Factoring with 100% Advance Rate

We are often asked if we can advance 100% against invoices. If you shop around on the Internet, you are bound to find some factoring companies advertising “up to 100% advance rates.” Is this too good to be true? Generally speaking, the higher the advance rate, the higher the fee. Some industries, like trucking, transportation, truckload hauling, freight brokerage and temporary staffing, command very high advance rates, sometimes as high as 97% to 100%. Fees for advance rates in this range vary but may be anywhere between 3% and 7% of the factored invoices.

If a factoring company quotes a 95% advance rate and a 5% fee, the advance rate is essentially 100% because the factor has no margin in its collateral. In other words, the factor advances 100% of the invoice amount, minus its fee. This is also known as “no reserve factoring” because, in the event the factoring company collects less than 100% of the amount of the factored invoice, there is no “reserve” from which the factor can make up the shortfall. Here’s an illustration:

Invoice Amount: $1,000
Advance Amount: $950 (100% advance minus fee)
Fee: $50
Reserve: $0

Now let’s say the factoring company collects only $975 from the account debtor. Now the client owes the factoring company $25 because there was no reserve to cover the shortfall. To make up the shortfall from that invoice, the factoring company will now have to deduct $25 from the advance on the next invoice as follows:

Invoice Amount $1,000
Advance Amount: $950 (100% advance minus fee)
Fee: $50
Minus: deficit ($25)
Net Advance: $925 (92.5% effective advance rate)

In industries like trucking and transportation, you should expect some “dilution” of the accounts receivable. Dilution is the percentage by which collections are less than the face amount of their corresponding invoices. For example, if a trucking company sells a factoring company $1 million of freight bills in a year, but the factoring company collects only $975,000 against those invoices, there was 2.5% dilution. Dilution of trucking receivables arises from such things as offsets, miscellaneous deductions and credits, late deliveries, pallet charges, lumpers, freight damage and freight claims. It is not uncommon to see 1% to 2% dilution or more if there are extraordinary uninsured claims. Add to this bad or uncollectible debt, and you may see collections run only as high as 94% to 96% of billings.

No reserve factoring places a very high burden on the client company and gives very little flexibility to the factoring company. No reserve factoring leaves no margin for error. Every penny not collected by the factoring company must be deducted from the next advance. To give the client more funding predictability, Interstate Capital prefers a slightly lower advance rate of around 90%. We can keep your costs lower and provide greater flexibility when a payment shortage arises. ICC will consider higher advance rates, but the fee will be a little higher.

Bear in mind, some advertising can be deceptive. Many factoring companies advertise a “97% advance rate,” but after deducting the 5% fee, the actual advance is 92%. Our fees for a real 92% are roughly half as much as the factoring company advertising misleading 97% advance rates. That being said, Interstate Capital offers advance rates up to 100%, minus our fee. Needless to say, the lower the advance rate, the lower the fee.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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