This question actually came up twice this week. Because of that, I thought I would add to the Factoring FAQs illustrating Accrued Reserves.
The Accrued Reserve is just the portion that the factor didn’t advance to the client; it’s the amount the factoring company is holding back until the invoice pays, in the event their customer (the account debtor) short pays, disputes, discounts, or for whatever reason doesn’t pay the full amount of the invoice.
Accrued (sometimes referred to as Escrowed) Reserves are created when a factoring company purchases an invoice from their client. The invoice amount, less the initial discount fee (typically), less the amount advanced to the client is what then goes into the Accrued Reserve.
Once an invoice pays and the factoring company has received actual cash, this payment then pays back the factor for their advance, pays the factoring fees earned/accrued and creates what is called a cash reserve.
The below calculation and example assumes (i) an 80% advance (or purchase) rate, (ii) a 1.75% discount fee for the first 30 days from when the invoice was purchased by the factor, and (iii) the invoice paying in 30 days or within the initial 30-day period:
Invoice Amount Totals: $263,500
Advance Rate 80%: $210,800
Discount Fee 1.75%: $4,611
Wire Charge: $12
Advance less wire fee: $210,788 (Amount that Client receives)
Ending Accrued Reserve: $48,089
Note the Accrued Reserve is the portion that is not advanced but being held back by the factoring company. When the invoice pays in full (assuming it pays in full), the Accrued Reserve would convert to a Cash Reserve and be returned to the client.
The Accrued Reserve would decrease if the invoice paid after the 30-days, based on the additional fees charged by the factor, thereby reducing the Cash Reserve back to the client. The above example illustrates the invoices paying within 30 days only.
Wishing you success. The Factor Guru.