So you’re ready to proceed with invoice factoring for improved cash flow and working capital to grow your business quicker. You understand the benefits of it not being a loan or a line of credit because there is nothing being borrowed. The cash flow is based on your pending invoices. It all makes sense, but what about all the invoice factoring definitions? We’ve compiled a useful list of the most commonly used definitions to guide you on your journey.
Put simply, invoice factoring allows you to improve your business cash flow by accessing a large percentage of the value of your unpaid customer invoices as a cash advance. You do not need to wait for the payment of your invoices from your customers. You can unlock most of the money quickly and easily, providing you with positive cash flow for immediate business expenses, investment, and growth.
A Factor is a third-party invoice factoring provider. The Factor advances a large percentage (eg. 80%) of the finance owed on your unpaid invoices to you so that you benefit from the cash flow to your business immediately instead of waiting for the payment of slow-paying invoices.
In effect, your business sells its invoices to the third-party Factor. Once the Factor has received full payment of the invoice from the Debtor (your customer), you will receive the remaining percentage of the value of your invoice (eg. 20% – known as a rebate) less interest.
The Debtor (your customer) is the business responsible for paying an outstanding invoice to the Factor.
A large percentage of an invoice advanced to you (the client) by a Factor. The advance can be up to 80% of the value of the invoice but can be dependent on the scenario, for example, the industry, volume of invoices, and the quality of the client’s customers.
Rebate / Retention
The amount owed to you after the initial cash advance from the Factor once the Factor has received full payment of the invoice from the Debtor (your customer). The rebate to you would be less interest for the service provided. In a standard scenario, the equation would look like this: 80% cash advance immediately* to you (less interest) + a 20% rebate once your customer has paid the Factor the full amount of the invoice.
A small fee the Factor charges for the service of providing the factoring facility. This fee is taken at the cash advance stage.
With recourse factoring your company is accountable for and must repay any invoices that the factoring company is unable to collect payment on. This is unlikely to occur if you have credit-worthy customers.
Non-recourse is the opposite of recourse factoring as the Factor inherits most of the risk of non-payment from your customers. There can be higher risks involved dependent on the agreement terms.
When an invoice hasn’t been funded but is paid by the Debtor, it is an unfactored invoice.
A batch of invoices submitted to be factored.
A remittance advice payment document sent by your customer (the Debtor) to the Factor to advise that the invoice has been paid.
The client’s right to an account is assigned to a Factor.
Client Credit Limit
Your overall account limit, which is the value up to which invoices can be funded.
Customer Credit Limit
Your customer’s overall account credit limit attributed to each individual customer/Debtor that you have.
OSKO is a single payment (not bulk) for fast, urgent payment in near real-time. This payment method will usually incur an additional fee from the Factor for prioritising the payment. Nova’s terms are one urgent transaction per day maximum for an additional fee.
RTGS or Real Time Gross Settlement is a transfer of specialist funds from one bank to another in Australia for same-day payment. This payment method will incur an additional fee from the Factor for prioritising the payment. At Nova, we need to be advised by no later than 12 Noon and a service fee will be deducted from your cash advance. OSKO has predominantly replaced RTGS and most banks now accept OSKO which is cheaper and more immediate.
Escrow / Reserve
Escrow is a reserve account established by the Factor to track funds owed to you. Funds can be set aside to mitigate risk and/or credit limit limitations.
If you have questions reach out to us for an obligation-free chat. Nova Cash Flow Finance offers a reliable recourse factoring facility and is committed to the growth of small and mid-sized businesses.
*Note: cash advances are paid within 24 hours once invoices have been fully verified