Most invoice financing transactions have two components, the advance and the rebate. The advance rate is provided to your company as soon as the invoice is financed, and can range from 70% to 95% of the receivable. The rebate is basically the amount that was not advanced, less any fees or reserves. For example, if your company got an 80% advance. You rebate will be 20% less any accrued fees and any held reserves.
Note that the rebate and the reserve are technically different, though many companies use the terms interchangeably (it can be confusing). A reserve is a percentage of your financed line that the receivables factoring company keeps on a permanent basis to handle invoice underpayments.
In reality you don’t get to negotiate the rebate per se. Rather, you negotiate the advance rate, your finance rate, and any reserves and then, what remains will be rebated.
Rebate payment policies
It’s important to note that different factoring companies have different rebate policies. This may seem like a trivial detail but can have a huge effect on your cash flow. Don’t forget it can be as high as 20% of your invoice. These are the most common policies and are listed in what we believe are best to worst. Items #1 – #3 are fairly common in the industry and tend to work well with most companies:
- It’s provided as each invoice is paid and settled
- It’s provided on a weekly basis
- It’s provided twice a month
- It’s provided once a month
- It’s provided when a schedule of account closes
Some companies will require that you group your invoices on a schedule of accounts when you submit them for funding as stated in item #5. While that is fine, many will also provide the rebate once the last invoice on the schedule get’s paid. Imagine that you submit a schedule with four large invoices that are due to be paid in 30 days. However, one of your customers goes through a temporary cash flow shortage and pays that invoice in 60 days. Three of the invoices may pay on time, but you will not see any rebates until the last invoice pays. Not every company does this but is very important that you determine this, and determine if it will work for you, before partnering with the factor.