Managing the Factoring Advance Rate

Many 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.