annual sales for operating a factoring arrangement. The service charge is levied monthly in arrears as a percentage of the invoices raised in the previous month.
Re-Factoring Charge - An additional charge when an invoice becomes of a certain age. Not all factoring companies levy a re-factoring charge.
Minimum Annual Charge - A factor will always impose a minimum charge that will cover any shortfall should the factoring charge not cover their basic costs. In general the greater the turnover the lower the percentage factoring charge (it has been known that a prospect will inflate projected sales in order to get a better rate).
Personal Guarantee - A document signed by a director of the client company confirming that in the event of the factor losing any money for whatever reason that director will make good that loss. Some guarantees are for fixed amounts.
Corporate Guarantee - As above but signed by a corporate body such as a limited company or a limited liability partnership.
Warranty - An undertaking that the person signing the warranty will repay the factor any loss as a result of breaching material clauses, such as raising false invoices or not passing customer payments to the factor. This is often called an anti-fraud warranty.
Concentration - A factor will impose a restriction on a single customer who represents a large proportion of the outstanding ledger. For example if one customer owed £60,000 out of a total ledger of £100,000 and the factor had a concentration limit of 50% then £10,000 would not be funded.
Factoring Agreement - The formal document setting out the terms of the facility. These documents are generally of a standard type, with extra clauses being inserted to cover additional circumstances
Debenture - A charge registered against a company showing that a lender has taken security over certain assets. This charge is registered at Companies House.
Waiver - Also known as a deed of priority. If there is more than one debenture this document sets out who has a charge over what assets and the order of priority.
CHAPS - An electronic transfer of money from the factor to the client. This method will deliver cleared funds to your account on the day of the transfer. The charge for this transfer varies between companies but expect to pay in the region of £30 plus VAT for each transfer.
BACS - Similar to the above, however it normally takes three or four days to receive the transfer. Normally BACS transfers are free of charge.
Working Capital is equal to Current Assets minus Current Liabilities
Corporate Voluntary Arrangement (CVA) An insolvent company can enter into a company voluntary arrangement (CVA). The CVA is a form of arrangement, where an insolvency procedure allows a company with debt problems or that is insolvent to reach a voluntary agreement with its business creditors regarding repayment of all, or part of its corporate debts over an agreed period of time. A CVA can be applied for by; the agreement of all directors of the company, the legal administrators of the company, or the appointed company liquidator. A company voluntary arrangement can only be implemented by an insolvency practitioner who will draft a proposal for the creditors. A meeting of creditors is held to see if the CVA is accepted. As long as 75% (by debt value) of the creditors who vote agree then the CVA is accepted. All the company creditors are then bound to the terms of the proposal whether or not they voted. Creditors are also unable to take further legal actions as long as the terms are adhered to, and existing legal action such as a winding-up order ceases.
During the CVA, payments are made in a single monthly amount paid to the insolvency practitioner. The fees charged by the insolvency practitioner will be deducted from these payments. The company is not required to fund any further costs. Factoring Companies are comfortable financing companies who have entered into such arrangements as the company is protected from any action by the creditors who are bound by the CVA.
