The list below is not exhaustive but hopefully it will explain, in plain English, some of the terms Factoring companies like to use. There are many instances of different phrases or words meaning the same thing.

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Advance Rate.The agreed percentage of eligible debts made available to your business. Sometimes also called initial prepayment (IP).

Approved Debt. A debt assigned to and accepted by the Factoring company as eligible for funding

Assignment. Legally you assign your debts to a Factoring company. With a factoring facility this is very visible in that every invoice raised must carry a stamp telling the customer that the debt has been assigned. With a confidential facility debts are still assigned but your customers are not (necessarily) aware.

Availability. In simple terms how much money can you have. Multiply your advance rate by the value of assigned/approved debts, then deduct the amount you have already drawn.

BACS. Bankers Automated Clearing System. A method of transferring money from one account to another. From a bank funds will take 3 days to clear. There shouldn't be a charge for receiving funds this way.

CHAPS. Clearing House Automated Payment System. Another electronic means by which you can receive money from your Factor. Same day transfer & clearance of funds. There is a charge for this service & it varies from Factor to Factor so make sure & ask how much.

CHOCC. Client Handles own Credit Control. A facility between Factoring & Invoice Discounting. Disclosed in as much as your customers are aware of the Factoring company's involvement but all ledger management is left up to you, i.e collections etc.

Contra Trading. This can make Factors nervous and exists where you are buying from and selling to the same organisation. In calculating availability Factors may offset amounts due to the customer

Credit Insurance. Can be invaluable, can be a waste of money. Factors can add credit insurance to your agreement charging a premium of anything from 0.1% of turnover to 1%. The actual premium depends entirely on the industry sector in which you operate & the type of customers to whom you sell.

Credit Limit. Factoring companies may set limits for each of your customers. You may not necessarily agree with these. If you trade so that the balance due from the customer exceeds the limit set, the Factor may reduce your availability

Credit Note. Raised when you need to void a sale or when product/service in some way deemed unsatisfactory. Makes Factors nervous when credit note levels too high.

Concentration Limits. Another issue that can compromise what you believe to be available funds. Factors like to see what they term a well spread ledger where no single customer dominates your ledger. A badly set concentration limit can make a factoring facility pointless and not all factoring sales people will explain it properly. If a Factor offers you an 80% advance, with a 20% concentration limit but you have your biggest customer representing 50% of your balance then take care, your facility won't be close to the 80% promised. Clear as mud. Please ask as it is always better to demonstrate with actual, rather than invented, figures.

Disapproved Debts. A catchall for the Factoring company where they can put anything they don't like & thus won't provide funds against. May include customer balances in excess of stated credit limits, balances due from customers who are also suppliers (contra), exports sales (unless previously agreed), debts too old (typically over 90 days) debts due from associated businesses.

Discount Charge. Also known as interest charged. For funds you use you will be charged interest at a rate typically expressed as a margin above Base Rate.

Factoring. Word to descibe any facility where you use your outstanding debtors to raise extra cash and where the facility contains some sales ledger management.. Non-recourse Factoring includes credit insurance. Recourse Factoring offers no such cover and after an agreed period of time (typically 90 days) a debt unpaid will be returned (recoursed) back to you, for you to collect. The amount of any debt recoursed will affect your availability. When a debt is recoursed back to you there will be a fee (Recourse Charge/Fee) typically between 0.5% & 1% of the value of the debt.

Invoice Discounting. Usually confidential (CID) although can be disclosed (DID). Your debtors are security to the Invoice Discounting company and an Advance Rate is agreed. You provide the Invoice Discounting company with details on all invoices (and credit notes raised). This can be done electronically and to a time scale that best suits your business. When you receive payments these are banked to the account of the invoice discounting company.

Personal Guarantees. Can be a highly contentious issue! When you enter into an agreement with a Factor you may think that their security lies in the debts that they buy and if anything goes wrong the Factor will simply collect outstanding monies from your customers and everybody's happy.In theory this is how it should be but Factors are aware that when things go wrong they don't always collect. Also Factors are hugely vulnerable to fraud where an unscrupulous person raises a fictitious invoice, forwards to the Factor and then asks for the agreed Advance Rate to be paid. Fraudsters are remarkably resourceful and their range of activities goes from the simple raising of bogus invoices to complex, opaque trading relationships designed to relieve the Factor of large sums of money.Factoring sales people are not always clear when asking for PG's exactly what the implications may be so please be aware.

Service Charge. There are two distinct charges with any type of Factoring agreement. The Discount or interest charge referred to above and the service charge. This will be expressed as a percentage of your sales turnover figure. The service charge is based on the workload involved in managing the ledger (and increased if you take a credit insurance option) with the rate negotiable only up to a point. Not all is lost with the service charge many businesses will offset the extra costs by passing them on to their customers. Alternatively the extra cash factoring brings enables businesses to manage their supplier relationships better. Also if a factor does a good job collecting your invoices the rate will be absorbed by having a smaller amount outstanding. Hopefull this is further explained here.

Take-On. The point at which a relationship with a Factor starts. On an agreed date the Factor will take-on your ledger and it's at this point that you truly find out how much they will make available against your debtor balance.Sadly situations have been seen where businesses enter into an agrement thinking they will be getting say, 80% but in reality, after the Factor has deemed certain balances not eligible have ended up receiving 50%. Consequently it's often worth asking or an exact figure prior to reaching take-on stage.