Most clients are initially perplexed to hear that the factoring advance, which is paid as soon as the invoice is sent to the factoring company, is less than the full value of the invoice. Most factoring companies advance between 70% and 90% as a first installment and hold 10% to 30% of the invoice as a reserve.
Why do factoring companies hold a reserve?
Factors hold a reserve for a simple reason: they want to protect themselves in the event the invoice is not paid in full. There are many reasons why invoices are not paid in full, including:
- Order errors
- Breakage (i.e. not all product was delivered in good condition)
- Delivery errors
- Quality errors
By not advancing for the invoice in full, the receivables factoring company protects itself. Bear in mind that the factor does not keep the reserve forever. Most will rebate it, less the financing fee, as soon as the client pays the invoice in full.
How to determine the advance percentage
The advance percentage is determined by a number of variables, including:
- The client’s track record in collecting full payments
- The customer’s track record of paying in full
- The financial stability of your firm
- The soundness of the delivery / payment confirmation documents
- The client’s industry
Actually, the client’s industry is one of the primary determinants of advance percentage. For example, transportation companies that use freight factoring usually qualify for advances that average 90% (or higher at times). Likewise, staffing agencies can get an advance of 90%.
On the other hand, construction subcontractors using construction factoring usually get advances of 75% because subcontractor invoices typically have retainage of 10% and general contractors are notoriously difficult payers. The same goes for companies using medical factoring: advances range from 65% to 85% because insurance companies can be difficult payers.
The following table shows the typical advance rates for every industry:
|General Business||70% – 85%|
|Staffing||90% – 92%|
|Transportation||90% – 96%|
|Medical||60% – 80%|
|Construction||70% – 80%|
Can we help you?
We are a leading factoring company and can offer competitive financing packages. For a quote, please fill out this form or call (877) 300 3258.