Glossary of Invoice Finance, Factoring, Invoice Discounting & Trade Finance Terms
Factoring and invoice discounting are complex and specialised subjects around which a whole range of industry-specific terms have emerged.
The umbrella term for these products is "invoice finance" or "receivables financing".
The jargon used within the sector can be very confusing to prospective users of factoring services, and so we have put together this glossary of terms and phrases to help you understand the terminology and acronyms that are used.
Please note that the lexicon used is not necessarily even consistent between different providers.
Definitions of Terms
| Term |
Definition |
| Accounts receivable | These are your debtor sales invoices also known as your sales ledger. |
| Application for payment | These are common within the construction sector, rather than raising an invoice an application for payment is produced. This can be uncertified and then become certified once it is approved to be paid. Funding can be provided against applications for payment, both certified and uncertified, in the same way as against invoices. |
| Approved debt | A debt that has been accepted by the financier as eligible for prepayment. |
| Asset-based lending | Asset-based lending refers to a financial service whereby the provider will fund against a range of assets within their customer's business e.g. sales invoices, property, plant and machinery and stock. |
| Asset finance | See the product page. |
| Assignment, assign, assigning | The legal process by which a factoring or invoice discounting company takes ownership of rights to receive payment in respect of their client's sales invoices. This enables the factoring company to provide prepayments against the invoices. |
| Auction platform | Some websites allow you to auction single or batches of invoices to investors who will bid for them. The investors will normally bid the fee that they are willing to accept and the prepayment that they are prepared to give. |
| Availability | The amount of cash available to the client of a funder is also called "available funds". |
| Broker | A third party introduces a customer to a provider. |
| Cash invoice or payment terms | A sales invoice that is required to be paid immediately i.e. without a credit period. |
| CIS | Construction Industry Scheme where contractors deduct tax from subcontractor's payments and pass it to HMRC. |
| Client | A common term used instead of the customer for customers of financiers. |
| Confidential invoice discounting | See our product page. |
| Confidential Factoring | See the product page. |
| Credit control | The process of ensuring that a business only gives credit to customers that are able to pay, and ensuring that outstanding sales invoices are paid on time. The process includes collecting sales invoices, often through a combination of sending letters, statements (or emails) and calling debtors by telephone. Also known as Dunning or Collections. |
| Credit note | A credit that can be taken against an invoice, is often given to correct errors, give a discount or resolve a dispute. Credit note levels are key to invoice finance companies as they dilute the value of the debts against which they fund. |
| Credit period | The amount of time granted to the buyer by the seller before which the buyer must pay the seller's invoice e.g. 30 days net, 60 days net. |
| Credit protection | Protection against debtors not paying due to insolvency or in some cases protracted default. Also known as non-recourse. |
| Current account | The amount of the financial obligation of a client to a financier. Normally the total of all prepayments, plus fees and charges, minus all payments received from the client's customers (debtors). |
| Debit note | A debit note sometimes called a debit memorandum, or debit memo is a document issued by a buyer to a seller as a means of requesting a credit note. A seller may also issue a debit note, as an alternative to raising another invoice, to upwardly adjust the value of an invoice that has already been issued. |
| Debt | An amount owed by a debtor to a creditor. Invoices are often evidence of such a debt. |
| Debt Factoring | See our product page. |
| Debtors | Parties that owe you money i.e. have sales invoices outstanding to them on credit terms, are also called customers. |
| Disapproved | An invoice that is not funded for reasons such as being over the recourse period or being disputed. Also called "unapproved debt" by some factors. |
| Disclosed invoice discounting | An invoice discounting facility whereby the client receives early payments against their sales invoices but retains responsibility for telephone and paper-based collection of payments from debtors. Payments are banked by the client into a "Trust Account" which is controlled by the discounter. |
| Discount charge | Part of the cost of factoring or invoice discounting. A percentage over base rate or LIBOR is charged in respect of the level of the outstanding liability of the client to the factor or discounter. |
| Dunning letters | Chasing letters sent to debtors to encourage payment of outstanding sales invoices. |
| Early payment | Also called "Prepayment". The funds are provided to the client against their invoices. Normally expressed as a percentage e.g. 85% of the gross value. |
| Export finance or export factoring | See the product page. |
| Invoice Factoring | See our product page. |
| Factoring fee | See service charge. |
| Funding limit | This can have two different meanings. In some cases, it refers to the maximum limit that the Current Account can reach. In other situations, it means a limit set on a debtor with the purpose of restricting funding against invoices to that debtor beyond the value of the funding limit. |
| High involvement | The total debtor's account constitutes a percentage of the total sales ledger. |
| Import factoring | Import factoring is a service offered to clients abroad who have customers within this country. The import factor will undertake the collection of sales invoices locally providing a service to the exporter abroad. |
| Independent factoring company | A factoring company that is not owned by one of the high street banks. |
| Invoice |
An invoice is a document detailing the payment required (or in the case of cash or proforma invoices already made) in respect of goods or services provided. |
| Invoice discounting | See the product page. |
| Invoice finance | See the product page. |
| Invoice finance company | The company or organisation that provides the factoring, invoice discounting or invoice finance facility. Also known as invoice financiers, invoice finance houses, factoring companies, invoice discounters or receivables finance houses. |
| JCT | JCT (Joint Contracts Tribunal) are standard contracts used in the construction sector, against which funding can be provided. |
| Letter of credit | Letters of credit are financial instruments, issued by a bank, that undertakes to pay a fixed sum to a seller on the production of specified documentation. They can be arranged as part of a Trade Finance facility. |
| Non Recourse | Non-recourse refers to an invoice finance facility that includes up to 100% protection against bad debts. If your debtor becomes insolvent the invoice finance company will credit the value of the invoice to your account (the remaining balance if a prepayment has already been provided to you). |
| Notifiable Invoice | The term "notifiable invoice" means an invoice that has to be notified (or sent) to the invoice finance company, The opposite of a non-notifiable or excluded invoice that does not need to be sent. |
| Overdraft | A form of bank lending where a customer is authorised to overdraw their current account by an agreed amount. The amount is fixed, unlike an invoice funding or finance arrangement, where the amount of funding grows in line with the growth of the business. |
| Overpayments (overpayment facility) | An overpayment is an additional amount of funding made available by a factor or invoice discounter in excess of the normal early payment percentage that they provide. Information about overpayments. |
| Phoenix | A business that "rises from the ashes" of a previous business that failed. Invoice finance can help with such situations. |
| Pre-pack | A pre-pack is when a business enters Administration and the business, or its assets are sold to its directors or another third party. The newco continues to trade without the legacy debt. Pre-pack finance can assist with this. |
| Prepayment, Early Payment or Initial Payment | Also called "Early Payment" or "Initial Payment". The funds are provided to the client against their invoices. Normally expressed as a percentage e.g. 85% of the gross value. |
| Proforma invoice | A sales invoice is raised in respect of the supply of goods or services that is required to be paid on cash terms. |
| Purchase ledger | The accounting structure holds details of all the purchase invoices. |
| Purchase order finance | An advance of money to your supplier to pay for goods. See Trade Finance. |
| Recourse | An invoice finance facility where you have chosen not to take advantage of protection against bad debts. With a recourse factoring or invoice discounting facility, if the debtor fails to pay the factoring company or invoice discounting company will withdraw any prepayment that has been provided against the invoice. |
| Retention of title | Retention of title or ROT is a clause in a set of terms or a contract setting out that the title of the goods supplied does not pass to the buyer until the buyer has paid the supplier. |
| Reverse factoring | See Supply Chain Finance below. |
| RPO | Recruitment Process Outsourcing (RPO) organisations are large recruitment purchasing organisations that provide staff to businesses. Many smaller recruitment companies provide staff through these umbrella organisations to end-users. Many invoice financing companies have difficulty funding RPOs but we have partners that can help you fund them. |
| Sales finance or sales financing | Another term for invoice finance (see above). |
| Sales invoice | An invoice raised by a seller in respect of the sale of goods or services. |
| Sales ledger | The accounting structure that holds details of all the sales invoices. |
| Selective invoice finance, factoring or invoice discounting | Similar to spot factoring (see below) whereby the client can select particular invoices or debtors to factor or discount without the obligation to factor or discount all of their sales turnovers. |
| Self-billing | Some large organisations self-bill rather than letting their customers raise sales invoices. These can still be funded through sales finance. |
| Stage payments staged payments or interim payments | Several invoices may be raised in respect of each stage of a project e.g. 50% after stage 1 is complete and 50% after stage 2. |
| Selective invoice finance | See our product page. |
| Service charge | Service charge is one aspect of the fees levied by a factor or discounter in respect of the service provided. Normally expressed as a percentage of the client's sales turnover although in some cases it can be a fixed fee. |
| Spot factoring | See the linked page. |
| Statement of account | A summary of all the transactions on a debtor account e.g. invoices, credit notes and payments. |
| Stock finance | See our product page. |
| Supply chain finance | Supply Chain Finance or Reverse Factoring is an umbrella arrangement where invoice finance is provided to several suppliers in a single customer supply chain based on the strength of the customer. |
| Trade finance | See the product page. |
| Trust account | Where a client is using an invoice discounting product a bank account is set up by the provider (discounter) into which the client banks all payments received from debtors. |
| Vendor | Another name for a supplier or seller. |
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