This reserve acts as a safety net for the factoring company, ensuring they have funds available to offset any losses related to the invoices they purchase. When a business factors its invoices, the factor typically advances a large portion of the invoice amount but retains a reserve to protect against the risk of non-payment. The reserve amount is determined based on the perceived risk of the invoices and may vary depending on factors such as the industry, customer creditworthiness, and payment history. After a set period, once the factor has assessed the invoices for potential losses, the reserve is released to the business if no significant issues arise.
Factoring Reserve Example
For example, if a business factors $200,000 in invoices with a 15% factoring reserve, the factor will advance $170,000 upfront while holding back $30,000 as a reserve. If all invoices are collected successfully without returns or disputes, the business will receive the $30,000 reserve after the specified evaluation period.