Receivables finance glossary

This receivables finance glossary defines the terms you will meet when funding invoices, from factoring at the bottom of the funding ladder to securitization at the top. For how they fit together, start with what accounts receivable securitization is.

A to C

Accounts receivable (AR)

Money owed to a business by its customers for goods or services already delivered, recorded as invoices payable on credit terms.

Advance rate

The share of eligible receivables funders pay for upfront, for example 85% or 90%. The rest is held back as protection against dilution and losses and comes back to the seller as customers pay.

Aging report

A list of unpaid invoices grouped by how long they have been outstanding, for example current, 1 to 30 days and 31 to 60 days past due.

Asset-based lending (ABL)

A loan to a company secured on its assets, usually receivables and inventory, sized by a borrowing base and governed by covenants and regular reporting.

Bankruptcy remote

A structure designed so that if the seller became insolvent, its creditors could not reach the assets held by the special purpose vehicle.

Borrowing base

The amount a company can draw at any time, calculated from its eligible receivables (and sometimes inventory) multiplied by the advance rate.

Collection account

A bank account controlled by the funding program that customers pay into, so collections reach the program before anything else. Also called a controlled account or lockbox.

Concentration limit

A cap on how much of the funded pool can be owed by a single customer, industry or country, so that one failure cannot do outsized damage.

Conduit

A funding vehicle, usually sponsored by a bank, that buys receivables from many sellers and funds them by issuing short-term commercial paper. A multi-seller conduit pools several companies' receivables.

Credit limit

In trade credit insurance, the most of a customer's debt the insurer will cover. Sales above the limit are uninsured.

D to I

Days sales outstanding (DSO)

The average number of days a company takes to collect payment after a sale.

Dilution

Reductions in a receivable that are not credit losses: credit notes, returns, discounts, disputes and other adjustments. Programs size their advance rate for expected dilution.

Eligible receivables

The invoices that meet a program's criteria and can be funded, for example owed by an approved customer, within its credit limit, not overdue beyond an agreed point and not in dispute.

Factoring

Selling invoices, or borrowing against them, to a factor that usually collects from your customers. Simple to arrange and the most expensive rung of the funding ladder. See factoring vs. securitization.

Insured percentage

The share of a covered loss a trade credit insurance policy pays, often around 90%.

Invoice financing

A general term for any way of raising cash against unpaid invoices, from factoring to securitization.

L to R

Loss payee

The party a trade credit insurance policy pays claims to. In a funding program, usually the program or its funders.

Notes

Debt securities issued by a special purpose vehicle to investors. Senior notes are repaid first; junior or subordinated notes take losses first.

Overcollateralization

Holding more receivables in the pool than the amount funded, so the excess absorbs losses before funders are affected.

Protracted default

When a customer does not pay for a set period after the due date, even if it is not formally insolvent. Many trade credit insurance policies treat it as a claim event.

Recourse

The funder's right to come back to the seller if a customer does not pay. Non-recourse arrangements leave that credit risk with the funder or its insurer.

Revolving period

The phase of a program during which collections are used to buy new receivables, so the facility stays in place as the company keeps selling.

S to W

Securitization

Funding a pool of assets, such as receivables, by selling them to a special purpose vehicle that lenders or investors finance. The cheapest rung of the receivables funding ladder.

Servicer

The party that manages the receivables after they are sold: collecting payments, applying cash and reporting to funders. A backup servicer stands ready to take over if needed.

SOFR

The Secured Overnight Financing Rate, the main US benchmark interest rate. Floating-rate funding is often priced as SOFR plus a margin.

Special purpose vehicle (SPV)

A separate legal entity set up only to buy and hold the receivables in a securitization and to raise the funding for them.

Trade credit insurance

Insurance that pays a seller if an insured business customer fails to pay because of insolvency or protracted default. See how trade credit insurance lowers your cost of capital.

Trade receivables

Receivables from selling goods or services to other businesses on credit terms.

True sale

A sale of receivables documented and structured so that it holds up legally as a sale rather than a secured loan, which is what keeps the receivables out of the seller's insolvency.

Waterfall

The order in which a program's collections are paid out, for example fees first, then senior funders, then junior funders, then the seller.