Invoice Factoring Terminology

It is very important for a company who is new to factoring to understand the terminology of factoring in order to get a complete understanding of how factoring works. Understanding the terminology will enable you to ask better questions and make the transition easier when you get started.

Here is an overview of some common terms or, for a more in-depth look, check out our Invoice Factoring Glossary.

  • An ‘account receivable’ is an unsecured debt that is due and payable from a customer to the client. It usually is made up of an invoice and supporting documentation as proof of service, delivery and/or acceptance on the part of the customer.
  • The ‘accounts receivable’ are multiple account receivables from many different customers to the client.
  • An ‘advance request’, also referred to as an‘advance’, is a group of invoice(s) and supporting documentation accompanied by an assignment that the client sends to the factor to be funded.
  • An ‘advance rate’, also referred to as the ‘advance percentage’, is the percentage of the invoice that is actually advanced to the client on each invoice. For example, if the advance request is for $10,000 and the advance rate is 80% then the amount advanced would be $8000 less the initial fee.
  • An ‘assignment’ is a form stating that the invoices and the supporting documentation making up an advance are for work that has been completed and the invoices are valid and will be paid in full to the factor.
  • The ‘factor’ is the person or company that provides operating capital by purchasing eligible accounts receivable
  • The ‘client’, also referred to as the ‘account creditor’, is you – the provider of goods and/or services
  • The ‘customer’, also referred to as the ‘account debtor’, is the company that purchases the goods and/or services.
  • The ‘due diligence’, is the process in which the factor reviews your application and the supporting documentation in order to approve you as a client
  • The ‘initial fee’, also referred to as the ‘discount fee’, is the fee charged by the factor on each invoice making up an advance. The initial fee is a fixed percent of each invoice for the initial fee period for which each invoice is outstanding.
  • The ‘initial fee period’ is the length of time for which the initial fee is charged. Although it may vary the length of time corresponds with the terms of the receivable. If the terms are Net 30 days then the Initial Fee Period is 30 days.
  • The ‘invoice(s)’ is the bill(s) documenting the goods and/or services provided to the customer. Combined with the proper supporting documentation it makes up an account receivable
  • The ‘late fee’ is the fee charged by the factor for each late period for which an account receivable is outstanding beyond the initial fee period.
  • The ‘late fee period’, is the length of time or any portion thereof for which a late fee is charged. If the initial period is 30 days and the late fee period is 15 days and an accounts receivable goes unpaid for 60 days then the total fee will equal the initial fee plus two late fees.
  • The ‘lockbox’, is a PO Box maintained by the factor at the factor’s bank to expedite the collection and processing of payments sent by customers to pay invoices. All payments of invoices are directed to the lockbox.
  • ‘recourse’ is the amount of outstanding invoices that are older than the recourse period and must be repurchased by the client
  • The ‘recourse period’, the length of time in which factor will fund a purchased account receivable before the factor will return a non-performing or unpaid account receivable to the client.
  • The ‘reserve’ or the ‘reserve settlement’ is the amount of the account receivable that is not advanced to the client and is held in escrow until the account receivable is paid in full. The balance on this account is paid to the client on a regular basis and represents collections on account(s) receivable.


  • The supporting documentation’ is the document(s) that make invoice(s) accounts receivable ( i.e. proof of delivery, time cards, acceptance signature, etc..) In simple terms, the paperwork that the customer needs to pay the bill.

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