Glossary of Cash Flow Financing Terms
For Pharmacy Owners

Part of the current market conditions that pharmacy owners must contend with are cuts in reimbursements. Along with the lower payments, some states are also paying slower… leaving some pharmacy owners in a cash flow crunch. Solutions to this situation may require the pharmacy owner to consider Cash Flow Financing options. Therefore we have included this Cash Flow Glossary to provide terms for pharmacy owners. 

The following glossary of cash flow financing terms is presented by the pharmacy industry expert Washburn & Associates. Financing including cash flow financing, business loans, conventional financing, SBA Loans, bridge loans, and asset based loans are available through Washburn & Associates. When you have questions regarding any forms of financing for your pharmacy don’t hesitate to contact Washburn & Associates.

"A" credit customers
Customers with excellent credit with the ability to obtain financing from traditional lenders.

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

Account Creditor
The Client. The company selling their accounts receivable for cash. The factor’s client.

Account Debtor
The customer. The Account Creditor's customer. The customer paying for the product/services purchased and owes money to the client per an invoice.

Accounts Payable
Any outstanding debt that a company has. The amount of money a company owes for goods and services it has received, but has not yet paid for.

Accounts Receivable
Outstanding customer invoices, which have not yet been paid by the customers. The amount owed for goods or services already provided and invoiced. Accounts receivable are considered an asset on a company’s balance sheet.

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

Accounts Receivable Funding
A short-term financing technique used to generate working capital. Account receivable funding is generally collateralized by a security interest in the company's accounts receivable.

Advance Rate
The percentage of the factored invoice or other income stream that a funding source will advance to a client. The advance rate is typically expressed as a percentage of the total invoice amount. Advance Rates usually range from 70-90%.

Amortization
The regular payment of a debt, such as a mortgage or other loan, paid in installments of principal and interest and set 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 value that is owned by a business, institution, or individual, such as real estate, equipment inventory, intellectual assets (copyrights or trademarks), and accounts receivable.

Asset Based Loan
A business loan where the borrower pledges business assets as collateral, and the funds are used for business-related expenses. All asset-based loans are secured.

Assignability
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.

"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 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.

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

Business-Based Income Streams
Cash flow instruments that are paid to a business by another business or government.

Business Note
A promissory note secured by a business including any inventory and equipment that belongs to the business, but does not include real estate property. Also known as Private Finance.

Carry Back Financing
Financing where the seller of the asset, or real estate, takes back a note for part, or all of selling price.

Cash Flow
In business terms, cash flow involves the flow of money 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 that 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.

Client
A business that sells its accounts receivable to the commercial factoring company.

Collateral
Something of value (accounts receivable, inventory, machinery, equipment, real estate, etc.) that is pledged as security to ensure the re-payment of an obligation. Collateral is promised to a funding source until the loan is repaid. If the borrower defaults, the Funder has the right, by law, to seize the collateral.

Collateral-Based Income Streams
Cash flow instruments that are secured by collateral.

Collectability
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
When a large percentage (usually 15% or greater) of one client's accounts receivable are due from a single customer.

Consumer-Based Income Streams
Cash flows in which the party that owes payments is a consumer or 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.

Credit
The privilege of extending time allowed to make payment on a debt by a vendor to its customer. Credit also includes the amount of dollars covered by the privilege.

Creditor
The person or business who is owed payments on a debt by a debtor.

Customer
Also known as the account debtor. The entity that owes money to the factor’s client and that will ultimately pay the factoring company for invoices purchased.

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
A person or business that owes something and makes payments to a creditor.

Default
The omission or failure to perform or fulfill a legal duty, obligation, or promise. Not repaying a debt.

Discount Fee
This is the fee charged by the factoring company for performing factoring services. Discount fees are typically time-sensitive and are usually a flat, fixed percentage of the total invoice, typically calculated in 30-day increments.

Discount Rate
The rate of return required from the funder to compensate for the risk of funding/buying a cash flow instrument. Interest rates are added to a principal. Discount rates are subtracted from the principal

Dilution
The amount of risk associated with the collection of accounts receivable due to returns, charge-backs, trade allowances, or other deductions taken by account debtors. The amount of dilution will affect the advance rate provided by the factor.

Due diligence
The background check and 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. Conducted by the funding source to assess the validity of a prospective factoring client (and that client's customers) before officially entering into a financing/ factoring agreement.

Equity
The value, or interest an owner has in property over and above any indebtedness owed on the property.

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.

Factor
A funding source that specializes in funding accounts receivable. The factor is the company that purchases the accounts receivable (invoices) from the client.

Factoring
The sale/purchase of a business' accounts receivable at a discount for the seller to obtain working capital. Also referred to as receivables factoring, invoice factoring, bill factoring, accounts receivable factoring, account receivable funding and invoice discounting.

Factor’s Advance
Same as an Advance except expressed as a dollar amount. It is the money the factor sends to the client immediately after invoice verification is complete. The advance is figured by multiplying the advance rate by the face value of the factored invoice. The advance is considered a down payment by the factor for the purchase of the client's accounts receivable.

Factor’s Fee
Same as the Discount Fee. The fee the factor charges for funding the client's accounts receivable. The fee includes an assortment of services performed by the factor including; advancing funds, credit work, collection and other accounts-receivable management services.

Factor’s Reserve
Same as the Reserve. The difference between the face amount of a factored invoice and the amount advanced to the client by the factor. The reserve balance is sent to the client periodically after the customer has paid the invoice and after the reserve account has been reconciled to reflect all factor charges, including the factor's fee.

Factor’s Reserve Release
The amount released from the factor's reserve once account-debtor payments have been received and credited by the factor. The reserve release is generally equal to the invoice amount less the advance amount, any charge-backs, other deductions, any factor fees or other costs associated with the factoring service.

Factoring Services
Factoring services include: funding advances, account debtor credit analysis, credit insurance, collection management and accounts receivable management.

Factor’s Verification
The process by which the factoring company verifies that the client has provided its product or service to the customer. Factors verify that the customer received and accepted the product or service and that the customer intends to pay the factor the money due under the invoice. This process normally takes place before the factor purchases an invoice and advances cash to the client.

Fictitious Name
A legal document/statement filed with the appropriate State agency when an entity uses a name other than their own official corporate name 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.

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, such as 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 indicating the amount due from a customer to pay for delivered goods or services.

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.

Limited Liability Company
A form of business structure designed to combine the best of corporate and partnership attributes into one entity.

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.

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

Non-Recourse Factoring
A type of commercial factoring in which the risk of customer non-payment is borne by the factor. If the client's customer does not pay, the factor generally does not have recourse against the client for payment of the invoice.

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.

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.

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

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.

Real property
Real estate and all appurtenances to the land including buildings, structures, fixtures, fences, and improvements upon or affixed to the same, excluding crops.

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 or Holdback
Amount not immediately provided to the company factoring its accounts receivable. Usually expressed as a percentage of the total invoice amount. Since the reserve and the advance equal 100% of the invoice (Advance Rate + Reserve = 100% or Total Invoice Amount), the reserve can be calculated by subtracting the advance rate from 1. If a company has an 80% advance rate, the reserve or holdback is 20% of the invoice's face amount, which is transferred to the client (less the factors fees and other expenses) once payment is received by the factor from the account debtor.

Recourse Factoring
A type of commercial factoring in which the risk of customer non-payment remains with the client. If the client's customer is financially unable to pay, the factor has recourse against the client's assets for that money.

Satisfaction
The discharge of an obligation by paying a party what is due, such as the satisfaction of an IRS lien or the satisfaction of a mortgage.

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.

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.

Trial Balance Printout
A spreadsheet that lists all loans in a portfolio and their payment schedule. Usually required for a portfolio transaction.

Uniform Commercial Code (UCC)
Standardized set of guidelines protected by law that set down how business transactions must be conducted.

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

Verification
The step during the due diligence process during which the factor confirms the validity of an invoice with the customer.

Viatical
The assignment, or transfer of life insurance benefits. The sale of a death benefit. Used in situations where a patient with a terminal illness can viate their life insurance policy to pay current expenses.

Working Capital
In general, the funds needed by a business to pay current expenses such as payroll, benefits, rent and other operating costs.