Unpacking Financial Jargon
It doesn’t matter if you’re dealing with a brokerage firm, investment bank, or a mortgage company. When you first dip your toe in the water of any financial service that’s new to you, you feel like you need to dust off your old Rosetta Stone software.
All of a sudden, you’re speaking a foreign language.
Every financial institution seems to have its own unique vocabulary and with it, a whole lot of jargon that can make an already intimidating situation seem almost impossible.
At Sky Business Credit, we pride ourselves on making sure our clients are always kept in the loop. No one wants to feel lost when it comes to their money.
To help make sure you’re not lost in factoring lingo, we’ve put together a list of some common terms you’re likely to come across – and brief explanations that shouldn’t require a translator.
- Account debtor – the factoring client’s customer, or the person who owes an obligation on an account.
- Accounts receivable or Accounts – money that’s owed from a factoring client’s customer to the factoring client.
- Advance – the amount of money the factoring company pays its client when the factor purchases the invoice.
- Advance rate – the percentage of the invoice that will be advanced, typically making up 75%-95% of the gross value of the invoice.
- Chattel paper – a document that contains information about monetary obligation paired with the specifics of a security interest held by the creditor; this is usually a lien on a moveable piece of property.
- Collections – payments that the factor received for invoices that were factored, or payments that flow through their lockbox.
- Credit limits – the financial limit that the factor places on each account debtor to be factored.
- Contra account – when a factored client and an account debtor owe each other money, creating a potential offset of the accounts the factor has purchased.
- Factoring fee – the discount rate charged by the factoring company when purchasing accounts. The fee will vary depending on how long it takes for the account debtor to pay the invoice. A typical fee may range anywhere from 1-3% on a monthly basis or prorated variation thereof depending on certain criteria, such as customer concentrations, customer credit worthiness and sales volume being factored.
- Lockbox – a bank treasury management system designed to receive payments by mail or automated clearing house (ACH) from an account debtor.
- Notice of assignment (NOA) – a legal assignment letter that is sent to account debtors to inform them that an account has been factored and pledged as collateral; the NOA also informs the account debtor of the new payment address.
- Progress billing – an invoice that is intended to obtain payment for a portion of a project that has been completed to date; often used when a project has a lengthy duration.
- Reserve – a specified amount of either escrowed funds or cash funds, expressed as a percentage of the funding line that is used to cover shortfalls.
- Recourse factoring – a form of factoring in which the factor will not absorb credit losses that result in an account debtor defaulting on an invoice. Typically, this means that when an invoice is 90 days old it is no longer eligible for factoring and the factoring client must buy back the invoice from the factor.
- Non-recourse factoring – a form of factoring in which the factor absorbs any losses on unpaid invoices due solely to credit losses. This means the account debtor has gone out of business or filed for bankruptcy for it to qualify for non-recourse protection. With his form of factoring, verifications and credit criteria are generally stricter.
- Uniform Commercial Code (UCC) – a comprehensive set of laws that governs all commercial transactions in the United States.
- UCC lien – a way for a lender to establish priority in repayment in case of account debtor default or bankruptcy.
- Verification – the process in which a factoring company verifies the validity of the factoring client’s invoice with their account debtor.
These certainly aren’t the only terms you will encounter in factoring, but this is a pretty comprehensive list to take you from mildly confused to mostly confident.
Is there other factoring jargon that you think requires further explanation? Reach out to us and we’ll do our best to put it in layman’s terms.