What is the Factoring Reserve in the Factoring Relationship?

What is the Factoring Reserve

Factoring Reserve is an integral part of the Factoring process. Factoring Finance works by funding the individual invoices of a small business.  The funding is done as two separate payments.  The first payment is called an advance and normally covers usually in two installments. The first payment covers approximately 80% of the total value of the invoice and is called the ‘advance’. What is the Factoring Reserve? The Factoring Reserve is the 20% (or other amounts) that is not advanced up front. The percentage amount of the advance is negotiated at the beginning of the factoring relationship and remains at that percentage for the duration of the agreement and for every invoice.  The advance is deposited to your bank account soon after the factor receives and processes the invoice.

The reserve amount

The second payment is called the rebate.  If the advance is 80%, the at the point of funding the 20% is called the ‘Reserve’.  The factor takes the 20% and puts it in a reserve account in the event of debtor non-payment.    

When the invoice is paid the factor, it is receipted and the 20% (less any fees) is paid to the small business owner.  This is called a rebate payment.  The amount that was in reserve is taken out of reserve and any fees due are deducted and the balance related to the small business owner.

The reserve amount plays a key role in non-recourse factoring if the invoice is not paid. Specifically, debtor default means the factor must assume the entire loss.   Although the reserve may not make good their full loss, it does protect them to some extent.

In recourse factoring when the invoice is not paid the factor can recover the amount owed from future invoices or a combination of the reserve amount and future invoices.  

The reserve/rebate payment does not represent complete protection for the factor but it does act as a sharing of the risk in the event of non-payment by the debtor.   

At all times the factor will endeavor to recoup their losses and make themselves whole by putting them in the same position as they were prior to funding the invoice.

the seller and this gives them some relief in the situation.

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