The factoring transaction, financing an invoice, is handled in three parts.
First is the Advance. The advance is a percentage of the face value of the invoice that gets wired into your bank account when the invoice is initially financed. The advance is typically 80% of the invoice, but can be more or less largely dependent on your particular industry. Some industries like construction related work receive less of an advance, and other industries like trucking get a higher advance. The advance gets wired into your bank operating account.
Next is the Reserve. Because the cost of financing an invoice is based on the time it takes for the invoice to be paid by the customer, there is no way to know what the charge will be until the customer remits payment. This is one of the reasons there is a reserve account. Another is to cover incidental credits and offsets a customer might take when making the payment. In cases where a full payment isn’t made, the difference is deducted from the reserve along with the charge for funding the invoice, and the remainder goes out to you. Here at Creative Capital Associates, we do this every Friday – clear the accounts that have been paid and issue reserve payments.
Lastly there is the service charge. This is not to be confused with interest on money loaned. That is what you pay when you can qualify for an institutional bank loan. The service charge covers all the notifications and verifications, advances and reserves, tracking and follow up. The service charge is a nominal percentage about the same as what credit card issuers charge for their advances. The charge can vary depending on the volume of funding going on and the industry.
Each invoice transaction is handled as its own separate event, once the payment is made, the fees calculated and the reserve sent out – that transaction is retired.