Common Terms Related to Invoice Factoring

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Are you new to invoice factoring? If so, you probably want to know the terminology associated with it. For starters, invoice factoring is a financial transaction in which a business sells its accounts receivable to a third party at a discount. Oftentimes, businesses do this to meet their present and immediate cash requirements. 

As far as the terms go, there are many and the definitions are complex. However, we are here to talk you through each term and break it down into simple terms. Hang on tight and listen up!

Account Creditor/Client

In this case, you are the account creditor that is providing goods or services to a debtor or customer. You are also the client to the factoring company, such as Alliance One.

Account Debtor/Customer

The account debtor is the company or companies that purchase the goods and services from the account creditor. 

Discount Fee

This is the factoring fee. Otherwise known as a small charge assigned by the factoring company when they purchase your accounts receivable. They are typically determined by the size of the invoice, the debtors’ creditworthiness, and the length of time the invoice is unpaid. 

Factoring Advance Rate

The factoring advance rate is the percentage of invoices that Alliance One will deposit up-front and into the client’s account up. The rest will be held in a reserve account. 

Factoring Agreement

This is the official contract that is decided between the factoring company and the client. It covers things such as fees, advance rates, and the length of the relationship. These contracts can be amended, extended, or terminated based on the provisions in the agreement.

Factoring Broker

The factoring broker is a third-party company or person who connects business owners to factoring companies for their funding needs. 

Factoring Company

This is what Alliance One is, otherwise known as a firm that specializes in providing working capital to other companies. We do this by advancing cash against unpaid accounts receivable. 

Factoring Fee

The factoring fee is otherwise known as the discount fee. 

Invoice Factoring

This is the process that companies such as Alliance One provides to companies. It is where a factoring company purchases a company’s accounts receivable, and it is also known as accounts receivable factoring. 

Non-Recourse Factoring

Non-recourse factoring is a factoring option that companies have. It is where a factoring company such as Alliance One will assume all risk and nonpayment. With non-recourse factoring, clients will receive a lower advance but will not be responsible for the invoice once it is purchased. 


This is the invoice remainder, without the fees. It is deposited into your account once your invoices have been paid. Do NOT confuse this with the reserve amount, which includes the factoring fees. 

Recourse Factoring

Recourse factoring is the standard factoring agreement. It is where a client is responsible for invoices that remain unpaid past their recourse period. 

Recourse Period

This refers to the amount of time a factoring company such as Alliance One will hold an unpaid invoice before requiring the client to close it. They typically vary from 60-120 days depending on the factoring agreement. 


The reserve is the balance of an invoice that is withheld due to a pending payment on behalf of the customer. The advance, plus the reserve, will equal the full amount of the invoice. Do NOT confuse this with the rebate. The rebate is the final amount the client receives with deducted fees and following the payment.