Consultants are utilized throughout the world in various industries as a result of having a specialized expertise or unique knowledge of a product, service, concept, etc.  As a new factoring broker or consultant, you will need to gain such expertise in factoring and several related areas of asset-based finance if you want to succeed and be a true professional.  The truth is, the more you understand about the factoring industry and the more knowledge you accumulate pertaining to small business finance, the more valuable you become to small business owners. Additionally, you will become an important resource of referral for bank lending officers and accounting professionals seeking financing alternatives for their clients  In short, to succeed as a broker, you need to know your stuff. 

Fortunately, factoring is a relatively simple form of commercial finance and once you grasp a few basic concepts, your product knowledge will expand fairly rapidly.  Factoring is really just a financing method used by businesses to obtain cash.  It is considered a type of asset-based finance (ABF) along with asset-based lending, equipment leasing, inventory finance and purchase order finance among others. 

Asset-Based Finance is pretty much exactly what it sounds like, a method of financing based on the assets of a business.  In the vast majority of instances, however, asset-based finance will involve only the “primary” liquid assets found in almost any business entity.  These primary assets include:

• accounts receivable
• inventory
• equipment

Real estate, also an often found business asset, is usually excluded in discussions of asset-based finance since real property is more typically financed in a separate transaction utilizing long-term amortized loan structures. 

Asset-based finance often tends to deal with the financing complexities associated with collaterals which are dynamic and whose value and location can change rapidly.  An example would be business inventory, which is constantly being decreased as sales are produced and increased as replacement goods are purchased or manufactured.  Real estate, on the other hand, tends to be more static in nature and an asset whose value (and location) is always easy to ascertain and monitor by the lender. 

Important Factoring Terminology

All industries tend to have a certain amount of industry-specific jargon associated with day-to-day operations and the factoring industry is no different.  Since, as a broker or referrer, you will be speaking with a factor, you should have some “factorese” knowledge.  So, to follow are some basic (but important) terms you should become very familiar with as an industry broker.  

In factoring…

• The term CLIENT: is the business that is selling its invoices to a factor.  As a broker / referrer, you will refer clients to factors and lenders to earn your commission
• The term ACCOUNT: is an account receivable or simply an invoice
• The term ACCOUNT DEBTOR or CUSTOMER: is the party obligated to make payment upon an account or invoice.  When you refer a client to a factor, that client will have customers or account debtors
• The Term ADVANCE: is often called the initial advance and is a disbursement of funds by a factor to the client upon purchased invoices. It is usually 80-85 percent.
• The term VERIFICATION: refers to the verification by the factor’s staff that an invoice is valid and represents goods or services rendered.
• The term DISCOUNT: is the fee amount charged over the period an account is outstanding for the factor’s service.  
• The term FACTORING FEE: is the factors total fee for services.  It is usually in the form of the discount set up on a grid based on the number of days an invoice is outstanding plus a service fee.
• The term ASSIGNMENT: is the assignment of ownership to a factor of the invoices of a business and rights involving such invoices such as rights to collect payment upon those invoices.  
• The term NOTIFICATION of ASSIGNMENT: is a notice sent to an account debtor (customer) regarding the assignment of ownership in the accounts of a business and rights to payment upon those accounts.  Once a customer receives the factor’s notification of assignment, that customer is then obligated to make payment to the factor and no longer the client (seller of the invoice). 
• The term NON-RECOURSE: is a factoring arrangement in which the factor assumes the non-payment risks associated with the bankruptcy or insolvency of a customer while an invoice remains unpaid
• The term RECOURSE: is a factoring arrangement where the factor has the right to charge-back purchased invoice amounts to the client if payment is not received from the account debtor within a specific period of time. (usually 90 days)
• The term RESERVE: the percentage of the face value of an invoice (usually 15 to 20 percent) which is not initially advanced.  It is used to secure the factor against not payment of an invoice or portion of an invoice trade disputes, reduced invoice payment, or non-payment
• The term RESERVE DISTRIBUTION: is commonly referred to as a “rebate” and  is the periodic payment to the client of the excess reserve held by the factor.  If a factor advances 80% of an invoice face amount, ultimately the factor will (hopefully) receive a payment of 100% of the invoice face amount.  The 15-20% not initially advanced on the invoice is reserve and will now be distributed to the client after the factor’s fee (which includes your commission) is taken out.
• The term AGING REPORT:  is an accounts receivable aging report and is a report generated by a client’s accounting software (such as QuickBooks) which lists all the invoices currently outstanding and how long they have been aged. 
• The term UCC:  is short for the Uniform Commercial Code which is a body of law adopted by the United States which regulates financial transactions.
• The term UCC Search:  is an online search and part of the due diligence performed by the factor to ascertain if it can perfect a first position senior lien in accounts receivable of a new prospective client.