Understanding the role reserves play in freight factoring is crucial for the trucking companies that take advantage of these services. Depending on the terms of your factoring agreement, knowing the specific reserve rate mentioned in your contract and why it exists can help you budget for the future and understand how much is truly going toward factoring fees.
A standard factoring agreement will pay out your invoice in two installments. The first installment is the advance and differs from company to company. For example, InstaPay has a 3% factoring fee.We pay clients a full advance, which is 97% since we subtract 3% from the invoice as the factoring fee. The second installment is called the reserve. The reserve is an amount of the invoice held by the factoring provider until the invoice is paid in full by the broker or shipper. The reserve is then rebated to the trucking company, minus any associated fees or factoring charges. The reserve may take a few days or up to a week to show up in the carrier’s account.
There are variations in reserve rates from factor to factor, and it’s important to know what you’re getting into when you decide to take these advantages of freight factoring. To understand reserve rates, let’s quickly review trucking factoring rates and advance rates. Read on to have these factoring fees explained.
When factoring, you’ll come across different types of rates.
The freight factoring rate is the percentage of an invoice the factoring company takes for its own profit. For example, InstaPay has a flat 3% rate. Other factoring companies 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. InstaPay gives customers the full advance on an invoice, minus the 3% factoring fee.
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.
Example of Typical Factoring Fees
Suppose you are a carrier with an invoice for $1,000.
At a 90% advance rate, you get paid $900 upfront.
At a 3% factoring rate, the factoring company keeps $30 for its own profit because it is handling your invoicing and collections.
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 loads by $30.
Reserves are simply a way for factoring companies to "insure" themselves if a carrier's client does not pay them back. It’s a safety measure put in place to mitigate financial risk for the factoring company. 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 the bank account. That's why it's important to consider reserve rates when signing up with a factoring company.