When factoring, you’ll come across different types of rates. To understand reserve rates, let’s review factoring rates and advance rates.
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.
An advance rate is the percentage of an invoice that will be paid to you upfront. For example, a company may give you a 90% advance rate.
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. For example, some factors charge a 7% reserve.
Suppose you are a carrier with an invoice for $1,000.
At a 90% advance rate, you get paid $900 upfront.
At a 7% reserve rate, the factoring company keeps $70 on hold until it collects on the invoice from your client. If your client short pays the factoring company, the $70 will be applied toward that. If the client short pays by $20, you get $50 back. If the client short pays by $100, the factoring company keeps the $70 and offsets your future load by $30.
At a 3% factoring rate, the factoring company keeps $30 for its own profit because it is handling your invoicing and collections.
Reserved are simply a way for factoring companies to "insure" themselves if a carrier's client does not pay them back. Once a factoring company does receive full payment on an invoice, it will disburse the money back to the carrier. It may just take 30-40 days for the money to show up in your account.