Invoice Factoring Fees Decoded: A Complete Glossary of Terms

Factoring contracts come with their own vocabulary. Understanding these terms before you sign protects you from surprises and helps you compare offers accurately. Here's a complete glossary of factoring terms every business owner should know.

Core Financial Terms

Advance rate: The percentage of an invoice's face value that the factoring company pays you upfront. If an invoice is $100,000 and the advance rate is 90%, you receive $90,000 immediately. The remaining 10% (minus fees) is remitted when your customer pays.

Reserve: The portion of the invoice not advanced upfront. Also called "holdback." In the example above, the $10,000 is the reserve. It's held by the factor until your customer pays, then returned to you minus the factoring fee.

Discount rate (or factor rate): The factoring company's fee, expressed as a percentage of the invoice face value per time period—usually per 30 days. A 2% discount rate means you pay $2,000 per month per $100,000 of invoices factored.

Factoring fee: The total amount paid to the factor for purchasing your invoice. Often calculated as the discount rate multiplied by the number of billing periods the invoice is outstanding.

Contract Terms

Recourse: Your obligation to buy back an invoice if your customer doesn't pay within the recourse period. In recourse factoring, you retain credit risk.

Non-recourse: A factoring structure where the factor absorbs the loss if your customer becomes insolvent. Protects only against genuine credit default, not disputes.

Recourse period: The number of days (from invoice due date) after which the factor exercises recourse rights. Typically 60–90 days past due.

Whole-ledger (or full-ledger) factoring: A contract requiring you to assign all of your accounts receivable to the factor. You cannot selectively factor only some invoices or customers.

Selective factoring (spot factoring): Factoring only specific invoices or customers rather than your entire receivables book. Usually costs more than whole-ledger arrangements.

Minimum volume commitment: The minimum monthly invoice volume you're required to factor. You pay a fee even if your actual factoring volume falls below this threshold.

Customer and Invoice Terms

Notice of assignment (NOA): The letter sent to your customer informing them that their invoice has been assigned to the factoring company and directing payment to the factor's lockbox.

Eligible invoice: An invoice that meets the factor's criteria for purchase—typically current (not past due), for completed work, to a creditworthy customer, with no known disputes or liens.

Concentration limit: The maximum percentage of your total factored receivables that can come from a single customer. Exceeding this limit may reduce the advance rate or require additional reserves.

Verification: The process by which the factor confirms an invoice is valid and the customer acknowledges the obligation. Methods vary from a phone call to email confirmation to automated systems.

Process Terms

Lockbox: A bank account controlled by the factor where your customers send payment. Funds received in the lockbox are processed to release your reserve.

Funding: The transfer of the advance to your bank account, typically via ACH or wire transfer.

Reserve release: The payment of your held reserve to you after your customer pays the invoice.

Charge-back: When the factor returns an invoice to you because it has become ineligible (typically due to the recourse period expiring without payment).

Understanding a Factoring Proposal

When you receive a factoring proposal, the most important numbers to compare are: advance rate, discount rate (and whether it's flat or tiered), monthly minimum, contract term, and termination fee. Calculate your total cost under realistic scenarios before accepting any offer.