The Essential Freight Factoring Dictionary
Learn freight factoring lingo with this A-Z guide to the essential factoring terms.
A
Account Debtor
The customer who owes money for goods or services provided by a business. In freight factoring, this would be the company responsible for paying the freight invoice (often the broker or shipper).
Accounts Receivable
Money owed to a company by its customers for goods or services delivered.
Accounts Receivable Factoring
A financial transaction where a business sells its accounts receivable to a factoring company at a discount to receive immediate cash. It’s commonly referred to as Invoice Factoring.
Advance Rate
The percentage of an invoice value that a factoring company will provide upfront to a business. For example, a 90% advance rate means the business receives 90% of the invoice value immediately from the factoring company.
Aging Report
A financial report that categorizes accounts receivable by how long the invoices have been outstanding. This helps businesses track overdue payments and assess the likelihood of getting paid.
Articles of Incorporation
A legal document that formally establishes a corporation. It outlines the company’s structure, purpose, and basic operating details.
Asset-Based Lending
A type of loan secured by the borrower’s assets, such as accounts receivable or inventory. It offers companies a way to access financing based on the value of their assets.
Automated Clearing House (ACH)
A network that electronically facilitates the transfer of funds between bank accounts.
B
Bill of Lading (BOL)
A legal document outlining details of a shipment, serving as a receipt of goods, contract of carriage, and title of ownership.
Broker
An intermediary who connects shippers with carriers for freight transportation, often charging a commission for their service.
Business Credit Check
A factoring company’s assessment of a new client’s creditworthiness and payment patterns.
C
Carrier
A company or individual that transports goods for a fee (often a trucking company).
Cash Advance
A short-term loan or a service where funds are provided before the load has been delivered.
Cash Flow
The movement of money into and out of a business over a period of time. Positive cash flow means the business has more money coming in than going out.
Collateral
An asset that a borrower pledges to a lender as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral.
Credit Check
An assessment of an individual’s or company’s creditworthiness, used by lenders to decide whether to extend credit and on what terms.
D
Debtor
The customer who owes money for goods or services provided by a business. In freight factoring, this would be the company responsible for paying the freight invoice (often the broker or shipper).
Discount Rate
The fee charged by a factoring company for their services. It’s typically expressed as a percentage of the invoice amount.
Dispatch
The process of assigning loads to carriers and coordinating their transportation activities. A dispatcher may be an employee of a trucking company or a third-party service provider.
Double Brokering
The act of re-brokering a freight load to another trucking company without the original shipper’s knowledge or consent. This deceptive practice creates a lack of transparency, leading to potential financial losses, liability risks, and difficulties in resolving any shipment issues for both carriers and shippers.
Due Diligence
The process of thorough investigation and assessment before entering into a business agreement. In freight factoring, this applies to both the factoring company evaluating the carrier’s creditworthiness and invoices, and the carrier assessing the factoring company’s terms and reputation.
E
Equipment Financing
A type of loan specifically designed to help businesses purchase the necessary equipment. The equipment itself serves as collateral for the loan, reducing the lender’s risk. This financing method can provide access to essential machinery, vehicles, and technology without a large upfront cash outlay.
Equipment Refinancing
The process of replacing an existing equipment loan with a new loan, potentially offering better terms, lower interest rates, or access to additional capital.
F
Factor
A synonym for a factoring company.
Factoring
The financial transaction where a business sells its outstanding invoices to a factoring company in exchange for immediate cash.
Factoring Agreement
The legal contract between a business and a factoring company. This document outlines the terms of the factoring relationship, including fees, advance rates, and responsibilities.
Factoring Company
A financial institution that specializes in purchasing unpaid invoices from businesses at a discount, providing them with immediate working capital.
Factoring Fee
The charge levied by a factoring company for their services. Usually expressed as a percentage of the invoice’s face value.
Factoring Receivables
The business’s outstanding invoices that are eligible to be sold to a factoring company.
Factoring Reserve
A portion of the invoice value withheld by the factoring company as security. This reserve is typically released to the business once the debtor pays the invoice in full.
Fraud
Intentional deception in the invoice factoring process. This could include falsified invoices, misrepresentation of debtors, or collusion to defraud the factoring company.
Freight Factoring
A specialized form of invoice factoring specifically designed for the trucking and transportation industry.
Freight Recession
A period of decreased economic activity in the freight transportation industry, leading to lower freight volumes and potentially reduced rates.
Fuel Advance
A financial service offered by some factoring companies where they provide carriers with a cash advance to cover fuel expenses.
G
Government Invoice Factoring
A niche form of factoring where businesses that provide goods or services to government agencies can factor their invoices. This process may have additional regulations compared to standard commercial factoring.
Gross Invoice Value
The total face value of an invoice before any deductions, such as factoring fees.
Guarantee Factoring
A less common type of factoring arrangement where the factoring company assumes full responsibility for unpaid invoices, even if the debtor defaults. This typically comes with higher fees than traditional factoring.
H
Holdback
The portion of the invoice value retained by the factoring company as a reserve or security against potential payment discrepancies, disputes, or chargebacks. This amount is typically released to the trucking company once the invoice is paid in full by the debtor.
High-Volume Discount
A discount offered by some factoring companies to trucking companies that factor a large number of invoices within a specified period. This discount may be applied to the factoring fee or advance rate, providing cost savings to high-volume clients.
Hybrid Factoring
A factoring arrangement that combines elements of recourse and non-recourse factoring. In hybrid factoring, the factoring company assumes some, but not all, of the risk associated with non-payment by the debtor.
I
Ineligibles
Invoices that do not meet the factoring company’s criteria for purchase. Reasons could include the debtor’s creditworthiness, the invoice age, or the type of goods or services involved.
Invoice Aging
The process of categorizing accounts receivable based on how long they have been outstanding. This helps both businesses and factoring companies assess the health of a company’s receivables.
Invoice Discounting
A form of financing similar to invoice factoring, where a business gets an advance on its outstanding invoices. The key difference is with invoice discounting you retain ownership of the invoices and are responsible for collecting payment from your clients.
Invoice Factoring
The process of selling outstanding invoices to a factoring company in exchange for an immediate cash advance.
Invoice Financing
A general term that encompasses both invoice factoring and invoice discounting. It refers to the methods of obtaining immediate funding based on outstanding invoices.
Inventory Financing
A type of asset-based lending where a business uses its inventory as collateral to secure a loan.
K
KYC (Know Your Customer)
Due diligence processes that factoring companies use to verify the identity and legitimacy of their clients.
L
Less Than Truckload (LTL)
A shipping mode used when the freight doesn’t require the space of a full truck. With LTL, multiple shippers share space, generally resulting in lower costs than a full truckload shipment.
Letter of Credit
A financial instrument issued by a bank guaranteeing payment to a seller, provided specific conditions are met. It’s often used in international trade to reduce risk for all parties.
Lien
A legal claim on an asset to secure the payment of a debt.
Line of Credit
A flexible financing arrangement where a business can borrow up to a pre-approved limit and repay funds as they become available. This can be an alternative or a supplement to invoice factoring.
Liquidity
The ease with which an asset can be converted into cash. Invoice factoring improves a business’s liquidity by providing immediate cash for outstanding receivables.
Loan to Value Ratio (LTV)
A ratio used in asset-based lending to determine the amount of financing a company can secure based on the value of its collateral (e.g., invoices or inventory).
Lumper
An individual or service that helps truck drivers load or unload freight, typically for a fee.
Lumper Fee
The payment charged by a lumper for their services. Carriers might be able to include these fees on a freight invoice that is factored.
M
Master Service Agreement (MSA)
A comprehensive agreement that outlines the broader terms and conditions governing the relationship between a business and a factoring company.
Maturity Date
The due date of an invoice, which is the date by which the debtor is expected to make payment.
Merchant Cash Advance (MCA)
A type of financing where a business receives a lump sum of cash in exchange for a percentage of its future sales (often credit card sales).
Minimum Volume Requirement
Some factoring companies may require a business to generate and factor a minimum volume of invoices to qualify for their services.
N
Net Terms
The payment terms specified on an invoice, indicating the length of time a debtor has to pay. Common examples are “Net 30” (payment due in 30 days) or “Net 60” (payment due in 60 days).
Non-Notification Factoring
A form of invoice factoring where the factoring company does not notify the business’s customers (debtors) about the factoring arrangement. This type of factoring is similar to invoice discounting and maintains confidentiality.
Non-Recourse Factoring
A type of factoring where the factoring company assumes the risk of non-payment by the debtor. This protects the business from bad debt if a customer fails to pay the invoice.
Notice of Assignment (NOA)
A formal document sent by the factoring company to the debtor, informing them that the invoice has been factored and that payment should now be made directly to the factoring company.
O
Onboarding
The process of setting up a new client with a factoring company. This typically involves providing business documentation, completing applications, and verifying invoices.
Operating Agreement
A contractual document that outlines the rights, responsibilities, and operating procedures governing the relationship between the factoring company and their client. Operating agreements address key aspects of the factoring arrangement, including funding terms, fee structure, recourse provisions, and dispute resolution mechanisms.
Owner-Operator
An independent truck driver who owns and operates their own truck. Owner-operators are a common type of client for freight factoring companies.
P
Partial Factoring
A flexible type of factoring where a business chooses to factor only a select portion of its outstanding invoices, rather than all of them.
Payment Terms
The conditions outlined on an invoice that specify the expected payment timeline and any potential discounts for early payment (e.g., Net 30, Net 60).
Per Diem
A daily allowance for living expenses that may be paid to truck drivers, especially for long-haul journeys.
Point of Sale (POS) Financing
A type of financing that allows customers to pay for purchases over time with installment payments, often made at the point of sale.
Prime Rate
A base interest rate used by banks to set other loan rates. Factoring fees may be linked to the prime rate, so changes in it can affect the cost of factoring.
Proof of Delivery (POD)
Documentation that confirms a shipment has been received by the intended recipient. A POD is often required by factoring companies to verify services were rendered before funding an invoice.
Purchase Order
A commercial document issued by a buyer to a seller, stating the types, quantities, and agreed prices for products or services.
Purchase Order Financing
A type of financing that provides businesses with funds based on outstanding purchase orders. This can help businesses fulfill orders without the capital to buy necessary supplies or inventory upfront.
Q
Quick Pay
A payment option allowing trucking companies to receive expedited payment for freight invoices, often with a fee deducted for the accelerated processing of funds.
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R
Rate Confirmation
A document issued by a freight broker or shipper to confirm the agreed-upon freight rates and terms for transporting goods by a trucking company. The rate confirmation typically includes details such as the shipment origin and destination, freight charges, pickup and delivery dates, and any special instructions or requirements.
Rate Sheet
A document provided by the factoring company outlining the fees, rates, and terms associated with its factoring services. Rate sheets detail factors such as discount rates, advance rates, processing fees, and additional charges applicable to factored invoices, enabling trucking companies to understand the cost structure and pricing transparency of the factoring agreement.
Real-Time Payments
A type of electronic funds transfer system that enables the immediate movement of money between bank accounts in real time. This means that once a payment is initiated, the funds are available to the recipient almost instantly, 24 hours a day, 7 days a week, including weekends and holidays.
Recourse Factoring
A type of factoring where the business retains liability if the debtor fails to pay the factored invoice. In recourse factoring, you bear the risk of non-payment by the debtor and may be required to repurchase delinquent invoices from the factoring company.
Receivables Aging
The process of classifying accounts receivable by how long they have been unpaid (e.g., 0-30 days, 31-60 days, 61-90 days, beyond 90 days). This helps assess the health of a company’s receivables and the potential risk to a factoring company.
Reserve Account
An account held by the factoring company where a percentage of each factored invoice is withheld as security, typically released once the invoices are paid in full.
Reserve Amount
The portion of an invoice value withheld by the factoring company and placed into the reserve account.
Reverse Factoring
A type of supply chain financing where a large buyer helps its suppliers access affordable financing by guaranteeing payment to a factoring company.
Revolving Line of Credit
A flexible form of business financing where a business can borrow up to a set limit, repay, and borrow again as needed. This can be used in conjunction with or as an alternative to invoice factoring.
S
Same-Day Funding
A service offered by some factoring companies where they provide funding on factored invoices within the same business day of submission and approval.
Schedule of Accounts
A report that lists all the invoices factored with a particular factoring company, along with their details, such as the invoice amount, debtor, and due date.
Small Business Financing
A broad term encompassing various financing options available to small businesses, including invoice factoring, lines of credit, and term loans.
Spot Factoring
The practice of factoring single invoices or a small selection of invoices on an as-needed basis, as opposed to a continuous factoring arrangement.
Subordination Agreement
A legal agreement that may be used in factoring when another lender already has a lien on a company’s accounts receivable. It establishes the factoring company’s priority in collecting payment.
Supplier Financing
A general term for any type of financing arrangement that helps a business pay its suppliers. This could include invoice factoring, reverse factoring, or other forms of trade financing.
T
Termination Clause
A provision within the factoring agreement outlining the conditions under which either the business or the factoring company can terminate the contract.
Transportation Factoring (or Trucking Factoring)
A specialized type of invoice factoring designed for the transportation industry. It helps carriers improve cash flow by converting their outstanding freight invoices into immediate cash.
Transportation Management System (TMS)
Software used by freight brokers, carriers, and shippers to manage logistics, including dispatching, tracking shipments, and potentially even managing invoices.
Turnaround Time
The time it takes for a factoring company to process and approve an invoice for funding. Faster turnaround times are crucial for businesses needing quick access to cash.
Top Tier Factoring
A term sometimes used to describe factoring companies specializing in serving businesses with a strong credit history and high-quality invoices. These companies may offer lower fees and more competitive rates.
U
Underwriting
The process by which a factoring company assesses the creditworthiness of a business and its customers (debtors) to determine their eligibility for factoring services and the potential risk involved.
UCC Filing
A legal filing made by the factoring company with the Secretary of State’s office to establish a security interest or lien on the trucking company’s accounts receivable or assets. UCC filings serve as public notices of the factoring company’s interest in the collateral and provide priority rights in the event of default or insolvency.
V
Validity Check
The process a factoring company may use to verify the authenticity of an invoice, and the likelihood that it will be paid. This can help minimize the risk of fraud.
Value-Added Services
Additional services that some factoring companies may offer beyond just purchasing invoices. These could include things like fuel discounts, carrier packet setup, credit checks on potential customers, and collections assistance.
Volume Discount
A potential reduction in factoring fees offered to businesses that factor a large volume of invoices.
W
Wire Transfer Fee
A fee that may be charged by factoring companies for sending funds via wire transfer. These fees can vary between companies.
Working Capital
The funds a business has available to meet its day-to-day operational needs.
