In a factoring relationship, you need to understand how reserves are calculated and the process for getting them paid. The reserves are your money so you need to understand the numbers and details from the start.
If the factoring company can’t answer that question, then you shouldn’t enter into the agreement. Without all the information, it’s impossible to compare different factoring companies and agreements to find the right one to partner with.
Some companies will delay paying you the reserve fee until 100 percent of the invoices are collected. Others might wait a month or more after they receive a cheque from your client before they send you the reserve. And surprisingly, even other factors that are thinly capitalized will use one client’s reserves to serve as another client’s financing capital.
Example: A reserve agreement to avoid
A factoring company has bought a $100,000 facility with 10 invoices. Nine of those invoices equalled $99,000 and one was for $1,000. The reserve is set at $20,000 and your agreement states that you will only receive a reserve when all the invoices on the schedule were collected.
Within 30 days you collect the nine invoices for $99,000. The factoring company holds your $20,000 reserve until the final $1,000 is collected, and the waiting game begins.
Liquid Capital Difference:
Liquid Capital generally pays reserves with each funding. Holding reserves is not a best practice. If there are reserves due then we pay them, and generally within the week.