• Agency factoring

Similar to Client Handles Own Collections (CHOCS).

• Approved debts

Another term for eligible debtors.

• Client Handles Own Collections (CHOCS)

A hybrid service more similar to factoring than invoice discounting. Whilst the client handles debtor collections, with CHOCS the factoring company usually maintains a full duplicate sales ledger in order to monitor closely the debtor trends.

• Confidential invoice discounting (CID)

A service where a factoring company discounts invoices but where the client retains the responsibility for collection. CID is aimed more at well-established, financially sound businesses with efficient credit control systems. Under this system the client banks debtor payments into a nominated account and reports monthly on the sales ledger. The factor may also make random checks on the sales ledger and collection systems.

• Disclosed invoice discounting (DID)

Operationally similar to confidential invoice discounting except that the client’s customers are notified of the arrangement. Aimed at clients who have the ability to manage the sales ledger but who do not match the CID financial criteria.

• Discount charge

The interest charged on the amount advanced against debtors. Rates are similar to secured overdraft rates.

• Eligible debtors

Debts that qualify for a prepayment – i.e. debts within the recourse period, not disputed by the customer, and within an agreed customer limit or within an individual debtor concentration limit set by the factor.

• Non-recourse factoring

Similar to recourse factoring but with bad debt protection added. The factor thus assumes responsibility for debts unpaid within an agreed period provided they are within a credit limit and thereafter has no recourse to the client.

• Prepayment

The amount that a factoring company agrees that a client may withdraw against debtors in advance of its customers paying. Set as a percentage of eligible debtors and usually between 70% and 85% depending on the view of the factoring company on the collectability of the debts.

• Receivables finance

The U.S. equivalent term covering both factoring and invoice discounting.

• Recourse factoring

The basic service – also known as full service factoring – where a business sells all its trade debts, present and future, to a factor who is then responsible for collecting the debt. The factoring company takes over once the invoice is sent out to the customer with an assignment clause – sending out debtor statements, operating collection procedures, receiving payments, reconciling cash and assessing customer risk. The Factor may re-assign debts that are overdue back to the borrower who will then take back the responsibility for their collection – i.e. the factor has recourse to the client.

• Recourse period

An agreed maximum period during which debtors are expected to pay and following which debts may be re-assigned to the client. The period varies from factor to factor and can be anywhere from 90 days from invoice date to 120 days or more following end of month of invoice.

• Re-factoring charge

A charge made by a factor when debts are re-assigned – usually between 0.5% and 1% of the amount of the debt. Some factoring companies do not make the charge at all and with others it may be discretional. Always check the small print in an offer letter.

• Sales ledger financing

A general industry term covering both factoring and invoice discounting.

• Service charge

The charge for administering the sales ledger, the level of which will depend on the amount of work involved. The service charge is calculated on the level of gross sales and will tend to reduce as a percentage as turnover increases.