Invoice Payment Disputes & Dilution while factoring

Invoice disputes pop up all the time, and in factoring, they can put stress on the relationship, especially if the disputes are big or happen often. That’s why factors don’t advance the full invoice amount upfront. By holding a portion back, they make sure the discount fee is covered and there’s a buffer for any shortfall in payment. In the factoring world, this is known as dilution or an offset. Dilution can be managed when it’s expected, but an offset usually comes as a surprise.

Let’s cover dilution first.

Experienced factors who understand your industry know what’s reasonable when it comes to advance rates. They can strike the right balance between giving you cash up-front and protecting both sides against dilution.

If dilution is common in your industry, factors are usually ready for it. But when unexpected dilution shows up, it can catch them off guard and often impact funding until the issue gets cleared up. To stay within the agreed formula, factors lean heavily on the cash reserve account.

When a factor knows that significant dilution is on the horizon, they typically take two steps:

• Hold back cash reserve releases to build a balance that can absorb the dilution.
• Offset with new fundings, though this is really just pushing the problem forward, since it’s essentially a journal entry to plug the gap.

Most dilution factors see comes from suppliers into big box retail but it can be tucked into any supplier agreement.