Factoring Industry Term Definitions
Like any specialized industry, factoring comes with its own lingo and terminology. Here are some common terms and their definitions so you know what your potential partners are talking about.
Advance Rate
The percentage measure of the amount you receive (usually by wire transfer or ACH) in cash when factoring an invoice. Advance rates typically range from 80% to 90% of your invoice amount.
If you were factoring a $10,000 invoice at a 90% advance rate, you would receive $9,000.
Reserves
The amount a factoring company will retain as a percent of your invoice after giving you initial cash in advance.
If you were advanced $9,000, your reserve equals the balance of $1,000. Once the invoices are paid, if there are no issues or unpaid fees, you will get back the $1,000 minus the factoring fees.
Factoring Fees
The fees a factoring company charges on your invoice amounts. Factoring fees can include daily fees, incremental fees, and admin fees. You may be able to arrange your fee structure (daily vs. admin) to fit your business/billing structure.
The factoring fees you might encounter include the daily dee, incremental fee, and admin fee (see below for more details).
Daily Fee
A small daily fee for each day your invoice is outstanding as a percent of the invoice. Therefore, the longer your customer takes to pay, the more you will pay in fees. Percent charges range widely from factoring company to company.
Incremental Fee
A fee structure where instead of paying a daily fee for outstanding invoices, you pay a percentage of the invoice on a fixed schedule. For example, 0.5% after 30 days, and every 10 days after.
Admin Fee
A fixed cost typically covering administrative costs or overhead of the quoting factoring company
Variable Rate Structure
A rate structure based on how long the invoice is outstanding. Most factoring companies prefer to use a variable rate structure. With a variable pricing model, the longer the invoice goes unpaid, the higher the cost. However, if your customers pay quickly you could wind up with a substantial savings.
Flat Fee Structure
A rate structure based on the amount of the invoice. Flat fees, sometimes called fixed fees, are the easiest to figure out as you pay a flat percentage on all the invoices you factor, no matter when they are paid.