Invoice Factoring: Advance, Reserve and Fees Explained

What invoice factoring actually involves

Factoring involves selling business receivables to a factor. The CFPB’s current interpretation for its small-business lending data rule describes factoring as a purchase of a payment claim for goods already supplied or services already rendered. [1] This guide explains the mechanics; it is not an announcement of a new rule or a claim that every invoice qualifies.

Check the transaction itself, rather than relying on the product name. An SBA educational article distinguishes factoring, where customers direct payment to a factor, from invoice financing, where payments continue to go to the business. [2] Ask who will notify your customer, where payment must go, and who handles collection questions.

Separate the advance from the reserve

The advance is the amount made available before customer payment under an advance-factoring arrangement. A portion may remain unadvanced, with its release governed by the agreement. The Federal Reserve’s supervision manual describes advances as a percentage of the balance due and explains that commissions, adjustments, and other deductions affect the amount available to the business. [3]

Request a dollar breakdown for one of your actual invoices: its eligible value, the proposed advance, any charges deducted immediately, the amount retained, and the conditions for releasing it. Do not count retained funds as money available for this week’s payroll. Ask whether a reserve can also be used to cover adjustments relating to other invoices.

A simple example of the cash you receive

Suppose, purely for illustration, a $20,000 invoice receives an 85% advance. That produces $17,000 initially and leaves $3,000 unadvanced. Assume the customer pays in full and the only charge is a hypothetical $600 fee deducted from the retained amount. The later release would be $2,400, bringing total cash received to $19,400.

The $3,000 retained amount is not automatically a $3,000 fee. In this example, the cost is $600, while $2,400 is released later. These assumptions are not typical-rate claims or a GoodToGo Capital offer. A real agreement may include different charges, deductions, or release conditions. Ask the provider to reproduce the calculation using its written terms.

Ask how late payment changes the cost

Request two written illustrations using the same invoice: one paid on its due date and one paid 30 days later. Ask whether fees change with elapsed time, which amount they apply to, and whether there are transfer, account, minimum-volume, or termination charges. Identify the event that stops any time-based charge.

GoodToGo Capital’s practical approach is to compare the initial net cash, later release, and total deductions together. A headline percentage alone cannot show those three amounts. Keep the invoice amount and assumed payment dates identical when comparing proposals so that different assumptions do not obscure the result.

Read the unpaid-invoice and dispute provisions

Do not assume that selling an invoice transfers every risk. The Federal Reserve manual explains that shipping disputes, returns, adjustments, and certain customer nonpayments can remain the client’s responsibility under a factoring agreement. [3] Ask exactly which events permit a chargeback or require you to repurchase an invoice, including under an offer described as nonrecourse.

Bring an invoice aging report, customer payment history, supporting delivery or service records, and details of existing financing to the conversation. Ask the provider to confirm invoice eligibility and any required permissions before proceeding. GoodToGo Capital can help you explore invoice factoring; availability and terms depend on the provider’s review and the written agreement.

Sources

General educational information. Consider your business’s circumstances and the written terms of any offer.