AR Finance & Factoring Terms Glossary
The world of small business Accounts Receivable finance and invoice factoring has its language with many acronyms and terms. The nomenclature of business and finance can be very challenging! Next time you are in a business meeting, talking to friends or applying for business funding, make sure you know the definitions of these important financial terms. Paragon hopes this glossary of AR finance and factoring terms will help.
3rd Party Payee
A 3rd Party Payee is a term you will see in medical factoring. The medical provider wants to monetize her AR. However, her client is typically individual patients, but the bills are paid by a 3rd party, i.e. Medicare, Medicaid, Humana, Blue Cross, etc. This is why Medical Factoring
is a small subset of general factoring. However, Paragon does have robust Nurse Staffing
and Medical Transcription
Programs for our B2B and B2G clients.
5 ‘C’s of Small Business Lending
Commonly referred to as the 5 ‘C’s
, here is what a lender will want to know about a business owner and their business:Character
– If you want a loan for your business, the lender may consider your experience and industry track record in your business and industry to evaluate how trustworthy you are to repay. When the going gets tough, will you help the lender get their monies back? Are you a help or a drain on your business? Lenders need to know the borrower and guarantors are honest and have integrity.
– This is perhaps the most important aspect a banker will look at when considering a loan approval. As history is the best predictor of the future, a lender will examine the personal credit of all borrowers and guarantors involved in the loan. A factoring company puts less emphasis on the Credit Score of the business owner and looks more into the Credit Score of the business’ customers (the Account Debtors).
– Lenders are going to look at your monthly and annual revenue and base this amount on the company’s ability to pay back the loan. A Factor will look at your gross margins and make sure you have a profitable business after the cost of factoring and credit protection. However, at Paragon we are very start-up
– Bankers are risk-averse and need to make sure the business has a means of paying back the loan in the case the capacity or revenue is lower than expected. Factoring companies often work with start-ups and companies with less capital on hand. They can do this based on the credit risk shifting from the business owner to business owner’s clients. An Invoice Factoring Company can turn your solid AR into “Capital”.
– Banks and traditional lenders consider assets like real estate or capital equipment as collateral. Banks will also look at accounts receivable or monthly credit card receipts as collateral as well, but an Invoice Factor or MCA Lender will typically assign a higher value.
An Account Debtor is any person or company that owes a balance on a monetary account to another party. In a factoring transaction, that is the creditworthy B2B or B2G Customer of the factoring company’s Client, who the Client has invoiced for the delivered services or goods (in arrears) on open terms.
Accounts Payable (AP)
Accounts Payable is the money that is owed to a company’s creditors. An example would be when a company buys goods from a supplier on open terms. That company owes the supplier payment for these goods. Accounts payable represents the money that is owed to the supplier and is a Current Liability on the Balance Sheet.
AP or Accounts Payable Aging
A periodic report that categorizes a company’s accounts payable according to the length of time an unpaid invoice has been outstanding. Similar to an accounts receivable aging, it is a critical management tool as well as an analytic tool that helps determine the financial health of a company by its ability to pay its bills on time. Credit memos and partially paid invoices will also be listed in the AP Aging.
Accounts Payable Financing
Accounts Payable Financing
allows a company to pay their supplier immediately (cash on delivery or COD) without having to use their own working capital. This is also known as trade credit financing. This type of financing gives the company a longer term to pay back the creditor or when they sell the inventory.
Accounts Receivable (AR)
Accounts Receivable are monies owed to a company by their customers (another business, a government entity or individual) for goods or services sold on terms. Accounts receivable are a Current Asset on a company’s Balance Sheet. In most businesses the “bodies are buried” in the AR and the inventory.
For example, AR over 90 days past due or of questionable collectability should be moved to Bad Debt so as not to be counted.
Besides cash, AR is the most liquid asset on a business’ balance sheet and is the most readily monetized via invoice factoring, accounts receivable financing or Asset-based Lending (ABL).
AR or Accounts Receivable Aging
A periodic report that categorizes a company’s accounts receivable according to the length of time an invoice has been outstanding. Accounts Receivable Aging
is a critical management tool as well as an analytic tool that helps determine the financial health of a company’s customers, and therefore, the health of their business. Credit memos and partially paid invoices will also be listed in the AR Aging.
Accounts Receivable Financing
Accounts Receivable Financing
is when a company turns its AR (accounts receivable) into ready cash versus waiting 30, 45 or even 90 days for their monies. Asset Based Lending (ABL) companies offer this short-term business funding based on your company’s good AR using a formula of availability (borrowing base). There may also be spot verification to determine the quality of your accounts receivable.
Accounts Receivable Verification
Accounts Receivable Verification is part of the due diligence process of AR Factoring. The factoring company will verify the accounts receivable of their client’s customer (the Account Debtor). The factor is verifying that the Account Debtor is happy with the quality, quantity and timeliness of the service or product provided. The invoice dollar amounts, terms, and conditions will also be verified.
Accrual vs Cash Basis Accounting
Accrual and Cash Basis Accounting are two different methods used to record a business’s income and expenses. Under the accrual method, transactions are recorded when they happen, without regard to monies being paid or received. With the cash basis, income is recorded when payment is received, and expenses are recorded when they are paid.
The accrual basis tends to smooth out a company’s earnings versus using the cash basis. However, cash basis accounting can better reflect true cash flow and discount any AR not paid in full for reasons such as slow-pay, bad debt, and allowances.
After Action Review (AAR)
A four-step process developed by the US Army and now used by businesses and other organizations. An AAR is a structured review or de-brief process for analyzing what happened, why it happened, and how it can be done better by the participants and those responsible for the project or event. AAR’s should be carried out with an open spirit and no intent to blame. The American Army used the phrase “leave your rank at the door” to optimize learning in this process. Some groups document the review results; others prefer to emphasize the no-blame culture by having no written record. AAR is a form of group reflection.
Articles of Incorporation
Articles of Incorporation or Certificate of Incorporation acts as a charter to establish a new corporation with basic information of the business. The document is filed with the government during the formation of a C corp or S corp. The document outlines information such as the company’s name, street address, agent for service of process, and stock to be issued.
Asset Based Lending (ABL)
Asset Based Lending
(ABL) is a credit facility based on primarily leveraging a company’s assets as collateral. An Asset Based Lender is giving you an Asset Based Loan typically tied to inventory, accounts receivable, intellectual property and your machinery & equipment.
An Assignee is a person, company or entity who has been assigned and receives the transfer of payments, proceeds, property, title or rights as defined in a legal agreement.
Automated Clearing House (ACH) & ACH Loans
Automated Clearing House (ACH) is a financial network allowing a business to electronically collect payments from their customers either in a single transaction or as recurring payments directly from the customer’s checking or savings account.
The term ACH has also morphed into an ACH Loan. An ACH loan and a Merchant Cash Advance (MCA) are similar. While an MCA loan is really an advance based upon your regular and predictable volume of credit card transactions, the ACH loan is a “cash flow” loan. Instead of looking at your credit card transactions, the ACH lender looks at the average daily balance of your business checking account.
Both ACH & MCA loans tend to be the fastest (good) and most expensive (bad) monies a business can obtain.
B2B, B2C & B2G Sales
These are the abbreviations for Business to Business (B2B), Business to Consumer (B2C) and Business to Government Sales (B2G), respectively. Invoice factoring is for B2B and B2G Sales on open terms. ACH & MCA products can typically be used for companies with B2C Sales that need funding.
A Balance Sheet is a financial document showing a company’s assets, liabilities and shareholders’ equity at a specific date; for instance at a month, quarter or year-end. The profit shown on the bottom of the Income or P&L Statement should ALWAYS match the profit on the bottom of the corresponding Balance Sheet. Most importantly, one without the other is near worthless.
Bill & Hold
Bill & Hold is when a seller of product or goods bills a Customer for the product but does not ship the product to them until a later date. It can make it more difficult for a factoring company to fund in this situation since the end user has not received and inspected the goods.
Bill of Lading
A Bill of Lading is a document from a shipping company regarding the number of packages with a particular weight and markings and gives title
of that shipment to a specified party
. A factoring company will look to the Bill of Lading as part of the proof of delivery.
When the shipper and receiver are not aware of one another, the freight shipment is called a Blind Shipment. In such cases, the bill of lading lists the party that paid for the shipment as the shipper or receiver of the freight shipment. Why would someone utilize a Blind Shipment? Small Vendors and Suppliers worry about large companies discovering their sources and vice-versa. Blind Shipping minimizes this risk of being cut out of future transactions.
Borrowing Base is the value assigned to a company’s assets, which is then used by lenders as criteria for providing availability under a loan agreement. These assets can sometimes be considered as collateral for the loan. Inventory and Accounts Receivable Asset Based Lending will many times use a Borrowing base to determine the eligible assets that can be borrowed against.
The point at which the income from sale of a product or service equals the invested costs, resulting in neither profit nor loss; the stage at which income equals expenditure. Our goal at Paragon is for companies to use our working capital solutions so they can grow past and through their Break-Even Point.
The rate at which an enterprise spends money, especially one venture capital, angel or private equity backed, in excess of income. A company cannot be Negative Cash flow forever (unless you are Tesla or Uber, apparently) and must eventually get to a Break-Even Point.
Cash Against Documents (CAD)
Cash Against Documents
(CAD): In Documentary Collection (D/C or Cash Against Documents) credit providers act as facilitators for their clients by only releasing funding on proper document presentation. Cash against documents funding is a much more robust type of cash on delivery (COD) payment arrangement for import transactions.
However, CAD or D/C’s offer limited verification and recourse in the event of non-payment versus a Letter of Credit (L/C). CAD also known as Drafts are generally less expensive than Letters of Credit (L/C’s), but (as stated) typically lack their control and safety.
“There’s no doubt about it: manufacturers who fail to meet a retailer’s vendor standards can get into financial trouble. After all, shave off $20 here for a short lot, $5 there for a cracked pallet and $10 over here for a mangled shipping label, and before long, it can run into real money. Manufacturers, consultants and trade groups supplying retail businesses are up at arms over these chargebacks
, arguing that their profits are being slashed unmercifully–and sometimes unfairly–by retailers claiming noncompliance.
In some cases, they say, the requirements are petty, arbitrary or even illogical. What’s more, retailers may change the standards regularly, making it difficult to keep up with what’s required. Even though retailers will swear to you that chargebacks aren’t a profit center, the candid opinion in the industry is that retailers intentionally make compliance difficult to make it a profit center, says Norman Katz, CEO of vendor-compliance consulting firm KatzScan Inc. of Deerfield Beach, FL.”
A company under contract to sell and assign their receivables to Paragon. Our clients also enjoy Credit Protection and AR Management. Our client’s customers are referred to as the Account Debtors.
is when a business has only one or a few large customers representing the majority of the business’ revenue. Many banks and factoring companies frown upon client concentration. However, Paragon with its credit protection program is fine with most client concentration situations.
Collateral is a specific asset owned by a borrower that is leveraged against the repayment of a loan. In invoice factoring, it would be your contracts, invoices, and proceeds.
Confession of Judgment (COJ)
A written authorization within a loan agreement by the borrower giving the lender a judgment against the borrower in the event there is a default. A Confession of Judgment (COJ) clause or document (many times notarized) allows the creditor (lender) on a default event, to appear in court and deliver the Notarized COJ to the judge and request a default judgment against the borrower. You see this many times in MCA and other “Hard Money” loans.
First, a consignment is NOT a sale. It creates an agency relationship between the consignor and the consignee, where the product, goods or produce continues to belong to the consignor until the consignee sells it on the consignor’s behalf.
A Consignment Sale
is a trading arrangement in which a seller sends goods to a buyer or reseller who pays the seller only as and when the goods are sold. A consignor who consigns goods to a consignee transfers only possession, not ownership, of the goods to the consignee. The seller typically remains the owner (title holder) of the goods until they are paid for in full and, can after a certain period, take back the unsold goods. This arrangement is also called a Guaranteed Sale, sale or return, or goods on consignment.
You can see the inherent problem with these Sales Terms if you are a small manufacturer, wholesaler or importer dealing with a large retailer. You don’t want the goods back (you want your money) and if they do come back there is a very good chance the product will no longer be of first quality. Also, what if your customer files bankruptcy with your consigned goods in their possession? Lawyer Jeffrey Wurst has a very good blog on Protecting Rights in Consigned Goods.
On a side note, be careful of a retailer offering you 180-day terms on a trial order. This is a defacto Consignment Sale and not typically financeable. This is also a very risky proposition.
A Contra Account, in terms of AR financing or Invoice Factoring, is when the Factoring Company’s Client and their Customer (the Account Debtor) each owe the other monies. For example, slotting or advertising fees in retailing. This must be disclosed immediately to the working capital provider so the borrowing base or availability can be adjusted accordingly.
is the availability of working capital (sometimes called a mobilization draw) prior to the Government payment to a contractor before the acceptance of goods or services by the Government. You often see these with SME/MBE set-asides. Paragon has a robust Government SME/MBE Funding Program.
, Trade Credit Insurance or AR Credit Insurance, is an insurance policy and a risk management product for companies wishing to protect their accounts receivable from loss due to credit risks such as Customer (Account Debtor) bankruptcy. Paragon does not sell credit insurance (of course), but has purchased its own credit insurance policy, which our clients enjoy the benefit of as Non-Recourse Credit Protection
A Credit Memo, in terms of goods or services, is issued by a seller in order to reduce the amount that a customer owes from an earlier sales invoice. A credit memo may be issued based on a buyer returning goods, taking an allowance, a price dispute, or other reasons where the buyer is no longer obligated to pay the full original amount of the Invoice. Credit memos should always be disclosed to your factoring company immediately.
Cross-Aged Accounts (10% rule)
This amount is deducted when a borrower has a customer with balances over 90 days, and also balances under 90 days. The rule states that when a customer has more than 10% of their total balance aged over 90 days, the remaining balance is also deducted as ineligible. While 10% is the most common cross-age percentage, lenders will sometimes increase the amount to 15% or 20%. The idea behind this ineligible category is that if a customer has not paid their outstanding over 90 days, it is highly unlikely they will pay the current portion (unless in dispute or because of a billing/accounts payable error).
Current Assets represent the value of all assets within a business that are Cash or expected to be converted into cash within one year and are found in the Asset Section of a Balance Sheet.
A company’s debts or obligations that are due within one year. Current liabilities appear on the company’s Balance Sheet and include short-term debt, accounts payable, accrued liabilities and other current debts.
Current Portion of Long-Term Debt (CPLTD)
Current Portion of Long-Term Debt (CPLTD) represents the amount of a company’s long-term debt that must be paid within the next year. This concept is important to help determine the amount of working capital a company needs to service their debts over the next 12 months. This is found in the Current Liabilities in the Balance Sheet.
Days Sales Outstanding (DSO)
Days Sales Outstanding
(DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. DSO is often determined on a monthly, quarterly or annual basis and can be calculated by dividing the amount of accounts receivable during a given period by the total value of credit sales during the same period, and multiplying the result by the number of days in the period measured.
A low DSO value means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect the monies. Historically, large companies take 45 days to pay smaller vendors and suppliers.
Paragon clients typically see their DSO go down with our AR Management and Credit Protection in place.
Debt Service Coverage Ratio (DSCR)
Debt Service Coverage Ratio (DSCR) is the amount of cash flow a company has to cover its debts over the period of one year.The ratio is the net operating income compared to the amount of debt being serviced including interest, principal and lease payments. It has become a popular benchmark for determining a company’s approval for a loan. In smaller companies the owner’s salary must be covered too. Lenders typically like to see a DSCR of 1.25 or higher.
is funding provided to a company that has filed for chapter 11 bankruptcy protection from creditors. It is typically available to companies where lenders believe the company has a credible chance and a viable plan to turn itself around. It is not available to firms that simply want to liquidate the company. Paragon offers DIP funding.
Deductions are funds subtracted by the customer (the account debtor) when paying a client’s invoice (other than discounts) and are typically unknown to the factoring company. If known to the Factor’s client they should be disclosed immediately.
Deposit Account Control Agreement (DACA)
Deposit Account Control Agreement (DACA) is an agreement between a debtor, secure party and the debtors bank where the bank agrees that the secure party controls the deposit account of the debtor. This agreement is part of the Uniform Commercial Code UCC §9-104
Dilution is comprised of discounts, chargebacks, credit memos, marketing allowances, end cap
& slotting fees
and other deductions that reduce the final payment amount against an Invoice.
A Discount is a reduction in the selling price of the merchandise as indicated by the “Terms of the Sale”. There are two major types:
- An early pay or cash discount is an incentive for quicker payment from your B2B or Government Customer. It is a deduction for paying within a stated shorter period of time. For example, 3% Cash, 2% 10 days or Net 45 days is a typically seen early pay discount. Be careful that your large corporate Customer doesn’t take the 2% discount and still takes 60 days to pay you!
- A trade discount is not a reduction for early payment. Rather it is a deduction which the customer takes because the discount offered is customary in a particular industry or the customer purchased merchandise in large quantities.
Due Diligence is researching a business and its owners in preparation for a business transaction. ACH and MCA lenders will have minimal due diligence and conversely, be the MOST expensive source of capital. A bank line will have the most expensive and time-consuming due diligence and will typically be the cheapest source of monies. Invoice factoring will be somewhere in between but can typically be the safest and offer the highest percent of capital available based on your good, clean AR.
Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA)
Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) is a measurement of a company’s financial performance and current operating profitability. It is calculated using a company’s net earnings, before interest expenses, taxes, depreciation and amortization are subtracted.
is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. It might also factor their invoices to mitigate credit risk. Factoring is commonly referred to as accounts receivable factoring, invoice factoring and sometimes erroneously accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset-based lending (ABL) using a company’s accounts receivable as collateral.
A cash advance to a Client (usually by wire transfer or ACH) for 80-90% of the value of the purchased and verified Invoice. Our goal at Paragon is to verify and fund the same day as invoice receipt (if before 10am with a wire transfer to you by 4pm).
Factoring Discount Fee or Factoring Rate
The Factoring Discount Fee or Factoring Rate is the cost to you for Invoice Factoring, AR Management and Credit Protection from Paragon. It is typically based on your monthly volume and creditworthiness of your Customers (the Account Debtors) and can range from .9-2.5% per thirty days and typically includes AR Management and Credit Protection services at no additional charge at Paragon.
Be very careful when doing a factoring rates comparison as there can be line fees, non factored fees in addition to the factoring discount fee.
The first payment to your company, the Factoring Advance, is typically 80-90% of the invoice value, and is made once the invoice is received and verified. As stated above, our goal at Paragon is to verify and fund the same day as invoice receipt (if before 10am with a wire transfer to you by 4pm). The remaining 10-20% is held in reserve (The Factoring Reserve) until the invoice is paid. Once the invoice is fully paid, the Factoring Reserve is rebated, less any Factoring Discount Fee.
The Federal Acquisition Regulations (FAR)
The Federal Acquisition Regulations
(FAR) is a substantial and complex set of rules defining the federal government’s purchasing process with suppliers. Selling to the government can be a great way to grow your small business, but it can be intimidating. Paragon understands the FAR and specializes in Government Receivable Funding
and can help you grow your business through sales to government entities.
The Financial Statements are the Income or Profit & Loss Statement and Balance Sheet of a company, which report the company’s sales, expenses and profit (income statement) and its assets, liabilities and net worth (balance sheet). Financial statements can be either Accrual or Cash-Based.
The term FinTech represents the emerging financial technology industry composed of companies using new technology and innovation to improve on the delivery of financial services.
Fraud can be any number of dishonest practices whereby a client and/or Account Debtor attempts to defraud a factoring company.
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) represents the standard account practice guidelines or the common way financial accounting is reported and recorded for a company (public or private), not-for-profit organization, or state or local government.
Gross Margin is the difference between revenue and cost of goods sold, or COGS, divided by revenue, expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially).
Gross Margin is often used interchangeably with Gross Profit, but the terms are different. When speaking about a dollar amount, it is technically correct to use the term Gross Profit; when referring to a percentage or ratio, it is correct to use Gross Margin. In other words, Gross Margin is a % value, while Gross Profit is a $ value. You should know both your Gross Margin and Gross Profit before talking to a funding source. These are also great business management tools.
Income or Profit & Loss Statement (P&L)
An Income or Profit & Loss Statement (P&L) is a Financial Report that shows the total revenue and total expenses over a specific period of time, usually a month, fiscal quarter or an entire year. The profit shown on the bottom of the P&L should ALWAYS match the profit on the bottom of the corresponding Balance Sheet. Most importantly, one without the other is near worthless.
The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC). They are widely used in International commercial transactions or procurement processes and the Incoterms rules have become an essential part of the daily language of trade.
Indemnification is typically an agreement in which one party agrees to protect or to hold harmless another party from financial loss or legal action.
are negotiable instruments or short terms assets that a company counts as an asset, but that a lender will not count as eligible collateral. Ineligible accounts might include accounts receivable that are more than 90 days past due, contra accounts, foreign accounts, affiliates (inter-company and employee) accounts, consignment sales, retention, change orders, pre-billing, stale inventory, WIP or illiquid investments.
An Inspection Certificate provides proof that goods being shipping is, in fact, what the customer ordered, and is also of good quality. Many times the inspection report is from an arms-length third party inspection service. A purchase order or vendor agreement will many times reference the need for an inspection certificate.
Inventory or Stock refers to the goods and materials that a business holds for the ultimate purpose of resale. It is a Current Asset on the Balance Sheet. Most manufacturing organizations usually divide their “goods for sale” inventory into:
- Raw Materials – materials and components scheduled for use in making a product
- Work in Process or WIP – materials and components that have begun their transformation to finished goods
- Finished Goods – goods ready for sale to customers
- Goods for Resale – returned goods that are salable
- Stocks in Transit
- Consignment Stocks
In most businesses the “bodies are buried” in the inventory and the AR. For example Pre-billed goods should be taken out of inventory and put into AR or they can be double counted. In addition, inventory not readily saleable in the next 12 months should be written down in value.
is a type of asset based lending that is based on a company’s convertible or saleable inventory assets. To constantly ascertain what is easily convertible and quickly saleable inventory is labor intensive and why Inventory Financing is not easy to obtain.
An Invoice is legal document listing a service delivered or merchandise shipped, the ship to name and address, the bill to name and address, the cost and terms of the sale. It is also important that the invoice reflects the proper legal name of the customer or payor. Many times an Invoice will also reference backup materials such as the corresponding purchase order, vendor agreement, proof of delivery, time cards, inspection certificates, etc.
An Intercreditor Agreement is an agreement between one or more creditors who have shared interests in a particular borrower. The agreement spells out aspects of their relationship to each other and to the borrower so that, in the event a problem emerges, there will be ground rules in place to handle the situation. The specifics of an inter-creditor agreement vary depending on the borrower, the type of debt, and other factors, such as the presence of cosigners.
Letter of Comfort or Financial Capability Certification Program
This program provides Paragon’s clients with a contingent financing commitment
so that they can demonstrate to government contracting officers and large US corporations that they possess the financial wherewithal to execute on contract awards. This results in Paragon’s clients being able to bid and win more (and larger) contracts! This program is very advantageous to SME, MBE and DBE’s.
Letter of Credit (L/C)
A Letter of Credit
(L/C) is payment arrangement used typically in International Trade. The issuing bank guarantees that an exporter will receive payment in full as long as certain delivery conditions have been met. In a Standby Letter of Credit, if the importer is unable to make payment on the purchase, the bank will cover the outstanding amount. A Letter of Credit (L/C) is typically more expensive than Cash Against Documents funding but offers more safety and control.
LIBOR or ICE LIBOR
(previously BBA LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It stands for IntercontinentalExchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. On December 21, 2015 the 1 month LIBOR Rate was .22%
Line of Credit (LOC)
A Line of Credit (LOC) is a credit facility provided to a government, business or individual by a financial institution or other commercial funder. The borrowing can typically draw down on the account at any time, with a maximum limit which cannot be exceeded. The advantage with a LOC over a term loan is a borrower is typically only charged interest on the amount withdrawn at any given time vs an entire loan amount.
Lock Box Payment Services
Lock Box Payment
is a service provided by banks and finance companies to clients for the receipt of payment from customers (Account Debtors). Under the service, the payments made by customers are directed to a special post office box, rather than going to the company. The bank/finance company will then go to the box, retrieve the payments, process them and deposit the funds directly into the client’s bank account.
Factoring companies including Paragon also use a lockbox payment arrangement for Account Debtor payments. Paragon also offers 24 hour online report access to our clients as part of our AR Management and Credit Protection Programs..
Long-Term Debt (LTD)
Long-Term Debt (LTD) are loans or other financial obligations that are being paid down over the span over more than one year. You will find long-term debt in the long term section of the Liabilities on a Balance Sheet.
Merchant Cash Advance (MCA) or MCA Loan
A Merchant Cash Advance (MCA)
isn’t technically a loan, but is one of the most popular methods used by small business owners who deal with credit cards (restaurants and other retail merchants). Although often referred to as MCA loans, they are an advance based upon a business’ monthly volume of credit card transactions. A regular and predictable flow of credit card transactions will often help a small business find the funds they need when traditional small business financing is unavailable. However, MCA’s are historically one of the more expensive sources of working capital for a small business.
MCA Factor Rate
The factor rate multiplied by the advance amount equals your total loan obligation to the Merchant Cash Advance provider. For example, if your MCA loan amount is $50,000 and your factor rate is 1.2, your total payback amount will be $60,000 ($50,000 x 1.2). Note: Your APR can change dramatically if you pay this $60,000 back daily over 1 month vs 3 months vs 6 months. See the example MCA Rate Chart
found here for the Factor Rate to APR conversion.
MCA ACH Loan Rule of Thumb
Whatever the MCA Rate Factor dollar amount is over the payback period, your net profit should be more. If not, at the end of that period you will be that much closer to bankruptcy. For example, if the ACH loan cost is $20k and you are paying it back over 3 months and your net profits are less than $20k in those 3 months – DON’T DO IT!
An ACH loan only makes sense if you are using the money for a one-time, high-profit transaction or you need that last $20k to open your next location or buy a piece of equipment to generate more incremental sales and profits.
Negative Cash Flow
Negative Cash Flow is when cash flow into a business is less than the cash being spent over a specific time period. You will also hear the term Burn Rate being used in startups.
Net Funds Employed (NFE)
The NFE is the balance of outstanding Advances on a Client’s Accounts at any given time. NFE can also refer to a type of pricing factoring companies occasionally offer to clients, whereby the fee charged is based on NFE. However, this type of pricing can be more complex and difficult for a Client to calculate their true cost of working capital.
Notice of Assignment
The Notice of Assignment is a legally binding notice sent to our client’s customers advising them to redirect payments on all client accounts to Paragon. Under the UCC laws, if a customer pays any other party, they have not relieved their legal obligation to pay the factoring company.
Non-Notification or Blind Notification
Non-Notification or Blind Notification is a type of factoring agreement that reduces direct communication between a factoring company and the factoring company’s client’s customer. The fact that the company is using a factoring company is typically not known to their customer. Under a standard factoring agreement the factoring company deals directly with their client’s customer under the verification and AR management process.
However, only the largest most creditworthy companies qualify for non-notification factoring and many of them do it only for the Credit Protection and AR Management (they don’t even take the Factoring Advance). For example, many Fortune 1000 companies will sometimes use non or blind notification to offload AR from their Balance Sheet.
Non-Recourse Factoring or Without Recourse Factoring
or Factoring Without Recourse is an agreement within a factoring contract where the factors client does not have to pay back the factoring company if an invoice is not specifically paid due to bankruptcy of the client’s customer (the Account Debtor) under an invoice with credit protection in place. Paragon offers Credit Protection as part of our Non-Recourse Program.
The process of notifying a customer of their obligation to pay Paragon under the terms of a factoring agreement. Typically formalized by the mailing of a Notice of Assignment.
An operating agreement is a document describing how a limited liability company (LLC) will carry out business obligations between its owners. Many states in the United States require an LLC to have an operating agreement. LLCs operating without an operating agreement are governed by the state’s default rules contained in the relevant statute. An operating agreement is similar in function to corporate by-laws.
Paid in Capital
Paid in Capital represents funds raised by the business from equity (investors & owners), and not from revenue or ongoing operations. It is listed in the Equity Section of the Balance Sheet.
Pay when Paid Clause
A Pay when Paid Clause in the vendor agreement requires payment to the subcontractor when the prime contractor gets paid by the project’s owner. A prime contractor’s obligation to pay is triggered upon receipt of payment. However, what happens if the prime contractor is underpaid or not paid at all? This is why Construction Factoring
is a small subset of general factoring.
However, Paragon has worked with many subcontractors if their prime customer is a strong credit.
Perishable Agricultural Commodities Act (PACA)
The Perishable Agricultural Commodities Act (PACA) protects businesses dealing in fresh and frozen fruits and vegetables by establishing and enforcing a code of fair business practices and by helping companies resolve business disputes. The Agricultural Marketing Service (AMS) is responsible for administering PACA and offers many PACA-related services to the produce industry.
A Personal Guarantee is an agreement signifying an individual, organization or a company accepts responsibility for a 3rd party debt in the event the debtor fails to pay.
Pre-Billing is submitting a request for payment before your product or services have been provided to you customer. If you are pre-billing this should be disclosed to the factoring company immediately.
Principal and Interest (P&I)
The Principal and Interest (P&I) is combined which represents the total scheduled loan payment amount. Principal (P) is the amount of the original loan still owed to the financial institution along with the interest (I) that is being applied to that loan on a monthly basis.
Property, Plant, and Equipment (PP&E)
Property, Plant, and Equipment (PP&E) is part of a company’s Balance Sheet representing long-term assets that are crucial for daily operation. PP&E includes a company’s property, machinery, office equipment, vehicles, furniture, and fixtures, less any depreciation or amortization.
The Prime Rate is the interest rate that commercial banks charge their most credit-worthy customers, which are typically corporations. On December 21, 2015 it was 3.5% in the US.
Proof of Delivery (POD)
Proof of Delivery (POD) is a receipt signed by the recipient of goods, confirming delivery
of a shipment
along with the proper quantity and quality. It will many times include a copy of the Bill of Lading.
A Purchase Order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, quality, timeliness and agreed to pricing for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. The offer is accepted by the seller when she supplies the requested items. A contract is formed and the seller can expect payment in return for the delivered goods.
The federal government will sometimes issue blanket purchase agreements (BPA). A blanket purchase agreement is a simplified acquisition method that government agencies use to fill anticipated repetitive needs for supplies or services. Essentially, BPAs are like “charge accounts” set up with trusted suppliers.
Purchase Order Funding or PO Financing
Purchase Order Financing
is a funding option for businesses that need cash to fill single or multiple customer orders. In many businesses cash flow problems exist and there will be times when there is not enough monies available to cover the costs of having available product to ship or monies to entice their vendor to release goods for resale.
You typically can
have Invoice Factoring or Financing without PO Funding but you cannot
have PO Funding without Invoice Factoring as most PO Funders want the protection and safety of being paid by an AR Funder.
Quick Ratio or Acid Test
The Quick Ratio
is a financial ratio used to gauge a company’s liquidity. The Quick Ratio is also known as the Acid Test. The Quick Ratio compares the total amount of cash + marketable securities + accounts receivable to the total amount of current liabilities. i.e. Very liquid assets to bills that need paid soon. A Quick Ratio of less than 1.0 is typically the sign of a company with cash flow issues and 2.0+ is that of a healthy company with good cash flow.
is when a borrower agrees to pledge their own assets against funding from a bank or other lender in case the borrower is unable to meet the debt obligations. Recourse factoring is when the client will repay or replace an unpaid invoice after 90 days or the time frame set in the factoring agreement.
Retention is the percentage of payments for a job in process that is held back to ensure adequate performance. Retention is considered an ineligible AR because it takes a long time to collect and it is common for disputes to arise regarding payment.
Reverse Factoring or Supply Chain Financing
or Supply Chain Financing
is when a bank or finance company commits to pay a company’s invoices to the suppliers at an accelerated rate in exchange for a discount. It is unlike traditional invoice factoring, where a supplier wants to finance his receivables. Reverse factoring or supply chain financing is a financing solution initiated by the ordering party to help his supplier finance their receivables more easily and typically at a lower interest cost than what would normally be offered.
US Small Business Administration (SBA)
The US Small Business Administration (SBA) was created by the US government to provide small businesses with loans, loan guarantees, contracts, counseling sessions and other forms of small business assistance. The SBA also gives small businesses the opportunity to bid on government contracts and sales of surplus property. Most “SBA loans” are loans made by traditional lenders (where a large portion of the loan is guaranteed by the SBA) and not loans made by the SBA itself.
SBA guaranteed loans typically give little availability based on your AR. Paragon has a program to work with SBA lenders to make available the working capital trapped in your Accounts Receivable.
Small & Medium Enterprise (SME) Financing
Small & Medium Enterprise (SME) Finance
is the funding of small and medium-sized businesses, and represents a major function of the general business finance market. Paragon has specific programs for MBE’s (Minority Business Enterprises), DBE’s (Disadvantaged Business Enterprises) & SME’s to meet their unique working capital needs. Paragon also has a robust Letter of Comfort or Financial Capability Certification Program for SME’s and MBE’s.
Statement of Work
A Statement of Work (SOW) is a document, routinely employed in the field of project management, which defines project-specific activities, deliverables, and their respective timelines, all of which form a contractual obligation upon the vendor, in providing services to the client.
A Subordination Agreement is when a creditor is placed in a lower priority for the collection of its debt from its debtor’s assets than the priority the creditor previously had, In common parlance, the debt is said to be subordinated but in reality, it is the right of the creditor to collect the debt that has been reduced in priority. The priority of right to collect the debt is important when a debtor owes more than one creditor but has assets of insufficient value to pay them all in full at the time of a default.
Paragon will sometimes enter into subordination agreement with banks and other lenders so clients can enjoy higher cash flow by unlocking the value in their Accounts Receivable. Paragon can also enter into a subordination agreement with taxing authorities to facilitate funding companies with Tax Issues.
Supply Chain Financing or Reverse Factoring
Supply Chain Financing
, also known as Reverse Factoring, is a form of factoring in which the high credit standing of a large purchaser is substituted for the credit rating of a supplier to achieve a lower cost of working capital to the supplier. Supply Chain Financing can also allow the large company to take extended payment terms.
Terms of the Sale
Terms of the Sale is an agreement between the buyer and the seller which references the price of goods being sold, the return policy, delivery
location, time of shipment
and payment terms. The sale’s terms may also reference the purchase order and the vendor agreement. The vendor agreement can be many pages long and applies not only to your company but your assignees, i.e. your factoring company.
is the term used for financing of international trade. Trade finance includes such activities as Cash Against Documents, credit insurance, export credit, bid and performance bonds, lending, trade-related promissory notes, Letters of Credit, purchase order funding, bills of exchange, trade acceptance drafts (TADS), supply chain financing, Vendor Guarantees and invoice factoring.
A “True Sale” means that the Big Box Retailer is purchasing the product from you and is obligated to pay you whether they sell it or not; the risk of sale is transferred to Mr. Retailer as soon as they accept delivery. Typically, factoring companies will only fund invoices that are a True Sale versus a Consignment or Guaranteed Sale.
A Turnaround represents a company demonstrating an improving financial situation after it has been performing poorly for an extended time or after a catastrophic event. Paragon will many times fund companies in a turnaround
Uniform Commercial Code (UCC) Filing
A Uniform Commercial Code (UCC) Filing is a legal public notice that a creditor files (i.e., banks, ABL’s and factoring companies) to disclose that it has an interest in the assets of a debtor. A UCC-1 financing statement (an abbreviation for Uniform Commercial Code-1) is the specific legal form that a creditor files to give notice that it has or may have an interest in the assets of a debtor (an entity who owes a debt to the creditor as typically specified in the agreement creating the debt). This form is filed in order to “perfect” a creditor’s security interest by giving public notice.
Legitimate finance companies and intermediaries will not ask for an upfront fee. A due diligence fee on the execution of the funding proposal from a reputable finance source (not a broker or intermediary) is customary to cover some of the costs of underwriting. The due diligence amount will typically vary based on the size and complexity of the funding facility.
Most large corporations have their own Vendor or Supplier Agreement that spell out their terms and expectations with their suppliers. For example, here is Kroger’s 32 page Standard Vendor Agreement
. It is interesting that Kroger lists the 50 or so names it operates under on Page 17 including Fred Meyer, Harris Teeter, and Tom Thumb Food Stores.
A Vendor Guarantee
or Vendor Assurance Program is when goods are pre-sold but your company’s credit and/or time in business will not allow you to buy the goods from your supplier on terms. Think of the Vendor Guarantee as an agreement between your company, your supplier and your invoice factoring company (Paragon).
If you have a bulk order to fulfill and are falling short of credit from your supplier, then the factoring company agrees to pay your supplier directly from the proceeds of factored invoices. Paragon acts as a guarantor to your supplier that they are paid if the goods meet quality, quantity, and timeliness specifications and are received and approved by your customer (the Account Debtor). Paragon many times offers our clients a Vendor Assurance Program with our Invoice Factoring Facilities.
Vendor Management System or VMS
A Vendor Management System
(VMS) is an Internet-enabled, often Web-based application that acts as a mechanism for business to manage and procure staffing services – temporary, and, in some cases, permanent placement services – as well as outside contract or contingent labor. Many times the term VMS will also refer to the Account Debtor (Paragon’s client’s customer) who is the outsourced vendor of the larger Fortune 1000 company versus the Fortune 1000 company itself.
For example, one large VMS company will supply all the nurses to multiple hospital locations and procure those nurses from local smaller staffing companies (Paragon’s clients). Paragon’s client will then bill the VMS and factor the invoices generated with Paragon. The availability of Credit Protection can be a critical component in these type 3rd party transactions as VMS companies have filed for bankruptcy in the recent past.
A Vendor Portal provides a single web interface for a large Company’s suppliers to log-in and view open orders and balances as well as to submit information such as electronic invoices, delivery notifications, acknowledgments, remit to advice and more.
A Vendor Portal allows companies and its vendors to share specific management information for mutual benefit, using Internet technology. In a Vendor Portal, each vendor has a tailored view of its data and is allowed access to only the specific information the company wants that vendor to see.
Work in Process (WIP) Financing
Work in Process or WIP Financing
(not to be confused with work in progress, a term used in construction or the building trade) is the portion of your inventory that is being “worked”. Because of its unsalable condition, most lenders value WIP inventory lower than raw or finished (salable) inventory. Production Financing describes the same.
The Z-score formula for predicting a company’s bankruptcy was first published in 1968 by Edward Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula predicts the probability that a firm will go into bankruptcy within two years.
Z-scores are used to predict corporate defaults and are an easy-to-calculate control measure for the financial distress status of a company.