What is a factoring reserve and when do I get it back?

The reserve is the portion of the invoice the factor holds back at funding — the gap between the invoice face value and the advance. Once your customer pays the invoice, the factor deducts its fee from the reserve and sends you the remainder as a rebate. Timing is contract-specific: some factors release rebates within days of payment, others release on a set schedule, so read the rebate provision before signing.

How is a factoring fee calculated?

Most factoring fees are quoted as a percentage of the invoice face value that grows the longer the invoice stays unpaid — for example, a base rate for the first 30 days plus an increment for each additional 10- or 15-day block. Because the fee depends on when your customer actually pays, your true cost varies invoice by invoice. Always model your customers' real payment behavior, not their stated Net 30 terms.

What happens in a factoring example if the customer never pays?

It depends on whether the agreement is recourse or non-recourse. Under recourse factoring, you must buy back or replace the unpaid invoice after a set period (often 60–120 days, per contract), typically by repaying the advance plus accrued fees. Under non-recourse factoring, the factor absorbs the loss if the customer is financially unable to pay — but usually not if the customer disputes the invoice or refuses to pay for other reasons.

Is invoice factoring a loan?

No — factoring is the sale of your accounts receivable at a discount, not a loan, which is one reason some businesses prefer it. Canada's BDC and U.S. regulators both describe it this way, and the CFPB's small business lending rule explicitly excludes factoring because it isn't business credit. That said, factors still evaluate your business and, especially, your customers' payment history before buying invoices.

Do factoring approval and pricing depend on my credit?

Factors weigh your customers' creditworthiness heavily, since the customer is the one paying the invoice — but they also assess your business, invoice quality, industry, and volume. Advance rates, fees, and reserve terms vary by provider and by deal. Approval and terms always depend on the individual factor's underwriting; no outcome is assured in advance.

Invoice Factoring Example: Advance, Fee, Reserve & Rebate

Q: Why can't I just compare a factoring fee to an interest rate?

Factoring fees are charged on the invoice face value for a short holding period, so a 2.5% fee on a 42-day invoice implies a much higher annualized cost than 2.5% interest on a year-long loan. The Federal Reserve notes factoring offers typically aren't expressed as an APR and consumer disclosure rules don't apply to small business finance. Convert every quote to total dollars paid and an approximate annualized rate before comparing it with a loan or line of credit.

Factoring quotes sound simple — "85% advance, 2.5% fee" — until you try to figure out what you actually receive and when. The confusion almost always comes from four moving parts: the advance, the reserve, the factoring fee, and the rebate. This guide walks one illustrative invoice through every step, with formulas, then scales up to a portfolio of four invoices, a late payer, and a recourse buyback so you can pressure-test any offer.

Key takeaways

In factoring, you sell an unpaid B2B invoice at a discount; the factor advances most of the face value now and returns the rest — minus its fee — after your customer pays (Federal Reserve, March 2025).
The core formulas: Advance = Face × Advance Rate; Reserve = Face − Advance; Fee = Face × fee rate (which usually grows with days outstanding); Rebate = Reserve − Fee.
On an illustrative $50,000 invoice at an 85% advance and a 2.5% fee (paid day 42), you'd receive $42,500 up front and a $6,250 rebate — $48,750 total, with $1,250 as the cost.
Late payment raises the fee, not the advance: the same invoice paid on day 75 could cost $2,000 instead of $1,250 under a tiered schedule.
Recourse vs. non-recourse determines who eats a nonpayment loss — the IRS defines both structures, and many agreements mix them (IRS Factoring ATG).

The Four Numbers in Every Factoring Deal

Invoice factoring is the sale of one or more unpaid B2B invoices to a factoring company at a discount. The factor collects from your customer, keeps a portion as its fee, and returns the remainder to you — that's how the Federal Reserve describes the transaction in its March 2025 Consumer & Community Context. Canada's BDC describes the same mechanics: advance, holdback, collection, then release of the balance minus the discount.

Here are the formulas you need:

Advance = Invoice face value × Advance Rate
Reserve = Invoice face value − Advance
Factoring Fee = Invoice face value × fee rate (often tiered by days outstanding)
Rebate = Reserve − Factoring Fee
Total received = Advance + Rebate = Face value − Fee

One honest caveat before the numbers: there is no government-published "standard" advance rate or fee. BDC notes that advance rates and fees vary with your customers' creditworthiness, your receivable volume, and industry risk. Everything below is an illustrative example — real quotes will differ by factor and by deal.

Scenario 1: One $50,000 Invoice, Step by Step

Say you invoice a creditworthy customer $50,000 on Net 60 terms and sell that invoice to a factor with these illustrative terms:

Advance rate: 85%
Fee schedule: 1.5% of face value for the first 30 days, plus 0.5% for each additional 10 days (or part thereof) the invoice stays unpaid
Structure: recourse, with a 90-day buyback trigger

Day 0 — funding.

Step	Formula	Amount
Invoice face value	—	$50,000
Advance (85%)	$50,000 × 0.85	$42,500 to you now
Reserve held	$50,000 − $42,500	$7,500

Day 42 — your customer pays the factor $50,000. The invoice was outstanding 42 days: the first 30 days (1.5%) plus two 10-day blocks (days 31–40 and 41–42), adding 0.5% each.

Step	Formula	Amount
Fee rate	1.5% + (2 × 0.5%)	2.5%
Factoring fee	$50,000 × 0.025	$1,250
Rebate to you	$7,500 − $1,250	$6,250
Total received	$42,500 + $6,250	$48,750
Total cost	—	$1,250

You effectively paid $1,250 to turn a 42-day receivable into same-week Cash Flow. Rebate timing is contract-specific — some factors release it within days of collection, others batch rebates weekly or monthly. Ask.

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Same Invoice, Late Customer: Day 75

Now suppose the same customer drags payment to day 75. Nothing changes at funding — you already have the $42,500 advance. What changes is the fee, which now spans the first 30 days plus five 10-day blocks (days 31–40, 41–50, 51–60, 61–70, and 71–75).

Step	Formula	Amount
Fee rate	1.5% + (5 × 0.5%)	4.0%
Factoring fee	$50,000 × 0.04	$2,000
Rebate	$7,500 − $2,000	$5,500
Total received	$42,500 + $5,500	$48,000

The 33-day delay cost you an extra $750. This is the single most important thing to model before you factor: your cost is driven by when customers actually pay, not by the terms printed on the invoice. Pull your Aging Report, look at real Days Sales Outstanding (DSO) by customer, and run the fee schedule against actual behavior. Our guide to factoring rates and fees covers the other line items (origination, ACH, monthly minimums) that can ride along.

Don't read the fee as an interest rate

A 2.5% fee for 42 days is not "2.5% annual interest." On the $42,500 advance, a simple annualized cost estimate is $1,250 / $42,500 × 365 / 42, or about 25.6%. At day 75, it is $2,000 / $42,500 × 365 / 75, or about 22.9%. These illustrative estimates exclude additional fees and compounding; they are not a substitute for a required APR disclosure. The Federal Reserve notes factoring offers typically aren't expressed as an APR, and consumer disclosure standards don't apply to small business finance. Some states (California, New York, Utah, Virginia) require commercial-financing cost disclosures, which the CFPB determined are consistent with TILA — but coverage varies by state and transaction, so don't assume you'll get an APR-style quote. See factor rate vs. APR for the method.

Scenario 2: A Portfolio of Four Invoices

Most businesses factor batches, not single invoices. Here's the same illustrative fee schedule (1.5% first 30 days + 0.5% per additional 10 days or part thereof, 85% advance) applied to four invoices totaling $180,000:

Customer	Face value	Advance (85%)	Reserve	Paid on day	Fee rate	Fee	Rebate
A	$60,000	$51,000	$9,000	25	1.5%	$900	$8,100
B	$50,000	$42,500	$7,500	40	2.0%	$1,000	$6,500
C	$40,000	$34,000	$6,000	62	3.5%	$1,400	$4,600
D	$30,000	$25,500	$4,500	48	2.5%	$750	$3,750
Total	$180,000	$153,000	$27,000	—	—	$4,050	$22,950

Tier counting, for clarity: Customer B's day-40 payment spans one 10-day block past day 30 (1.5% + 0.5% = 2.0%); Customer C's day-62 payment spans four blocks — days 31–40, 41–50, 51–60, and 61–62 (1.5% + 4 × 0.5% = 3.5%); Customer D's day-48 payment spans two blocks (2.5%).

You received $153,000 within days of invoicing and $22,950 in rebates as customers paid. Total cost: $4,050 on $180,000 collected — a blended 2.25% of face value, entirely determined by payment speed. Notice Customer C alone accounts for about a third of the total fees. If one slow-paying customer dominates your AR (Concentration risk), factors will price for it — and it may be worth negotiating terms or excluding that account.

When the Customer Doesn't Pay: Recourse in Action

Suppose Customer C never pays and the agreement is recourse with a 90-day trigger. Per IRS guidance on factoring, in a recourse agreement the seller (you) bears the nonpayment risk; in non-recourse, the factor bears the risk of the customer's financial inability to pay. Many agreements purchase some accounts with recourse and others without.

On day 90, a typical recourse buyback on the $40,000 invoice looks like this (contract terms vary):

You repay the $34,000 advance (or the factor replaces it with a fresh eligible invoice, or nets it against your reserve account).
You owe accrued fees through day 90 — here, 1.5% + six blocks × 0.5% = 4.5%, or $1,800.
The invoice is reassigned to you, and collection becomes your problem again.

Two traps to read for before signing:

Non-recourse isn't dispute insurance. It typically covers customer insolvency, not short-pays, quality disputes, or refusal to pay. See recourse vs. non-recourse factoring for the full comparison.
Cross-collateralized reserves. Many contracts let the factor deduct a defaulted invoice from rebates owed on other invoices — meaning one bad customer can drain the whole reserve pool.

A Quick Contract-Review Checklist

Before you sign any factoring agreement, confirm these eight items in writing:

Advance rate — and whether it differs by customer or invoice age
Fee schedule — base rate, tier length (10/15/30 days), and whether partial tiers round up
Rebate timing — released per invoice on payment, or batched?
Recourse terms — trigger day, buyback mechanics, and whether reserves are cross-collateralized
Notification — will customers be told to pay the factor directly (most arrangements), and how is that communicated?
Minimums and term — monthly volume minimums, contract length, and termination fees
Extra fees — origination, ACH/wire, credit checks, lockbox, unused-line charges
UCC filing — factors commonly file a lien on your receivables; ask about scope and release terms

Note that factoring isn't a loan — it's a sale of Accounts Receivable (AR) at a discount, as BDC emphasizes — but factors still underwrite the deal. They assess your customers' payment history and creditworthiness, your invoice quality, and your business's track record. Approval, advance rates, and fees vary by provider; nothing is assured until a factor issues terms.

Comparing Offers the Smart Way

Because factoring pricing has so many moving parts, two offers with the same headline fee can differ meaningfully in real cost. Standardize every quote to three numbers: cash at funding, total dollars of fees at your realistic DSO, and approximate annualized cost. Then weigh factoring against alternatives — a business line of credit may be cheaper if you qualify, while factoring can win when your customers' credit is stronger than yours or your growth is outrunning your cash.

EQ Funding is a financing marketplace, not a lender: one application reaches a network of factoring companies and lenders across the US and Canada that compete for your business, so you can compare real terms side by side instead of taking the first quote.

Invoice Factoring→Up to 90% ARConvert outstanding receivables into same-day working capital.Lines of Credit→$10K – $500KRevolving capital, drawn on demand. Only pay for what you use.