Factoring Reserves

Today we’re going to be taking a look at factoring reserves, what they are, the types of reserves, how they work and how you can better understand and manage your factoring reserves for your benefit.

Factoring reserve is an amount of money that belongs to you (the factoring client) but that your factoring company is holding for you as well as keeping an accounting record for. For example, lets say you have a factoring relationship with a 3% flat discount fee and a 2% reserve requirement, in this case if you submit an invoice of $1,000 you would receive payment of $950, $30 would go towards the discount fee and $20 would go into your reserve account.

Your factoring reserve will be divided in 2 accounts or types of reserves, escrow reserve and cash reserve. If we come back to the previous example, the $20 that went into your reserve account, would actually go into the escrow reserve, the escrow reserve is where the amount is kept while the invoice that generated the reserve is outstanding. Once your factoring company collects on the invoice, the reserve amount will automatically move from the escrow reserve to the cash reserve. The cash reserve is where the reserve amounts generated from invoices already collected are kept and is the part of the reserve that is available for distributing to you if requested to your factoring company. Some factoring companies will automatically distribute to you the amount available in the cash reserves with  certain frequency, for example, weekly, monthly, etc.

As your cash reserves start to build up you might decide you want to keep them in reserve and let them grow, some of the reasons why this could make sense would be: To keep it safe from potentially spending it and maybe save up for a future date, perhaps to have funds available for unexpected or large one-time expenses, such as repairs, insurance down payments, deductible, etc. Or maybe to use as collateral to request exceptions from your factoring company, such as over-advances, short-term loans, equipment loans, etc.

If you have any questions with respect to reserves or if you want to know more, please reach out to us. At Little Mountain Logistics we’ll tailor a factoring program specific to your needs, we’ll answer all your questions and make sure you know exactly how everything works, we’ll guide you each step of the way, and do everything we can to help you run your business without worries.