Factoring glossary
Assignment (cession)
The transfer of a receivable from a creditor (factoring client) to a third party (factor). In factoring, the factoring customer assigns its invoices to the factoring company, which then collects them.
Purchase limit
The maximum amount that the factoring company is prepared to finance for the outstanding receivables of the factoring client.
Default risk
The risk that a debtor (customer of the factoring client) does not pay its invoice. With genuine factoring, the factor assumes this risk.
Credit check
Analysis of the financial situation of a company or debtor in order to assess creditworthiness and the risk of non-payment.
Gross factoring
Factoring model in which the invoice amount including VAT is pre-financed.
Cash flow optimization
The sale of receivables in factoring generates immediate liquidity, which leads to better financial planning.
Credit Policy
Guidelines on lending and risk management for a factoring company when financing receivables.
Debtor
The customer of the factoring client who has received the invoice and is obliged to pay it.
Accounts receivable management
Management of outstanding invoices, including dunning and collection procedures, which are often handled by the factoring provider.
Debt-income ratio
Key figure for assessing the financial health of a company through the ratio of debt to income.
Genuine factoring (factoring without recourse)
Factoring variant in which the factoring company assumes the entire risk of non-payment.
Equity ratio
The amount of a company’s equity in relation to its balance sheet total. Factoring can improve this ratio by removing receivables from the balance sheet.
Primary assignee / secondary assignee
A first assignee is the original recipient of the assigned receivable (e.g. the factoring company). If the receivable is assigned again, this is referred to as a secondary assignee.
Factoring
A financing model in which a company sells its outstanding invoices to a factor in order to obtain immediate liquidity.
Factoring fee
Costs that the factoring company charges for its services, usually in the form of a percentage of the invoice amount.
Factoring contract
Contractual agreement between a factoring company and the factoring customer on the purchase and management of receivables.
Maturity factoring
A factoring variant in which the factoring company does not pay the receivable until the due date.
Financing ratio
The percentage of the invoice amount that the factoring company pre-finances (e.g. 80-90%).
Full-service factoring
A factoring solution that includes debtor management and default protection in addition to pre-financing.
Credit management
Service in which the factor takes over receivables management for the factoring client.
Principal claim
The original invoice amount that the debtor must pay to the factoring recipient.
Liability of the factoring client
Depending on the type of factoring (with or without recourse), the factoring client may be liable for payment defaults.
Maximum liability
The maximum amount for which the factoring borrower is liable in the case of non-genuine factoring.
Debt collection service
Additional service provided by a factor to collect unpaid invoices in or out of court.
Credit limit
The maximum amount of receivables that a factor assumes for a specific factoring client or debtor.
KYC (Know Your Customer)
Process for verifying the identity and assessing the creditworthiness of corporate customers in order to comply with regulatory requirements.
Liquidity
The availability of funds in a company. Factoring improves liquidity by enabling fast incoming payments.
Factoring contract term
The duration of the contractual agreement between the factoring client and the factor.
Limit monitoring
Process in which the factoring company continuously checks whether the credit limit for debtors is being adhered to.
Dunning
Systematic management and tracking of outstanding receivables through reminders or other communication channels.
Value added tax for factoring
In the factoring process, VAT can either be pre-financed or settled only after payment by the debtor.
Minimum turnover for factoring
Many factoring providers require a certain minimum annual turnover of receivables in order to make factoring economically viable.
Non-recourse factoring (genuine factoring)
See Genuine factoring.
Open Factoring
Factoring type in which the debtor is informed about the sale of receivables to the factoring company.
Commitment
The sum of outstanding receivables that have already been sold to the factoring company.
Pool factoring
Factoring variant in which not individual invoices are sold, but an entire invoice group.
Commission for intermediaries
Remuneration for third parties (e.g. consultants or banks) who refer companies to the factoring company.
Recourse factoring (non-genuine factoring)
Factoring model in which the factoring borrower bears the risk of bad debt losses.
Repurchase agreement
Agreement in non-genuine factoring that the factoring customer must buy back an unpaid invoice after a certain period.
Chargeback
If a debtor disputes the claim or does not pay, the factoring company can carry out a chargeback in the case of non-genuine factoring.
Assumption of debt
With genuine factoring, the factoring company assumes the entire risk of non-payment.
Protection against bad debts
This is a key advantage of genuine factoring, where the factoring company bears the default risk.
Discount advantage
Immediate liquidity from factoring allows a company to pay suppliers more quickly and take advantage of discounts.
Subrogation
A legal term for the assumption of receivables rights by the factoring company.
Confidential Factoring
Factoring variant in which the debtor is not informed that the receivable has been sold.
Repayment
Repayment of a receivable by the debtor to the factoring company.
Turnover factoring
Factoring model in which a company regularly finances a certain percentage of its turnover via factoring.
Recourse Factoring
See recourse factoring.
Underwriting
Risk assessment and determination of the credit limit by the factoring company.
Contract factoring
Factoring model in which receivables from long-term contracts are financed.
Confidentiality agreement (NDA)
Contractual agreement between the factoring client and the factoring company to protect sensitive company data.
Prepayment rate
The percentage of the invoice amount that the factoring recipient receives directly after the invoice is sold.
Extended retention of title
A clause that ensures that goods only become the property of the buyer once the invoice has been paid in full.
Business information
Credit check of a debtor by external credit agencies.
Prohibition of assignment
A contractual exclusion of the assignment of receivables can be an obstacle to factoring, as the receivables may not be transferred.
Interest surcharge for factoring
Additional costs for factoring if the pre-financing is regarded as a loan.