Invoice factoring glossary: 80+ terms in plain English

A

Account debtor: The customer who owes payment on an invoice. In factoring, the funder underwrites the account debtor’s ability to pay at least as closely as it underwrites the business selling the invoice.
Accounts receivable (AR): Money customers owe a business for goods delivered or services performed but not yet paid for. AR is the asset that invoice factoring and AR financing convert into cash before customers pay.
Advance rate: The percentage of an invoice’s face value the factor pays up front when it buys the invoice. Advance rates commonly run 70% to 90%, depending on industry, customer credit and dilution history; the balance is held as a reserve.
Aging report: A report that lists every open invoice by customer and groups balances by how long they have been outstanding, usually in 30-day buckets. It is one of the first documents a factor asks for, because it shows who pays, how fast, and where problems sit.
Asset-based lending (ABL): A revolving loan secured by receivables, inventory and sometimes equipment, with availability set by a borrowing base. Unlike factoring, ABL is a loan, typically priced as an interest rate over a benchmark and carrying financial covenants and field exams.
Assignment of Claims Act: The federal law (31 U.S.C. 3727 and 41 U.S.C. 6305) that allows a contractor to assign payments due under a federal contract to a bank or other financing institution. The assignment is effective against the government only after written notice is properly filed with the contracting officer, the disbursing office and any surety.

B

Blanket lien: A lien that covers all, or nearly all, of a business’s assets, usually perfected with a UCC-1 describing “all assets.” A blanket lien held by a bank, SBA lender or MCA provider must be released or subordinated before a factor can take a first position in receivables.
Borrowing base: The formula that sets how much a business can draw on an asset-based line, typically a percentage of eligible receivables plus a smaller percentage of eligible inventory, minus reserves. Borrowers usually report it weekly or monthly on a borrowing base certificate.
Buyout letter: The agreement under which a new factor pays off an incumbent factor and takes over the client’s receivables. It sets the payoff figure, the wire instructions, how in-transit payments will be handled, and the incumbent’s commitment to release its lien once paid.

C

CAGE code: A five-character Commercial and Government Entity identifier assigned to businesses that contract with the federal government, issued as part of SAM.gov registration. Factors that fund government receivables use it, along with the Unique Entity ID, to confirm the contractor’s identity on awards and payments.
Chargeback: A charge the factor makes against the client for an invoice that goes unpaid past the recourse period or is reduced by a dispute. Chargebacks are usually taken from reserves or future advances, or the client replaces the invoice with a new one.
Collateral: Assets pledged to secure an obligation. In factoring, the purchased invoices are the core asset, though most factors also file a lien on related assets such as other receivables, deposit accounts and proceeds to protect their position.
Concentration limit: A cap on how much of a facility can be tied to a single account debtor, often expressed as a percentage of total funded receivables. Higher limits are usually available when the concentrated customer is a large investment-grade company or a government agency.
Confession of judgment: A document, signed in advance, that lets a creditor obtain a court judgment against the signer without a lawsuit if the signer defaults. Many merchant cash advance contracts have included them, and several states restrict or limit their use.
Covenant: A promise in a loan agreement that the borrower will meet certain conditions, such as a minimum debt service coverage ratio or maximum leverage. Tripping a covenant can let the bank freeze, reduce or call the line, even if every payment is current.
Credit insurance: Insurance that pays the policyholder if a covered customer fails to pay because of insolvency or prolonged default. Some factors use trade credit insurance to offer non-recourse terms or higher concentration limits on specific debtors.
Cross-aging: A rule that makes all of a customer’s invoices ineligible once a set share of that customer’s balance, often 25% to 50%, is past a cutoff such as 90 days. It keeps a lender or factor from advancing on new invoices to a customer that has stopped paying old ones.

D

Days sales outstanding (DSO): The average number of days it takes a business to collect payment after a sale. A common formula is accounts receivable divided by credit sales, multiplied by the days in the period; the higher the DSO, the more cash is trapped in receivables.
Dilution: Any reduction in what a customer actually pays against an invoice, including credits, returns, disputes, discounts and offsets. Factors track dilution closely because it shrinks the collateral; high dilution means lower advance rates or larger reserves.
DPAS (Defense Priorities and Allocations System): A Department of Commerce program that requires contractors and suppliers to give priority to rated orders supporting national defense, marked DO or DX. A DPAS-rated purchase order signals a defense supply chain customer, which matters when underwriting aerospace and defense receivables.
Due diligence fee: A one-time charge some factors collect at onboarding to cover lien searches, background checks and customer credit reviews. Ask whether it is refundable or credited against fees if the facility closes; the proposal decoder flags it alongside other one-time charges.

E

Eligible receivables: The invoices a factor or lender will fund against under the agreement. Eligibility usually excludes invoices past a set age, invoices to affiliates, foreign or consumer debtors, disputed amounts, and anything subject to offset.
Estoppel letter: A signed statement in which a customer confirms that specific invoices are valid, unpaid and not subject to dispute or offset, and agrees to pay the factor. Funders sometimes require one on large or concentrated debtors before advancing.

F

Factor: A company that buys a business’s invoices at a discount and collects payment from the customers. Because the factor is purchasing an asset rather than lending money, approval leans heavily on the credit quality of the customers who will pay.
Factor rate: A decimal multiplier, such as 1.30, that sets the total amount owed on a merchant cash advance. A $100,000 advance at a 1.30 factor rate means $130,000 is repaid regardless of how fast, which is why the effective annual cost can be far higher than the rate suggests.
Factoring fee: The charge a factor takes for buying an invoice, also called the discount fee. Factoring fees commonly run roughly 1% to 5% of invoice value per 30 days, depending on volume, customer credit and payment terms.
Field exam: An on-site or remote audit in which a lender’s examiners test a borrower’s receivables, inventory and reporting against the books. Field exams are standard in asset-based lending and are usually billed to the borrower.
Forbearance agreement: An agreement in which a lender temporarily holds off on enforcing its remedies after a default, usually in exchange for fees, tighter terms and a deadline to refinance. Many businesses use the forbearance period to put a factoring facility in place and pay the bank out.
Form 941: The IRS Employer’s Quarterly Federal Tax Return, which reports wages paid and the federal income, Social Security and Medicare taxes withheld. Payroll funders review 941 filings and deposits because unpaid payroll taxes can lead to federal tax liens that compete with the factor’s claim on receivables.

H

Holdback: In a merchant cash advance, the fixed percentage of daily or weekly sales or deposits remitted to the MCA provider. The term is also sometimes used for an amount a funder retains from a payment, similar to a reserve.

I

Ineligible receivables: Invoices a factor or lender will not advance against, such as those past a set age, owed by affiliates or consumers, billed in advance of performance, or subject to dispute. Ineligibles still sit on the aging report but add nothing to availability.
Intercreditor agreement: A contract between two creditors of the same business that sets who has priority in which assets and how each may act on a default. It is how a factor and an SBA lender or bank can both stay in place, with the factor first on receivables and the lender first on everything else.
Invoice factoring: The sale of a business’s unpaid B2B or government invoices to a factor for an immediate advance, with the balance, minus a fee, paid when the customer pays. It is not a loan, so approval depends mainly on the customers’ credit rather than the seller’s balance sheet.

J

Joint check agreement: An arrangement in construction where a payer issues a check made out to both a subcontractor and its supplier, so neither can cash it alone. Factors funding subcontractors need to know about joint check arrangements because they change who controls the payment.

L

Lien waiver: A document in which a contractor, subcontractor or supplier gives up lien rights for work covered by a payment, either conditionally (effective once payment clears) or unconditionally. General contractors typically require lien waivers with each pay application before releasing funds.
Lockbox: A bank-managed address or deposit account where customers send payments, so collections go directly to the factor or lender rather than through the business. Lockboxes reduce the risk of misdirected payments and speed up reconciliation.

M

Mechanic’s lien: A claim against improved real property filed by an unpaid contractor, subcontractor or supplier, also called a construction lien. Lien rights are created by state statute and have strict notice and filing deadlines; on most public projects, payment bonds take their place.
Merchant cash advance (MCA): A purchase of a business’s future sales or receipts at a discount, repaid through daily or weekly debits until a fixed total, set by a factor rate, is collected. MCAs fund quickly but often carry a much higher effective cost than invoice factoring.
Minimum volume requirement: A contract term requiring the client to factor at least a set dollar amount each month or year, with a fee charged on any shortfall. It matters most for seasonal businesses, and it should be checked in any proposal before signing.
Misdirected payment: A customer payment on a factored invoice that goes to the business instead of the factor. Factoring agreements require the business to forward it promptly, often within one or two business days, and keeping it is a serious breach that can trigger default fees or termination.

N

Net terms: The number of days a customer has to pay an invoice, such as net 30, net 60 or net 90. Longer net terms are the most common reason growing B2B businesses turn to factoring.
Non-notification factoring: A factoring structure in which customers are not told their invoices have been sold and keep paying the business, which then remits to the factor. It is usually reserved for larger, financially stronger clients because the factor gives up direct control of collections.
Non-recourse factoring: Factoring in which the factor absorbs the loss if a customer cannot pay because of insolvency or another credit event defined in the contract. It does not cover disputes or quality issues, and it typically costs more than recourse factoring.
Notice of assignment: A written notice telling a customer that its invoices have been assigned to a factor and that payment must go to the factor. Under UCC Article 9, once a customer receives a valid notice, paying the original business may not discharge the debt.
Notice to owner: A preliminary notice that subcontractors and suppliers serve on a property owner to preserve their construction lien rights. In Florida, a notice to owner generally must be served within 45 days of first furnishing labor or materials.
Notification factoring: The standard factoring structure, in which customers receive a notice of assignment and send payment directly to the factor. It gives the factor control of collections and is why most factors can approve businesses that banks decline.

O

Offset: A customer’s right to reduce what it pays on an invoice by amounts the business owes it, such as when the customer is also a supplier. Offset risk reduces a factor’s collateral, so invoices to customers with mutual balances are often ineligible.
Overadvance: Funding above what the borrowing base or advance rate normally allows, usually for a short period and at extra cost. Lenders and factors grant overadvances sparingly, typically to bridge a seasonal peak or a large new contract.

P

Pay application: A construction contractor’s periodic request for payment, often on AIA G702 and G703 forms, showing work completed to date against the schedule of values. Factors funding subcontractors usually advance against approved pay applications rather than raw invoices.
Payment bond: A surety bond that guarantees subcontractors and suppliers will be paid on a construction project. Payment bonds are required on many federal construction contracts under the Miller Act and on state public projects under similar state laws, standing in for lien rights that do not apply to public property.
Payoff letter: A letter from an existing lender or factor stating the exact amount required to satisfy the obligation as of a specific date, usually with a daily per diem and wire instructions. It also states that the creditor will release its lien and file a UCC-3 termination once paid.
Payroll funding: Factoring designed for staffing agencies, in which the funder advances against weekly invoices or approved timesheets so the agency can meet payroll before clients pay. Funders typically review payroll tax compliance closely as part of underwriting.
Personal guarantee: A promise by an owner to be personally responsible for a company’s obligations. Factoring guarantees are often limited to performance, covering fraud, misdirected payments and breaches of warranties, rather than a customer’s failure to pay.
PO financing: Funding that pays a supplier to produce or deliver goods for a confirmed customer purchase order, before the business can invoice. Once the goods ship and are invoiced, the receivable is often factored to repay the PO funder.
Prime contractor: The company that holds a contract directly with the project owner or government agency and is responsible for its performance. Subcontractors are paid by the prime, so the prime’s payment habits matter as much as the end owner’s credit.
Prime-plus pricing: Pricing expressed as the prime rate plus a margin, charged on the funds actually outstanding. It is standard in asset-based lending and appears in some larger factoring facilities, where it can be easier to compare against a bank line than a flat discount fee.
Prompt payment laws: Federal and state statutes that set deadlines for paying contractors and may require interest on late payments. The federal Prompt Payment Act covers federal agencies, and Florida, like many states, has its own prompt payment rules for public and private construction.

R

Rebate: The portion of the reserve returned to the business after the customer pays the factor in full, net of the factoring fee and any other charges. Rebates are typically released weekly or monthly, depending on the agreement.
Reconciliation clause: A provision in a merchant cash advance contract that lets the business ask for its fixed daily or weekly payment to be adjusted to match actual receipts. Courts have looked at whether a real reconciliation right exists when deciding if an MCA is a true sale or a disguised loan.
Recourse factoring: Factoring in which the business must buy back or replace any invoice the customer does not pay within the recourse period. It is the most common structure and usually carries lower fees than non-recourse factoring.
Recourse period: The number of days, often 60 to 120 from purchase or invoice date, after which an unpaid invoice can be charged back to the business. Longer recourse periods give slow-paying customers more room before a chargeback hits.
Reserve: The portion of an invoice’s value the factor holds back instead of advancing, usually the difference between face value and the advance rate. It protects the factor against short payments and disputes, and is released as a rebate once the customer pays.
Retainage: A percentage of each construction progress payment, commonly 5% to 10%, that the owner or general contractor withholds until the project or the trade’s scope is complete. Most factors do not advance on retainage until it is billed and approved for release.
Revolving line of credit: A bank loan facility a business can draw, repay and draw again up to a set limit, usually secured by a blanket lien and subject to covenants and annual renewal. When a line is reduced, frozen or not renewed, factoring is a common replacement.

S

SAM.gov: The federal System for Award Management, where businesses register to bid on, receive and be paid under federal contracts. Factors funding government receivables confirm the contractor’s active SAM registration and use the registered details when filing an assignment of claims.
SBA 7(a) loan: A small business loan made by a private lender and partly guaranteed by the U.S. Small Business Administration, typically secured by a lien on business assets. Adding factoring alongside a 7(a) loan usually requires the lender to subordinate its interest in receivables through an intercreditor agreement.
Schedule of accounts: The list of invoices a business submits to the factor for purchase in a given batch, usually with copies of the invoices and proof of delivery or approved timesheets. Each schedule is reviewed and verified before funds are advanced.
Spot factoring: Factoring a single invoice or a small batch on a one-time basis, without committing the entire ledger or a monthly minimum. It offers flexibility but usually costs more per invoice than an ongoing facility.
Stacking: Taking a new merchant cash advance while one or more existing advances are still being repaid, so daily debits pile on top of each other. Stacking is a common path into an MCA debt spiral and often leads to defaults within months.
Subcontractor: A company hired by a prime or general contractor to perform part of a project. Because subcontractors are paid only after the prime is paid, they often face long payment cycles, retainage and pay-when-paid terms.
Subordination agreement: An agreement in which one creditor accepts a lower priority than another in some or all of a business’s assets. A bank or SBA lender subordinating its interest in receivables is what allows a factor to fund while the loan stays in place.

T

Termination fee: A fee charged for ending a factoring agreement before its term expires or without the required notice. It can be a flat amount or tied to minimum volume for the remaining term, and it is one of the most important lines to check before switching factors.
Tiered pricing: A fee schedule in which the factoring fee rises the longer an invoice stays unpaid, such as a base fee for the first 30 days plus an added charge for each additional 10 or 15 days. Tiered pricing rewards fast-paying customers and penalizes slow ones.
Trade credit: Credit a supplier extends by letting a customer pay after delivery on net terms. Every invoice on net terms is trade credit, which is why a business’s receivables are effectively an interest-free loan to its customers until they pay.

U

UCC Article 9: The part of the Uniform Commercial Code, adopted in every state, that governs security interests in personal property and the sale of accounts. It sets how factors and lenders perfect their interests, how priority is decided, and how customers must respond to a notice of assignment.
UCC lien search: A search of state filing records for UCC financing statements filed against a business. Factors run one before funding to find existing liens, from banks, SBA lenders, equipment lessors or MCA providers, that must be released or subordinated.
UCC-1 financing statement: The public filing, usually with the secretary of state where the business is organized, that perfects a creditor’s security interest and puts others on notice. A UCC-1 is generally effective for five years and can be continued by filing within six months before it lapses.
UCC-3 amendment: The filing used to change an existing UCC-1, whether to continue it, terminate it, assign it to another creditor, or release specific collateral such as receivables. In a factor buyout or loan payoff, the exiting creditor files a UCC-3 termination or partial release.
Unique Entity ID (UEI): The 12-character identifier the federal government assigns to every entity registered in SAM.gov, which replaced the DUNS number for federal awards in 2022. It appears on contracts and payment records and is used to match a contractor to its receivables.

V

Verification: The factor’s check, usually by phone, email or customer portal, that an invoice is real, the goods or services were accepted, and the customer intends to pay in full on the stated terms. Verification is standard before the first funding and is often done selectively afterward.

W

Whole-ledger factoring: A facility in which the business sells all, or all eligible, receivables to the factor on an ongoing basis. In exchange for that commitment, it usually earns lower fees and higher advance rates than spot factoring.
Working capital: Current assets minus current liabilities, the cash cushion a business uses to cover payroll, materials and overhead between paying costs and collecting from customers. Fast growth on long net terms can consume working capital even when the business is profitable.

Factoring terms, in plain English

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Know the terms. Now see the numbers.