There are 3 parts to the typical invoice factoring transaction. First is the advance, which is determined as the percentage of total invoiced dollar amount. The advance gets paid as soon as the invoice goes live and is verified as accepted by the customer. For example, if the invoice submitted is $10,000 and the advance rate is 80% then the advance will be the $8,000, usually bank wired into the clients company account.
Next is the reserve. that is held back until the customer pays the invoice – directly to the factoring company. Again it is determined by the remaining portion of the invoice after the advance. Once the customer payment is received by the factor, the reserve is released to the client. Factoring companies handle the reserve differently, so be sure to understand what the offer specifies. Some companies hold a semi-permanent reserve, some batch invoices and only release the reserve when all the invoices in the batch have been paid. For example, every Friday our firm releases the reserve for any individual invoices that have been paid during the week.
Lastly is the discount rate. This is the cost for funding the invoice. Some factoring companies handle this computation a little differently. But when the invoice gets paid, the discount fee is taken out of the reserve and the balance is sent on to the client, thus completing the transaction.