At some point, a company might require immediate cash to meet several financial obligations and invoice factoring is a form of securing funding that will help during such periods. Invoice factoring is where a business sells their accounts receivables to a third party company to raise funds. During this process, these are standard terminologies used
- Discount Rate
This is the fee charged to provide the factoring service. The discount rate, also known as the factoring fee. The factoring fee is always a percentage of the value of the invoices for an orderly transaction which involves the complete purchase of the invoice. The discount rate differs according to the period that has been agreed upon between the two parties.
- Advance rate
The factoring company pays a certain percentage up front to protect against any losses in case they occur and ensure proper coverage for their fees. The advance rate always gives back the difference between the invoice face value, the advance amount and the costs back to the company that had engaged them in the form of factoring reimbursement.
- Reserve Account
This type of account refers to a backup which serves to reduce the factoring company risk during this period further. While there is always a difference between the face value and the advance a factoring company has to further cushion itself with this type of account. Please note that not all factoring firms reserve hold factoring accounts.
- Minimums and long-term contracts
Like any other business, factoring companies have both long and short term contracts. Many companies have monthly minimums, and they require lasting agreements that guarantee a profitable relationship. Short contract periods are now becoming more common for such contracts; as scheduled minimums are distinctive and entail factoring all of a company’s accounts or all of the company’s invoices from a particular debtor.
- Spot factoring
Also known as single invoice discounting is an option to “the whole ledger “and allows a firm to factor a single invoice. With the added flexibility in business, absence of predictable capacity and monthly minimums for the factoring companies means that single invoice discounting carries the premium charge.
- Notification vs. Non-notification
Invoice factoring companies have always operated under a necessary information arrangement which involves them notifying your clients about the factoring agreement. Such a relationship requires any future payments to be made to the factoring company. These days, however, the factoring companies can also offer a non-notification choice that allows the sellers advance their invoices without concerning the third party.