What are Reserve Rates in Factoring?
In order to understand reserves, you need to understand what advance, reserve, and factoring rates are.
As you already know, the factoring rate is a percentage of an invoice the factoring company takes for its own profit. For example, InstaPay has a flat 3% rate. Some factors may charge up to 5% depending on if their rate is based on recourse or non-recourse factoring.
Some factors offer reserves therefore they also have advance and reserve rates. An advance rate is the percentage of an invoice that will be paid to you upfront. The reserve rate is the percentage of an invoice that the factoring company keeps until your customer pays. If the customer short pays the factor will take the amount they were short-paid from the reserve. If the customer doesn’t pay at all for any reason, the whole amount will be kept from the reserves.
Factors have reserve rates for one simple reason: to reduce risk if an invoice isn’t paid in full. The reserved money is like an insurance for factors.
Let’s look at a specific example with all 3 types of rates.
Suppose you are a carrier with an invoice for $1,000.
When the factor receives your invoice, they will pay you $900 and keep $30 as their factoring fee. $70 is kept “reserved” in case there is a problem with getting paid from your client.
If there is no problem receiving the full payment from your customer, the factor will give you back those $70 in 30 to 40 days. If your client does not pay the factor in full and their payment is short by $100, the factor keeps the $70 in reserve and you will owe $30, which will be taken out from other reserves. If your customer’s payment is short by $50, the factor will pay you $20 and keep $50.
A factor keeps a total reserve account at all times, which is the sum of all the reserves kept from unpaid invoices. For example, suppose you have 10 invoices, each worth $1,000.
A 7% reserve on $10,000 worth of invoices would mean a factor keeps $700 of your money. Look at this as a deposit.
Basically, 7% of your revenue - if you get paid in 30 days - is not available for your use because it’s sitting in your factor’s reserve account. If you get paid on average in 40 days, you actually have 9.3% of your monthly revenue sitting in your factor’s reserve account because you accumulate more revenue over 40 days.
Keep in mind that factors don’t pay you back the reserve amounts immediately after they receive payment from your clients. They release those reserves back to you on a schedule, which could be every 2 weeks, every 1 month, or whatever the factor decides. This increases the time a factor has your money on hold.
For example, your factor collects on 5 invoices worth $1,000 each from your client between January 1 and January 14.
The amount you should get paid back is $350, but you probably won’t get that money back until after January 15. The factor might schedule the reserve to go back to you on January 15, but it takes a few more days for the transfer to be done.
InstaPay, on the other hand, doesn’t keep reserves. We pay you 97% of your invoice upfront and keep 3% as the factoring fee. This way, there is no money stuck “on hold.” Following our non-recourse terms, if the broker goes bankrupt we won't deduct anything from a carrier’s account. Instead, we absorb the loss.
Factors like reserves because they have better leverage in case they don’t collect from your clients. There are many benefits of having reserves for some factors, but at InstaPay we like to keep it simple. Be sure to check out our blogs on other topics like hidden factoring fees so you can make the best decisions for yourself when picking a factor!
InstaPay offers commitment-free factoring with flat rates. Apply today and start getting paid the same day!