Hennessey Capital Southeast

Factoring - Glossary

Account Debtor - The customer of a factor's client. The company that is legally responsible for paying for goods or services provided.

Accounts Payable - The amount owed by a business to its suppliers or vendors.

Accounts Receivable - The balance due from the sale of goods or services on credit.

Accounts Receivable Aging Schedule - The classification process, as reported on a schedule divided by time periods.

Accounts Receivable Financing - a/k/a factoring. A financing tool that utilizes accounts receivable as collateral for short-term funding.

Asset Based Lending - Business loans using current assets as collateral for advances. Fundings are based on a percentage of the collateral pledged.

Assignment - A transfer of ownership or interest in a payment or obligation.

Charge Back - An amount of money that is owed to the factor and is deducted from the reserve or future advances due to non-payment by account debtors.

Client - The customer of the Factor that sells accounts.

Chapter XI - A chapter of the Bankruptcy Code addressing reorganization that is available for both individual and business debtors. Its purpose is to rehabilitate a business as a going concern or reorganize an individuals finances. A debtor can maintain control of its business during reorganization under Bankruptcy Court supervision.

Chapter VII - A chapter of the Bankruptcy Code addressing liquidation and discharge. It is available to both individual and business debtors. Its purpose is to achieve a fair distribution to creditors of whatever non-exempt property the debtor has.

Chapter XIII - A chapter of the Bankruptcy Code used to rehabilitate an individual with regular income whose debts do not exceed specified amounts, typically used to budget some of the debtor's future earnings under a plan which creditors are paid in whole or in part.

Dilution - An adjustment to an invoice for charge-backs, adjustments, and returns. A factor attempts to determine the amount of dilution when establishing an advance rate.

DIP - or Debtor in Possession - A chapter 11 or Chapter 12 (family farmer) debtor that operates on its own business and remains in possession of its assets and property. For the purposes of the Bankruptcy Code, a debtor-in-possession has substantially all the rights and powers of a trustee. A Bankruptcy judge may order that the debtor-in-possession be replaced by a trustee appointed by the US Trustee.

Due Diligence - The research and background checks conducted by a factor to determine the eligibility of clients and account debtors.

Factor - The party who purchases and advances funds against accounts receivable. The funding source for client.

Factoring - The selling of accounts receivable (invoices) to a factor for cash.

Factoring Advance - The initial funding that a factor provides to a client. The advance is a percentage of the face value of the factored invoice.

Factoring Fee - The fee the factor charges, usually a percentage of the face amount of the invoice and is based on time outstanding.

Letter of Credit (L/C) - a financial document issued by a bank at the request of a consignee guaranteeing payment to the shipper for cargo if certain terms and conditions are fulfilled. Normally it contains a brief description of the goods, documentation required, shipping date, and an expiration date after which payment will no longer be made.

Mechanic's Lien - A lien against real property (real estate, buildings, structures) allowed by some states to contractors, laborers, and suppliers or materials used in their construction or repair. The lien remains in effect until these parties have been paid in full and in the event of liquidation, may give them a priority interest over other parties.

PACA - Perishable Agricultural Commodities Act. Assets subject to PACA are deemed to be held in trust for the benefit of all PACA creditors and for this reason, PACA claims take priority over the claims of other creditors, including secured creditors. Two types of assets are subject to PACA trust: (1) perishable agricultural commodities and inventories of food or other products derived from the sale of perishable agricultural commodities and cherries packed in brine; and (2) proceeds from the sale of such commodities, including accounts receivable.

PASA - The Packers and Stockyard Act. Similar to PACA, PASA grants livestock producers priority over a secured creditor's lien in packers' inventories, accounts, and proceeds from cash sales. "All livestock purchased by a packer in cash sales, and all inventories of, or receivables of proceeds from meat, meat food products, or livestock products derived there from shall be held by such packer in trust for the benefit of all unpaid cash sellers of such until the full payment has been received by such unpaid sellers."

Verification - The process by which the factor verifies that the product and services provided by the client was received and accepted and that the account debtor will pay the monies due under the invoice. The factor completes this process prior to advancing on accounts.