Factoring Terminology
Advance Rate: This is the percentage of the invoice amount that will be advanced to the client up front. Typically, this rate is around 75-80%. Some factors advance 90-95%, but take a cash reserve from the advance or hold or limit reserve disbursements through the month, effectively advancing 80% or even less. Make sure you understand how the money to be funded up front is calculated.
Chargeback: A chargeback occurs when a factor has funded an invoice and it is later determined that part or all of the invoice amount is in error and will not be remitted before a predetermined period or at all. This could result, for example, from defective product being delivered, aging invoices or disputes. The factor charges this back to the client. Some factors charge an additional fee for this, it is important to understand these fees up front.
Discount: This is expressed as a percentage of the invoice amoun and represents the amount the factor keeps as a fee. Again, the use of this term varies. Some factors quote an "all in" rate that includes servicing and funding. Some factors quote a funding rate, but there is also a servicing fee or other costs. Liquid Capital always quotes one rate, there are no hidden fees.
Reserve: This is the amount, expressed as a percentage of the invoice amount, that a factor holds as a reserve until the invoice is paid. The factor pays the reserve amount, less their fees, when the invoice is collected. It is important to know when that gets paid. Some factors hold all reserves until the end of the month when they release them. Other factors, such as Liquid Capital, release reserves at least weekly.
Spot Factoring: With traditional factoring, all of a customer's invoices are factored on a continuous basis. Spot factoring is the factoring of an invoice or group of invoices on a one time basis.
UCC Filing: The Uniform Commercial Code is a common code governing commerce. The UCC itself is not law, it has to by adopted into law by the individual states. All states have adopted the UCC in its entirety EXCEPT Louisiana. However, when changes are made, state legislatures differ in their timing of adoption, so you need to check state laws. A UCC filing is a notice filed by a debtor that registers its claim to certain or all of the assets of a business as collateral against the debt obligation. Equipment Leasing companies will also file to put people on notice that certain assets of the business are their property and not property of the business. Generally, under UCC this is filed at the state level.