Glossary

Glossary of Financial Terms

“A” credit customers:
Consumers with impeccable credit, who can obtain a loan from traditional lenders.

Acceleration Clause:
Language in a lease that secures payments for the full term of the lease.

Account:
A collection of claims or invoices against a particular customer for goods or services delivered.

Account Debtor:
The person, business or organization responsible for paying an invoice. In the case of factoring, the account debtor is the customer whose name is on the invoice sold to the factor.

Accounts Payable:
The amount of money a company owes for goods and services it has received; any outstanding debt that a company has.

Accounts Receivable:
A collection of a company’s outstanding invoices (invoices which have not yet been paid by the company’s customers).

Accounts Receivable Aging Report:
A report showing how long invoices from each customer have been outstanding.

Accounts Receivable Financing:
A form of financing which uses accounts receivable as collateral for a loan. This is different than factoring in that the party providing the financing does not own the invoice and is not responsible for collecting the debt.

Advance Rate:
The percentage of the face amount of an income stream that a funding source will advance to a client.

Amortization:
The gradual, systematic payment of a debt, such as a mortgage or other loan, in installments of principal and interest for a definite time, so that at the end of that time, the debt will have been paid in full.

Articles of Incorporation:
A document filed with a U.S. state by the founders of a corporation. After approving the articles, the state issues a Certificate of Incorporation; the two documents together become the Charter of Incorporation.

Asset:
Anything having commercial or exchange value that is owned by a business, institution or individual. A business’ assets might include its real estate, equipment inventory, intellectual assets such as copyrights or trademarks, and accounts receivable.

Asset Based Lending:
A form of lending where the factor uses collateral, such as equipment or inventory, as security against the loan.

Assign ability:
The ability to assign (or sell) an income stream to another individual or business.

Assignee:
The person or business entity who is given, obtains, or buys the right to an asset.

Assignment:

The transfer of the rights, title or interest of any debt instrument that is properly owned by another party.

Assignor:
The person giving or selling an asset, and subsequently, forfeiting rights to that asset.

Authorized Signatory:
An individual who is authorized to execute a binding document on behalf of a corporation, partnership or other legal entity.

“B” through “D” credit customers:
These consumers have less than perfect to bad credit and usually cannot qualify for traditional financing. Also called sub-prime credit customers.

Bad Debt:
Any debt that is delinquent and has been written off as uncollectible.

Balance sheet:
A financial statement that shows a business’ current financial condition, with assets on the left side and liabilities and net worth on the right side.

Balloon:
The balance of principal that is due and owing in its entirety at a specified point in time, but in any event, less than the time required to fully amortize the debt.

Bankruptcy:
A state of insolvency of an individual or organization. The inability to pay debts.

Beneficiary:
The person or party entitled to receive the benefits, or proceeds, of the life insurance policy upon the death of the insured person.

Bill of Exchange:
An instrument similar to a time or sight draft which the buyer signs. This is acknowledgement of debt for the goods he is buying.

Bill of Lading:
A shipping document which gives instructions to the company transporting the goods.

Bill of Sale:
A document used to transfer the title of certain goods from seller to buyer.

Blanket Assignment:
A legal transfer of ownership of all accounts receivable, both present and future as collateral for funding.

Break Even Point:
The degree of operation where costs equal revenue.

Broker:
An individual who pairs clients in need of cash with appropriate financial entities including factors.

Business-based income streams:
Cash flow instruments that are paid to a business by another business or government.

Capital Net Worth:
The amount of funds remaining in a business after all debts have been satisfied; i.e. assets over liabilities.

Cash flow:
The flow of cash through a business or household. In business terms, cash flow involves the flow of cash into a company in the form of revenues, and out of the company in the form of expenses.

Cash flow broker:
Professional whose primary purpose is to unite income stream sellers with funding sources. They may operate as referral sources or as the primary liaison for cash flow transactions.

Cash flow industry:
The buying, selling, and brokering of privately held debt in the secondary marketplace; the marketplace where businesses and individuals get help managing their cash flow needs.

Cash flow instrument:

Future payment or series of payments. Also called a debt instrument or income stream.

Cash flow specialist:
A cash flow professional who brokers cash flow transactions or buys cash flow instruments.

Cash flow transaction:
Occurs whenever a funding source pays cash to an individual or business in exchange for an income stream.

Chattel mortgage:
A mortgage on personal property, given to secure a debt. Typically used in the sale of a business. Also called a security agreement.

Chapter 11:
A Federal Bankruptcy Act where a debtor can maintain control of its business and operations, under court supervision, as long as current debts remain paid.

Chapter 1:
Affords businesses an opportunity to reorganize by restructuring debt and negotiating payment schedules.

Clients:
The individual or company that sells its accounts receivables to a factor or other financial entities.

Commercial Credit Insurance:
Insurance against large losses from the uncollectability of accounts receivable.

Collateral:
Something of value (land, a home, a car, etc.) that is pledged as security to ensure the payment of a debt. Collateral is promised to a lender until a loan is repaid. If the borrower defaults, the lender has the right, by law, to seize the collateral.

Collateral-based income streams:
Cash flow instruments that are secured by collateral.

Collectibility:
Refers to the funding source’s ability to collect future income stream payments once they are purchased.

Commission:
Fee paid to a broker for executing or referring a cash flow transaction.

Concentration:
The amount of one client’s accounts receivable due from a single customer. A large concentration for a single customer is considered high risk.

Confidential Invoice Discounting:
An arrangement between a client and a factor in which the factoring relationship is not disclosed to the client’s customers.

Consumer-based income streams:
Cash flows in which the party that owes payments is a consumer, a private individual.

Contingency-based income streams:

Cash flows in which the recipient is not necessarily legally entitled to receive payments, or in which the amount of the payment is uncertain or contingent upon outside factors.

Conversion:
The process of converting a qualified prospect into an active client.

Corporation:
A legal entity, chartered by a U.S. state or the federal government, and separate and distinct from the persons who own it. It is regarded by the courts as an artificial person; it may own property, incur debts, sue or be sued.

Corporate Resolution:
An action taken by the vote of a corporation.

Credit Analysis:
An analysis of records and financial affairs to determine the creditworthiness of a business.

Creditor:
One who is owed payments on a debt by a debtor.

Customer:
The business or organization that owes money on an invoice purchased by the factor; i.e. the client’s customers, also known as account debtors.

DBA (Doing Business As):
Used to designate the name of a business as it is commonly known rather than its legal name, the name of the owner, etc.

DBT:
An abbreviation for “days beyond terms,” which indicates how many days past the due date an invoice is late.

Debt instrument:
Future payment or series of payments, or a debt that one party owes to another party. Also known as income streams or cash flow instruments.

Debtor:
One who owes something and makes payments to a creditor.

Default:
The omission or failure to perform or fulfill a legal duty, obligation, or promise (i.e. to pay a debt).

Delivery Evidence:
A document that proves delivery and invoicing of a shipment.

Direct Mail:
Mail sent to large numbers of potential customers advertising a product or service and soliciting orders.

Discount Factoring:
Arrangement whereby a factor purchases an account(s) receivable from a business (your client) at a discount to the face value of that receivable. The factor earns a fee based on the number of days that the receivable remains unpaid, i.e., the longer the receivable remains unpaid, the larger the fee incurred.

Discount Fee:
The amount earned by a factor on each invoice purchased. It is based on the period of time the invoice remains outstanding (unpaid) and is set forth and agreed upon by both parties in the Discount Schedule.

Discount Rate:
The percentage of the face value of an invoice that a factor holds as its fee.

Due diligence:
Exhaustive research on a transaction, income stream, client, and/or payor. Due diligence may involve credit checks, appraisals, UCC searches, lien searches, or on-site visits with clients.

Escrow:
The system by which money documents, personal property, or real property is held in trust for another party by a disinterested third party until the terms and conditions of the escrow instructions are completed or terminated.

Face value:
The current principal balance on an income stream.

Factoring:
A funding source that specializes in funding accounts receivable.

Fictitious name:
A legal statement filed when a person uses a name other than his or her own to operate a business.

Foreclosure:
A legal proceeding in court to seize property given as security for a debt that is in default.

Funding source:
An individual investor or an investment company that buys income streams.

Government-based income streams:
Cash flows paid by a government entity, either directly or through an insurance company.

Hypothecation:
Borrowing funds from a lender, investing those funds in a debt instrument, and giving the lender a security interest in the debt instrument as the collateral for the loan.

Income stream:
A future payment or series of payments, or a debt that one party owes to another party. Also known as a debt instrument or cash flow instrument.

Indemnification:
A promise to compensate for loss or damage sustained as a result of a stated set of circumstances.

Institutional lenders:
Savings and loan associations, local and regional banks, mortgage companies, finance companies, and commercial lenders.

Insurance-based income streams:
Cash flows stemming from insurance companies and paid to individuals or businesses.

Intangible personal property:
Something that has value but is not a tangible asset, for example, a trademark, copyright, patent, or trade secret.

Investment-to-value ratio:
A measure of how secure a creditor’s position is and how likely the creditor is to recoup all of his or her money in the event of a foreclosure.

Invoice:
A legal debt instrument which indicates the amount due from a customer to pay for delivered goods or services. Invoices may be traded or sold.

Joint venture:
A business entity established for a specific task, operation, or goal.

Lead:
A piece of information of possible use in the search for a prospective client.

Leverage:
The ratio of debt to total assets.

Liabilities:
The amount owed by a business or an individual, excluding ownership equity. There are two types of liabilities: Current and Long-term. Current are debts which must be paid within one year (such as accounts receivable, dividends, notes payable, bank loans payable, taxes payable, wages and long-term debt due within one year). Long term liabilities, also called funded debt, are debts that are not due until after a year’s time.

Lien:
A creditor’s claim against property. When the debt is paid, the lien is removed. Liens may also be granted by courts to satisfy judgments.

Lien Search:
A search through public records on file in both the County Clerk’s and Secretary of State’s offices for any claims (pledges) against the property of a business (such as their accounts receivable) or an individual. An example would be if a taxing authority has a lien against the accounts receivable of a business due to taxes owed.

Limited liability company:
A form of business structure designed to combine the best of corporate and partnership attributes into one entity.

Line of Credit:
The amount of credit that may be extended to a borrower by a lender. This type of arrangement gives a borrower more flexibility in planning for operating expenses.

Liquidity:
The ability to convert assets into cash (or cash equivalent) without significant loss. If a business has good liquidity they will be able to meet their maturing obligations promptly, earn trade discounts, benefit from a good credit rating, etc.

Loan-to-value ratio:
A measure of how heavily mortgaged a property is and how likely the owner is to default on his or her debts.

Marginal credit customers:
Consumers who may have had some slow pay problems, but generally pay their bills.

Market value:
The price at which a ready, willing, and informed person would buy something; the price property would command in the current market.

Marketing:
The process of identifying and communicating with qualified prospects.

Master Broker:
Individual who has been certified and designated by the American Cash Flow Association to work with Diversified Cash Flow Specialists.

Mechanics Lien:
A lien on property (such as a building or an invoice) given by statute to a worker or contractor who performs work or furnishes materials for the improvement of that property, until compensation is made for the improvement. Until that lien is satisfied, it usually takes precedence over all other liens.

Mortgage:
A written instrument that creates a lien by pledging real property as security for a debt.

Negative Cash Flow:
A situation where income is less than expenses. Prolonged negative cash flow can lead to the failure of a business.

Note:
A written promise to pay a named amount to a particular company or business by a certain date.

Notice of Pre-lien:
A document notifying the owner of real property that materials or services are being furnished to his real property, putting him on notice that the one sending it will look to have a lien against the real property if those materials or services are not paid for.

Notification:
Process whereby the factor lets an account debtor (your client’s customer) know that an invoice(s) has been purchased from your client, and that the debtor is to pay the factor directly.

Non-Notification:
An aspect of confidential factoring where the customers are not notified of the client’s arrangement with the factor.

Non-Recourse:
A type of factoring where the factor assumes complete responsibility for collection of debt. If the debt is not collected due to the financial inability of the customer, the factor assumes the loss.

Overhead:
The cost of doing business unrelated to production or sale of goods or services. Office rent, for instance, is an overhead expense. It remains unchanged no matter how much a company sells.

Owner financing:
A type of financing in which the seller of a tangible item accepts a promissory note as a portion of the purchase price. Also called seller financing.

Partnership:
A common form of joint ownership of a business.

Payee:
Person or business that has the right to receive a payment or series of payments and is interested in selling that income stream for cash. (Also called the seller or client.)

Payor:
The person, company, or government responsible for making payments on an income stream.

Partial:
Any part of a payment stream that is less than the full amount due.

Personal guaranty:
A contractual agreement between a funding source and a seller, whereby the seller assumes personal responsibility and liability for the obligations of the income stream.

Portfolio:
A group or package of income streams of the same type.

Pre-ship Invoice:
A legal debt instrument which indicates the amount due from a customer to pay for goods or services which have NOT yet been delivered. Generally, factors will not purchase pre-ship invoices.

Privately held:
Owed to a private individual or business rather than to a bank or other financial institution.

Principal:
The owner of a privately held business, or one of the main parties (buyer or seller) involved in a transaction.

Principal Generally:
A major party to a transaction, acting as either a buyer or seller; or the owner of a privately held business.

Profit and loss statement:
A financial statement that shows a historical record of a business’ income and expenses.

Promissory note:
A written promise to pay a specified amount to a specified party over a certain period of time.

Purchase Order:
A document or form used by a customer to issue an order for goods or services.

Quantity Discount:
Price reductions experienced as a result of purchasing in larger volume.

Rate of Return:
The yield on equity or invested capital.

Real property:
Real estate.

Rebate:
The return of funds issued to the client by a factor from the reserve account.

Recourse:
A form of factoring where the client is liable for payment in the event the customer does not pay.

Replevin:
A legal proceeding in court to seize property (other than real estate) given as security for a debt that is in default.

Reserve:
An amount a funding source holds in its account to cover potential payment defaults. After a certain time period has passed, the funding source rebates the reserve to the client less any fees or charges for delinquency. Also called a bad debt reserve.

Reserve Account:
An account established by the factor to track funds owed to a client as factored invoices are paid. The account amount equals the invoice face value minus the advance, the factor’s fees, charge backs and administrative charges.

Satisfaction:
The discharge of an obligation by paying a party what is due (i.e., the satisfaction of an IRS lien or the satisfaction of a mortgage).

Schedule of Accounts:
Report give by the client to the factor. The report lists information about the account of each of the client’s customers.

Seasoning:
The length of time payments have been made on a note or other debt instrument.

Secondary market:
The marketplace where individuals and businesses can sell privately held income streams to funding sources for cash.

Security:
Property given or pledged to ensure the repayment of a debt by a borrower.

Securitization:
The bundling and resale of debt instruments to investors; permitted only for parties licensed and regulated by the SEC.

Security interest:
An interest in property, other than real estate, which is given as security for a debt or other obligation. A security interest is created by execution of a security agreement and one or more financing statements under the Uniform Commercial Code.

Seller:
The person or company that is holding a debt instrument and wants to sell it.

Servicing:
The collection of payments of interest and principal, and trust fund items such as fire insurance, taxes, etc., on a note by the borrower in accordance with the terms of the note. Servicing by the lender also consists of operational procedures covering accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquent loan follow-up and loan analysis.

Sole proprietorship:
A business owned and operated by an individual.

Subordination:
The act of a creditor acknowledging in writing that a debt due him or her by a debtor shall be inferior to the debt due another creditor by the same debtor.

Tail:
The payment stream and/or balloon payment of an income stream subsequent to another party’s right and interest in the income stream. Usually the back half of the payment stream when another party has purchased the front half.

Tangible personal property:
Personal property other than real estate, such as cars, boats, or other assets.

Time value of money:
Concept that addresses the way the value of money changes over a period of time.

Title commitment:
A commitment on the part of the insurer, once a title search has been conducted, to provide the proposed insured with a title insurance policy upon closing.

Title insurance:
Title insurance can benefit either the payor or the payee. Should the beneficiary suffer any damages due to clouded or false title to real estate, title insurance recompenses the damaged party to the extent of the damages.

Title policy:
An insurance policy that insures a party against loss due to a defective title.

Trade Discount:
A deduction from the list price of goods provided by a business in return for payment within a specified time frame.

Trial balance printout:
A spreadsheet that lists all loans in a portfolio and their payment schedule. Usually required for a portfolio transaction.

UCC-1:
The document filed with the Secretary of State and/or the County Clerk’s office(s) to perfect a factor’s lien on a clients’ assets (accounts receivable). Also called “UCC Financing Statement.”

UCC-2:
The document that is filed with the Secretary of State and/or the County Clerk’s office(s) as evidence of an assignment, release or change in the UCC-1. In the case of factoring, a UCC-3 is filed to terminate a UCC- 1 when all outstanding invoices are paid and the relationship between the client and the factor is severed. Also called “UCC Statement With Respect To Change.”

Uniform Commercial Code:
The State Code which regulates the transfer of property.

Unseasoned:
A lease or note that has had few, if any, payments made.

Verification:
A step during the due diligence process in which a factor confirms the validity of an invoice with the customer.

Yield:
The return on an investor’s capital investment presented as a ratio of income to the total cost over a specified period of time.