Most factoring transactions are structured as the purchase of an invoice in two installments. The first installment is called the advance and the second installment is called the rebate. This article will help you understand how these work.
The Advance
The factoring is advance is the installment that your company gets once the product has been delivered or work completed. It's provided to your company once the invoice is submitted to your customer and verified by the factoring company. Advances usually range from 70% to 85% of the invoice and vary by industry. The reason why factoring companies don't advance 100% of the invoice is because invoices don't always get paid in full. Sometimes, invoices are disputed or have discrepancies. The portion that is not advanced by the factoring company is used to cover any possible discrepancy.
The Rebate
The factoring rebate is the second installment that you get, once your customer pays the invoice in full. Usually, it's the remaining 15% to 30%, less any fees or invoice underpayments. The invoice factoring rebate is usually paid twice a month. but each factoring company has their own policy.
Summary
So if a factoring transaction has an 80% advance, your company will get 80% as soon as it invoices and the remaining 20% (less fees and underpayments) as soon as the customer pays. One important thing to note is that the advance percentage can be used as a risk mitigation tool by factoring companies. For example, if your customer have slightly below average credit, the factoring company may decide to give you a lower advance on those as a way to cut risk.
