Invoice Advances, Reserves and Factoring Fees

• Advance rate: This is the amount (usually expressed as a percentage) of the face value of an invoice that the factoring company will fund when you factor an invoice.
• Reserve rate: The reserve is an amount (usually expressed as a percentage) of the face value of an invoice that the factoring company will hold back “in reserve” pending payment from your customer on a factored invoice.
• Factoring fee: This is the cost of factoring an invoice. Like the advance and reserve, it is often expressed as a percentage of the face value of an invoice the factoring company earns when you factor an invoice.

Added together, the advance rate, reserve rate and factoring fee should equal 100%. Here is an example of their application and how the factoring process works:

• Day 1 – Factor an invoice and get 98% of the invoice amount the same day, with 2% held in reserve and a 2% factoring fee.
• Day 30+ – Receive the 2% reserve after your customer has paid the invoice (factoring company retains the other 2% as their factoring fee).

Some factoring companies use low introductory rates or progressive fee structures that sound appealing, but actually represent a higher invoice factoring fee than many of their competitors.

Some factoring fees are flat – meaning the small percentage is the only cost of factoring an invoice regardless of how quick your customer pays the invoice. Other factoring fees might sound low but when reading the fine print, are actually assessed weekly instead of monthly, or are progressive in some other way.

Because of this, a 2.5% factoring fee might actually be lower (less costly to your business) than a 1% fee offered by a factoring company that assessed the fee weekly if your customer takes more than 21 days to pay. Given that payment terms are often 30, 60 or even 90 days, a 2.5% flat fee will nearly always be far more economical than a low fee applied progressively.

To avoid increasing the cost of factoring, look for proposals where the factoring fee is your “all in” cost of factoring. I.e., there are no additional costs for processing schedules, funding advances, maintaining your account, and so on.

Some factoring companies have add-on and hidden fees that should be taken into consideration when comparing invoice factoring services; such as fees that will be charged for:

• Schedule processing
• Collection activities
• Due diligence
• Customer credit checks
• Online account access
• Account administration or maintenance
• Funding fees (may vary depending on the method of funding)
• Buy-backs / chargebacks

When reviewing a proposal for invoice factoring services, look beyond the advances and factoring rates to determine if there are add on or hidden costs that might drive up the real cost of invoice factoring, thereby reducing its benefits as a cash flow management tool.

In addition, your proposal for invoice factoring services should also outline the account limit (how much money the factoring company will have out on advances at any given time for all factored invoices) and account debtor limits (the amount the factoring company is willing to have out on advances at any given time for an individual debtor).

Benefits to Look For When Choosing a Factoring Company

The benefits provided by the factoring company are the promises and perks that their clients will enjoy, in addition to expedited cash flow from factoring invoices.  This includes factoring advance rates but may encompass promises of good customer service, knowledgeable account managers, client online account access, reports, funding options, credit checks on customers and industry-specific benefits like those offered to transportation factoring clients; fuel card programs, fuel discounts, TruckersB2B, etc.

Since the program benefits provided by factoring companies may vary greatly, here are some of the benefits you might want to look for as far as how to choose a factoring company:

• Fast funding (same day  or next business day) on advances via ACH, wire transfer, and so on
• Credit checks to help you vet new customers, establish limits for clients, or set terms
• Consistently high level of professional customer service
• Dedicated account managers who understand the client’s business and preferences
• 24 x 7 online account access
• Transparency – no hidden fees
• No application or account administration fees
• No long term contracts or crazy penalties if you stop factoring
• No monthly factoring minimums – factor only when it’s in your business’ best interests
• No requirement to factor all of a client’s invoices – factor only those you choose
• Low factoring fees
• High advances
• Non-recourse factoring, non-notification factoring
• Spot factoring
• Micro factoring (small invoice or small ticket factoring)

In terms of how to choose a factoring company, there are different types of invoice factoring. One could be more or less advantageous depending on the unique needs of your business.

Factoring with Recourse 

This is the most common type of invoice factoring. Companies that factor with recourse may require you to “buy back” an invoice if the customer cannot pay or does not pay within a given period of time.

Non-Recourse Factoring

Non-recourse factoring companies assume the credit risk from bad debt on invoices they factor, and rarely require clients to buy back invoices. Non-recourse factoring companies may still require clients to buy back invoices if the client cannot pay within a given time period or cannot pay due to reasons not associated with insolvency.

Non-Notification Factoring

Non-notification invoice factoring may be done with recourse or as non-recourse factoring. It is essentially the white labeling of factoring so that the customer is not aware that the client is factoring customer invoices.

Spot Factoring 

Spot factoring is a term that refers to one-time factoring. It can be done with full recourse, non-recourse factoring, or non-notification factoring.  Receivables financing companies that offer spot factoring are comfortable working with a client who has a one time or only very occasional need to factor invoices.

Micro Factoring 

Micro factoring is invoice factoring of small dollar amount invoices. Many factoring companies will not factor small invoices, so finding factoring companies that will factor even small invoices could be beneficial for small businesses, solopreneurs, startups, owner/operators, etc.