Get Your Business Funded: Creative Methods for Getting the Money You Need

Understanding the Players and Terms

Even though the idea of factoring is easy to understand—you are owed money so you sell that “asset” to someone else—factoring is still a specialized way of getting money. It has its own language. The following are the terms you need to know:

Client. You (presumably). The company that is owed money on an invoice.

Account debtor. Your client or customer. The one who owes you money.

Accounts receivable. Money owed to you, generally due within 90 days or less.

Factor. The company that is willing to buy the accounts receivable so as to provide businesses with operating capital.

Advance rate. The amount of money, expressed as a percentage less than the 100 percent you are owed by a customer. This is the amount the factor will advance you on the invoice.

Verification. This is the process whereby the factor verifies that you have in fact provided a product or service for a customer and that the customer plans on paying the invoice.

Discount fee. The fee that the factor will charge you for the service. Let's say that the factor pays you a 98 percent advance rate. The other 2 percent is the discount fee. The discount fee is deter- mined by:

• The amount of the invoice.
• The perceived risk involved.
• How long it is expected to take to collect the funds.
• The creditworthiness of your customer (not you, since you do not owe the money; your customer does).

Reserve. A deposit maintained by the factor. It is used to protect the factor against nonpayment should ...