After the account has been set up, the due diligence is completed, credit has been checked, the invoice has been verified, then comes the actual funding. It happens in three parts;
1. The advance – is the amount wired into your bank account at the time of the funding. It is a percentage of the face value of the invoice. The advance is the immediate amount of funding you receive when you factor and invoice for a creditworthy account.
2. The reserve – is the amount of the remaining percentage of the face value of the invoice. The reserve is to cover the service charge which is the cost of financing an invoice and any credits or non-payments that might arise if the customer has deducted them from their full payment of the invoice.
3. The discount fee or service charge – is the cost of financing the invoice. This is not an APR or capital interest rate. It includes interest on the use of funds, but that is only part of the activity associated with providing the financing. There is always substantial operational work that goes into the processing of the account.
So these are the three parts that constitute the factoring transaction. For decades this has remained virtually unchanged. Simple gets it done.