Glossary of Terms
Accounts Receivable – Amounts owed to you by your customers where you have given credit terms and raised invoices ie your sales or debtor ledger.
Administration Charge – a fee charged by the lender for administering the facility – can include chasing and collection of debts. This is usually charged on the turnover/sales of the business.
Advance – Also referred to as pre-payment. The amount of money that an invoice finance provider will give you against your invoices. This is expressed as a percentage eg 85% of the invoice value is advanced to you.
Aged Debtor Ledger – A report showing your outstanding invoices arranged by due date. Also referred to as the sales ledger.
Approved Debt – A debt which has been approved for an advance/pre-payment.
Arrangement Fee – A fee which is charged when the facility commences. It can also sometimes include a fee for registering the debenture.
Asset Based Lending (ABL) – A funder combines a range of facilities to raise finance against business assets of a company eg debtors, plant, machinery, property and/or stock.
Asset Finance – A facility which releases funds based on the value of assets eg plant, machinery, property or stock. Can be arranged as hire purchase, leasing or stock finance.
Assignment – This transfers title of the outstanding debts to the funder. For disclosed facilities a notice is usually printed on to invoices to advise customers that the funder should receive payment.
Availability – The amount which can be made payable to the client once invoices have been purchased by the lender.
BACS – (Bankers Automated Clearing System). Allows electronic payments to be made from one bank to another. A BACs payment takes 3 days to clear.
Bad Debt Protection – (BDP) Also referred to as credit insurance, it offers protection against the insolvency or administration of a buyer. It can also include protection against buyer default for export transactions.
Ban on Assignment – A clause often found in suppliers’ contracts which stops the seller assigning an invoice/invoices to a third party (i.e. a Factor).
Bill of Exchange – a formal undertaking by a buyer to pay a supplier at an agreed future date
Broker – A specialist who helps source a finance facility and makes the introductions to a finance provider.
Cashflow – The money which goes into and comes out of the business.
CHAPs – (Clearing House Automated Payment System). Allows electronic payments to be made and cleared the same day. Banks can charge up to £35 per transfer.
CHOCC Facility – (Client handles own credit control). A hybrid factoring product where the facility is disclosed but the factor does not carry out any credit control, so therefore has minimum contact with the debtors.
Concentration – Usually expressed as a percentage of the approved ledger, it is the maximum percentage that a funder will finance a particular customer to.
Confidential Factoring – An undisclosed funding facility where the funder will also carry out collections in your name.
Confidential Invoice Discounting – An invoice finance facility where the funder’s involvement is not disclosed.
Construction Finance – A specialist finance product given to businesses in the Construction Sector. Similar to invoice discounting/factoring, funding will be based on the collectability of contracts often resulting in a lower pre-payment.
Credit Insurance – see bad debt protection.
Credit Limit – This is the maximum amount of credit recommended on a particular customer and therefore the maximum funding that will be given against that customer.
Credit Period – The length of time given to a seller before they have to pay the invoice e.g. 30 days, 60 days.
Credit Protection – see bad debt protection.
Debenture – A charge registered by a funder giving them entitlement to the assets of a company.
Debtors – Your customers with whom you have agreed credit terms.
Debtors Ledger – See Aged Debtor Ledger
Disbursement Charges – Additional charges applied by the funder, over and above the service fee and discounting fee. They will include CHAPs charges, credit reports and over-payments for example.
Disclosed Invoice Discounting – An invoice finance facility where the funder’s involvement is disclosed. Client will carry out his own collections/credit control.
Discounting Charge – The percentage charged for borrowing money. Charged either as a percentage over base rate or libor rate.
Early Payment – see Initial payment.
EFG – The Enterprise Finance Guarantee is a scheme introduced and backed by the Government to encourage more lending to SMEs. Can be given alongside an invoice finance facility subject to certain criteria being met.
Export Factoring – A funding and collections facility for debtors who are outside the UK.
Facility Limit – Funders will agree a maximum funding level across all your customers. This limit will usually be flexible and is based on sales levels.
Factoring – A finance facility which uses the debtor book of a company as security to lend money against. It includes a full credit control and collections service from the funder.
Funding Limit – see Facility Limit. This term though can also be applied to the maximum funding allowed against individual customers – see credit limit.
Funding for Lending Scheme – Introduced by the Government in 2012 to increase funding for SMEs by allowing Banks to obtain cheaper money from the Bank of England which could then be offered as loans.
Funding Period – Funding will be agreed for a maximum period of between 90 and 120 days on each customer. If the invoice is outstanding longer than this, then the debt becomes disapproved.
High Involvement – If a single customer accounts for more than about 40% of your ledger (although this % varies with funders), the funder may restrict the funding depending on the creditworthiness of the debtor. Strong debtors may be allowed up to 100% concentration.
Import Finance – Also known as Trade Finance and Purchase Finance. This is funding which helps with the purchase of goods from your supplier including freight and VAT charges. A confirmed order for the goods is usually required.
Initial Payment – Commonly referred to as the IP or Pre payment, this is the maximum percentage the funder will give against invoices. This may subsequently be reduced depending on the credit worthiness of the debtor.
Invoice Discounting – A facility which provides funding against unpaid invoices. Usually confidential so all credit control is carried out by the client.
Invoice Finance – A generic term encompassing factoring and invoice discounting.
JCT Contract – Stands for Joint Contracts Tribunal. A standardised form of contract wording used mainly in the Construction Industry.
Lender – The financial institution which provides funding.
Letter of Credit – A legal document raised by a Bank to provide assurance to a supplier that payment will be made available on presentation of certain documents.
Minimum Base Rate – A fee is charged for the money you draw down and this will usually be charged at a rate over base with a minimum base rate being set e.g. 1% obr.
Minimum Fee – This is the minimum service fee which a funder would expect to receive during the term of the facility. It may be shown as a monthly, quarterly or annual figure, and the funder will reconcile the account accordingly.
Non Recourse – This means that bad debt protection has been included alongside a finance facility. If the debtor doesn’t pay because they have gone into administration/receivership then the debt may be covered by the insurance. In the case of export debts it may also cover buyer default cases.
Overpayment – Additional payments made available by the funder over and above the normal initial payment percentage.
Payroll Funding/Finance – Suitable for businesses which supply temporary contractors. Based on invoice values a rolling loan is given to pay the wages, with repayment expected over a 2 month period.
Pre payment – see Initial Payment
Pro Forma Invoice – A sales invoice raised in advance of supplying goods or services and usually required to be paid before delivery.
Purchase Finance – see import finance.
Purchase Ledger – The accounting record of your purchases. Also called Creditor Ledger.
Reassignment – In the event that an invoice remains unpaid a funder will reassign that invoice back to you for collection. The invoices will have either been disapproved by the funder or disputed by the debtor.
Recourse – If a debtor fails to pay an invoice the funder will withdraw any prepayment which has been made against the invoice. The funder will seek to recover this payment from the client, but this is usually done by taking availability from other invoices.
Refactoring Fee – When an invoice has been outstanding longer than the agreed funding period, the funder will usually make an additional charge for collection of this.
Retail Finance – A loan based on future debit and credit card sales. Suitable for businesses which deal direct with the general public.
Sales Ledger – See Aged Debtor Ledger.
Stage Invoices – This refers to invoices which are raised part way through a job for work which has been completed in part, but the job has not been finished. Common in project and contractual work. Also referred to as staged payments or interim payments.
Service Fee – The fee levied by a funder for the service provided. Usually based on the client’s turnover and charged as a percentage of the sales. Occasionally a fixed fee can be charged monthly instead.
Single Invoice Finance – See selective factoring and Spot factoring
Spot Factoring – Also referred to as selective factoring allows funding against single customers or invoices.
Trade Finance – see Import Finance