What is a factoring advance rate and how does it work?

When you sell an invoice to a factoring company, the company advances a percentage of the invoice value to you immediately — this is the advance rate. The remaining percentage (the 'reserve') is held until the factoring company collects from your customer, minus the factoring fee. A 90% advance rate on a $10,000 invoice means you receive $9,000 now, and if the customer pays in full, you receive most of the remaining $1,000 minus the factoring company's fee.

The advance rate varies by industry, customer creditworthiness, and invoice age. Invoices to large creditworthy customers tend to command higher advance rates because the factoring company's risk of non-collection is lower. Invoices to small businesses with unknown credit history, or invoices that are already past due, receive lower advance rates or may be declined entirely.

Understanding the advance rate matters because it is only one of three numbers that determine the actual cost of factoring: the advance rate, the factoring fee (the percentage charged for the service), and whether the arrangement is recourse or non-recourse (whether you owe the money back if the customer doesn't pay). A high advance rate with a high factoring fee can be more expensive than a lower advance rate with a low fee. Compare all three numbers to evaluate factoring proposals accurately.