Managing the Factoring Advance Rate

chess-money-290Many companies struggle over how to manage their factoring advance rate when in reality it is pretty basic.

Let’s say that you begin factoring in January. If you factor $100,000 in accounts receivable  you will immediately receive $80,000 (assuming an 80% advance rate).

That is $80,000 you receive up front. The remaining $20,000 is held in ‘reserve” by the factoring investor.

In February you factor another $100,000 of invoices and obtain another $80,000 advance.

Also in February the January invoice pays and you receive the January ‘reserve” minus the factor fee (we will say 3%).

So now, in February, you have received $80,000 advance AND $17,000 from the previous month’s ‘reserve” for a total of $97,000.

Going forward you will continue to net the same each month assuming payments are made on time and you continue to factor.

In a nutshell it is only the first month that does not give you the full amount. But keep in mind; you would not have realized that full amount until your customer paid you (in full). With factoring you have the benefit of receiving 80% of the cash upfront rather than waiting 15 to 30 days, or more, for payment from the customer.

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