For business owners exploring invoice factoring as a financing solution, the industry's specialised terminology can often feel like learning a new language. Understanding these terms is crucial when evaluating different providers and determining which factoring solution best suits your business needs.
This comprehensive glossary breaks down the essential terminology you'll encounter in the world of invoice factoring, empowering you to navigate conversations with providers confidently and make informed financing decisions.
Core Invoice Factoring Terms
Advance Rate
The percentage of an invoice value that the factor pays upfront, typically ranging from 70% to 90%. For example, with an 80% advance rate on a £10,000 invoice, you would receive an initial payment of £8,000.
Assignment of Invoices
The legal process of transferring ownership of your invoices to the factoring company, giving them the right to collect payment directly from your customers.
Bad Debt Protection
An optional service (sometimes called non-recourse factoring) where the factor assumes the risk of customer non-payment due to insolvency for an additional fee.
Concentration Limit
A cap on the percentage of your factoring facility that can be allocated to a single customer, typically ranging from 20% to 40% of your total ledger. This protects the factor from overexposure to a single debtor.
Confidential Factoring
An arrangement where your customers are unaware you're using a factoring service. The factor collects payment in your company's name, maintaining the appearance that you handle collections internally.
Discount Fee
The primary charge for factoring services is typically calculated as a percentage of the invoice value or as a margin above the base rate on the advanced amount. Often ranges from 1% to 3%.
Disclosed Factoring
An arrangement where your customers are explicitly informed that you're using a factoring service and will be paying the factor directly rather than your business.
Factoring Facility
The overall financing arrangement between your business and the factoring company is often established with a maximum limit based on your sales volume and customer creditworthiness.
Funding Limit
The maximum amount a factor will advance across all your outstanding invoices, usually based on your annual turnover and risk assessment.
Ledger Management Fee
An administration charge for managing your sales ledger and handling collections is typically calculated as a percentage of your factored turnover (commonly 0.5% to 3%).
Recourse Factoring
The most common factoring arrangement is where you remain ultimately responsible if your customer doesn't pay. If an invoice remains unpaid after a specified period (often 90-120 days), you must repurchase it from the factor.
Reserve
The portion of the invoice value (typically 10% to 30%) is held back by the factor until your customer pays in full. This serves as protection against disputes or adjustments to the invoice amount.
Service Charge
The combined fees for using factoring services typically include both the discount fee and the ledger management fee.
Verification
The process where the factor confirms with your customer that goods or services have been delivered satisfactorily and the invoice is approved for payment without any disputes.
Specialised Factoring Terminology
All-Asset Debenture
A legal charge that some factors require over all company assets as security for the factoring facility, giving them rights over these assets if your business defaults.
CHOCS (Client Handles Own Collections Service)
A hybrid arrangement where you initially manage collections yourself, but the factor takes over collection efforts on invoices that remain unpaid after a specified period.
Debtor Concentration
The percentage of your sales ledger attributed to a single customer. High debtor concentration (over 20-30%) may be a concern due to increased risk.
Dilution
Reductions to invoice values after they've been factored, including credit notes, returns, or disputed amounts. High dilution rates may result in reduced advance rates or higher fees.
Disapproval Period
The timeframe (typically 7-14 days) during which the factor can reject an invoice for funding after initial acceptance is usually due to disputes or verification issues.
Export Factoring
Specialised factoring for invoices issued to international customers, often involving additional services such as currency exchange and international collections expertise.
Facility Review
A periodic assessment (typically quarterly or annually) of your factoring arrangement, potentially resulting in adjustments to your advance rate, fees, or funding limit.
Minimum Monthly Fee
A guaranteed minimum charge is applied regardless of your factoring volume, often based on an expected minimum monthly turnover.
Notice Period
The required advance notice (typically 1-3 months) you must give to terminate your factoring agreement without incurring early termination penalties.
Personal Guarantee
A commitment from company directors to personally cover factoring obligations if the business fails to do so. Many factors require this for small businesses.
Reassignment
The process of transferring an invoice back to your ownership typically occurs when you repurchase an unpaid invoice under recourse factoring.
Selective Factoring
An arrangement where you choose specific invoices to factor rather than your entire sales ledger, providing flexibility but typically at higher per-invoice costs.
Set-Up Fee
A one-time charge for establishing your factoring facility, covering the factor's due diligence costs, legal documentation, and system integration.
Spot Factoring
One-off factoring of a single invoice without an ongoing commitment usually carries higher fees than a regular factoring facility.
Trust Account
A separate bank account where customer payments are deposited before being allocated between you and the factor according to your agreement terms.
Industry-Specific Factoring Terms
Construction Factoring
Specialised factoring for the construction industry, accommodating staged payments, retention amounts, and contractual complexities unique to construction projects.
Recruitment Factoring
Tailored factoring for recruitment agencies, often including features to handle timesheet verification and temp payroll funding.
Retail Factoring
A specialist service for businesses selling to major retailers, often with extended payment terms and complex compliance requirements for invoicing.
Supply Chain Finance
A variant of factoring is initiated by the buyer rather than the supplier, allowing suppliers to receive early payment based on the buyer's stronger credit rating.
Transportation Factoring
Specialised factoring for logistics and haulage companies, often including fuel card programs and streamlined verification processes for proof of delivery.
Understanding the Fine Print
Early Termination Fee
A penalty is charged if you end your factoring agreement before the minimum contract term expires, often calculated as a percentage of your average monthly fees multiplied by the remaining contract months.
Lock-In Period
The minimum duration you're committed to maintaining your factoring facility typically ranges from 6 to 24 months.
Rebate
A partial refund of factoring fees is sometimes offered for high volumes or as a loyalty incentive for long-term clients.
Representations and Warranties
Legal assurances you provide about the validity of factored invoices, confirming they represent legitimate completed sales with no disputes or offsetting claims.
Security Release Fee
A charge for removing the factor's legal charges over your assets when you exit the factoring arrangement.
Final Thoughts
Mastering this terminology will help you confidently evaluate factoring proposals, negotiate better terms, and select the most appropriate facility for your business. When reviewing factoring agreements, don't hesitate to ask providers to clarify any unfamiliar terms before signing.
Remember that different factoring companies may use slightly different terminology for similar concepts, so always seek explicit definitions in your specific agreement. Having a solid grasp of these terms will ensure you fully understand the costs, commitments, and operational implications of your chosen factoring solution.
