What Is a Reserve Account in Invoice Factoring?
Understand how reserve accounts work in factoring, why they exist, and what happens to your reserve when invoices are disputed or customers don't pay.
Key Takeaways
- ✓The reserve is the portion of your invoice (10%–20%) held by the factor until customer payment.
- ✓Reserves protect factors from invoice disputes, short-payments, and credit risk.
- ✓Reserve funds are released promptly once your customer pays the full invoice.
- ✓In recourse factoring, disputed invoices may be charged back against your reserve.
- ✓Some factors maintain a floating reserve pool; others hold reserves per individual invoice.
Why Reserve Accounts Exist
When a factoring company advances 85% of your invoice immediately, they're taking on risk that your customer might not pay the full amount—or any amount—within the expected timeframe. The 15% reserve is a built-in buffer against that risk.
The reserve protects against:
- Partial payments or short-payments by customers
- Invoice disputes ('We didn't receive the goods' or 'The work wasn't complete')
- Payment delays beyond the contracted period
- Credit risk if the customer becomes unable to pay
In non-recourse factoring, the reserve also covers the factor's risk in case of customer insolvency.
How Reserves Are Released
The standard release mechanism is straightforward: when your customer pays the invoice in full, the factor releases your reserve minus the factoring fee.
Example: $30,000 invoice, 80% advance, 2% fee:
- Day 1: You receive $24,000 (80% advance)
- Day 45: Customer pays $30,000 to the factor
- Reserve: $6,000 – factoring fee ($600) = $5,400 released to you
- Total received: $29,400
Most factors process reserve releases within 1–2 business days of receiving customer payment. The money flows automatically without you needing to request it.
What Happens If a Customer Doesn't Pay?
This depends on whether your factoring agreement is recourse or non-recourse:
Recourse factoring: If your customer doesn't pay within a set period (typically 90 days from invoice date), the factor charges the invoice back to you. They either deduct it from your reserve, offset it against future advances, or require you to repay the advance. Your reserve may be used to cover this obligation.
Non-recourse factoring: If your customer doesn't pay due to insolvency or credit default (as defined in the agreement), the factor absorbs the loss. Your reserve is protected. However, most non-recourse agreements still include recourse for disputes, fraud, or quality issues—only true credit default is non-recourse.
Floating Reserves vs. Per-Invoice Reserves
Factoring companies handle reserves in two main ways:
Per-invoice reserve: The factor holds back 15%–20% on each individual invoice and releases that specific reserve when that specific invoice is paid. Clean, transparent, and easy to track.
Floating reserve account: The factor maintains a pooled reserve balance across all your factored invoices. As invoices are paid, the reserve fluctuates. Some factors set a 'reserve percentage' target (e.g., 15% of the outstanding portfolio) and adjust your advances to maintain that balance.
Floating reserves are more flexible but less transparent. If you factor high volumes, ask for a per-invoice reserve schedule so you always know where your money is.
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