The transportation factoring process involves an abundance of legal phrases and financial terminology that may not be familiar to truck drivers.
Before establishing a funding arrangement, make sure to review any confusing transportation factoring terms and understand how factoring works.
Take a look at this glossary of transportation factoring terms to get educated on how to ensure the best factoring experience possible.
Account Creditor – You! The owner of a transportation company that chooses to factor their freight bills.
Account Debtor – The customers that owe you money
Accounts Receivable – The amount of money that customers owe you for goods and services provided
Accounts Receivable Aging Report – A report that details each of your customers and the length of time their invoices have been outstanding.
ACH – An electronic funds transfer (EFT) system provided by the US Federal Reserve Bank
Advance Rate – The amount of cash you receive upfront for your invoice. With freight factoring, the typical advance rate usually ranges from 95% – 100% depending on your program.
Articles of Incorporation – The document a company must file to their US state in order to launch a corporation.
Bill of Lading – A shipping document with instructions for transporting goods. The BOL outlines the details of a particular shipment and its destination.
Cash Flow – The money coming into and going out of a business
Client – The business that sells its accounts receivable to the factoring company. Also known as the account debtor.
Customer Concentration – The amount that your client does business with the same customer.
Debtor – A person or business that owes money to another person or business.
Discount Fee – The fee charged to the client by the factoring company for services. The discount is the profit earned by the factor.
Due Diligence – The research and background check done by a factoring company before taking on a new client. This also involves looking into a client’s customers, checking credit, reviewing accounts receivables, searching UCC and liens, and potentially on-site visits with clients.
Factoring – The sale of a company’s invoices to a factor. The factor provides the company with fast working capital in return. Used worldwide to help companies of all types and sizes
Factoring Company – The company purchasing the invoices from client
Factoring Fee – The fee the factoring charges for funding invoices. Can be variable (ex: 1% for the first 30 days) or flat (ex: 3% for the life of the invoice).
Freight Broker – An intermediary between the shipper and the transport carriers
Invoice – A document issued by a seller to the buyer. Usually lists the goods and/or services provided along with a bill for the amount due.
Lien – A claim that a person or entity holds over a debtor’s property to ensure the repayment of a debt. The lien is removed once the debt is paid.
Line of Credit – The amount of credit that a lender can extend to a borrower
Non-Recourse Factoring – A type of factoring in which the financial risk of customer non-payment is put on the factor. If the client’s customer is unable to pay that client is unable to pay the shipping bill because they went bankrupt or became insolvent, the factor will typically accept the loss.
Notice of Assignment (NOA) – A legal document issued by a factor to notify a debtor of their related debts. It also informs the debtor of the new payment address.
Notification Letter – A written notification sent to customers informing them that invoices of the client have been sent to a factor.
Personal Guarantee – The seller of the invoices takes responsibility and liability for the financial obligations of the factoring agreement, guaranteeing repayment of debt.
Profit and Loss Statement – The financial statement of a business that shows a record of income and expenses over time.
Proof of Delivery (POD) – A document confirming that goods were successfully received.
Recourse Factoring – A type of factoring that offers lower fees, but holds the Account Creditor responsible should their clients fail to pay after an agreed amount of time.
Reserve – Money withheld by the factor to protect against payment shortages, client and customer disputes, or any other losses due to non-payment. The reserve is your money and you’ll get it back once your clients submit payment to the factoring company.
Verification – The process where a factoring company confirms the validity of an invoice to ensure the goods and or services were provided, accepted by your customers and invoiced by your company.
Wire Transfer – The electronic transfer of funds from the factoring company to your business.
Working Capital – The number of funds that a business has available.
To learn more about factoring, see if factoring is right for your business or get a free, no-obligation quote in under five minutes, call now!