The Components of Invoice Factoring

We try our best to explain the pros and cons of invoice factoring. We don’t pretend that it is a good fit for all businesses. But accounts receivable factoring has been a viable financial tool for many companies in need of working capital. For those that are thinking about factoring invoices, this post is devoted to a review of the basics.

There are three main components to a factoring relationship. The first is the advance rate. This is the percentage you will receive upon submission of an invoice. For example, if you submit an invoice for $1,000 and your advance rate is 75%, $750 will be wired to your bank account. The advance rate is determined by many factors, such as the industry you’re in and the amount of days it usually takes to collect the receivables.

The second component is the reserve. This is the total invoice less the amount that has been advanced. It gives the factoring company a cushion if there is a problem with collections. The reserve is remitted to the factoring client when payment from the customer has been received.

The third component is the factoring fee. This is the amount charged to you for the invoices you have factored. The fee is based upon many factors, such as the creditworthiness of the customer and the concentration of accounts. The fee is usually quoted as a percentage per thirty days and then a per diem after that. Also known as the discount, it is deducted from the reserve after the invoice has been collected.

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Business Financial Services

The Components of Invoice Factoring