Reserve Account

A factoring company typically has two kinds of reserve accounts for each client.

The first type is what’s not advanced to you up front when an invoice is purchased. It’s basically an accounting entry used to track the balance that’s still owed to you once the invoice gets paid, minus the factoring fee. In reality, this isn’t cash sitting in an account; it’s more of a “paper reserve.” So when you see a “Reserve” listed on a factoring report, remember it may just be a bookkeeping entry, not actual money being held.

The second type of reserve is the real one, the cash that becomes available once your customer pays the invoice. After the factoring company takes out its discount or fees, this reserve balance is released and sent back to you.

Table Here showing difference between accrued/cash reserve.

                                                Accrued Reserve Example                                                              Cash Reserve Example

                                     Invoice Value                      $10,000                                           Payment Received                      $10,000
                                     Advance Rate                     85%                                                 Advance Repaid                           $8,500
                                     Funding to Client              $8,500                                             Factors Discount                         $200.00
                                     Accrued Reserve               $1,500                                             Cash Due Client                           $1,300

 

Factoring companies handle reserve accounts in different ways, and how yours is structured can have a real impact on your day-to-day cash flow. The reserve account is an important part of any factoring relationship; it’s one of the main tools your factor uses to make sure your account stays “within formula.”

When we say “within formula,” we’re simply talking about balance, making sure the total amount advanced to you never exceeds your agreed-upon advance rate. In other words, it keeps everything in check so you’re always within the funding limits set in your factoring agreement.

Let’s focus on what matters most to you, the cash reserve and how often you can get it back from your factor.

In most cases, factoring companies release reserves once a week. This gives the balance time to build up as payments come in. However, if you have a big collection week or your factor receives a large amount of non-factored payments and assuming your account is in good standing, they’ll often make an exception and release your reserve early.

That said, there are times when a factor might hold off on releasing the reserve usually if there’s a pending chargeback or a dispute that could impact their ability to collect on previously purchased invoices. It’s not ideal, but it’s part of keeping the account protected until things are cleared up.

When it comes to reserves, one of the biggest things to keep in mind is the credit quality and payment history of the customers you plan to factor. Factoring works best when you’re selling invoices from solid, reliable payers those customers make funding smooth and reserve releases predictable, this is cash flow.

Remember, invoice factoring is designed only to speed up your cash flow, it’s not able to change how your customers pay. A factoring company doesn’t have any special leverage to influence your customers nor should they act like a collection company. Factoring companies prefer good performing customers.

If, on the other hand, you set up customers who pay slowly or inconsistently or does not communicate your factor may hesitate to buy more invoices or hold back reserves until payments come through. That uncertainty directly impacts your cash flow (both in funding and reserve releases), so it really pays to choose your factored customers wisely.