A factoring reserve is the portion of an invoice's value that a factor does not pay at funding. It acts as a cushion: once the customer pays, the factor subtracts its fees and any shortfalls from the reserve and sends the remainder to the seller.
How it works in factoring
The reserve equals the invoice face value minus the advance. Factors use it to absorb:
- The factoring fee and any transaction charges
- Short payments, where a customer pays less than invoiced
- Credits, returns or pricing disputes
- In recourse arrangements, the cost of invoices the customer never pays
Some factors hold reserves invoice by invoice. Others hold a pooled reserve account across all invoices and set a required reserve balance; anything above that level is released on a schedule, such as weekly.
Illustrative example: A $30,000 invoice funded at an assumed 85% advance leaves a $4,500 reserve. If the customer pays $29,500 because of a $500 credit and the fee is $750, the seller receives $3,250 from the reserve.
What to check
- When reserves are released, and whether release is automatic or by request
- Whether the factor can increase the required reserve during the contract
- Whether reserves can be held after termination, and for how long
- How short payments are communicated to you
The reserve is your money until the factor has a valid claim against it, so ask for regular statements showing each deduction.