How to ask for early reserve release

Remember the old adage, "It's not what you ask, but how you ask it?" This also applies to requests you make to your factoring company. Most likely, the payment you get for the invoices you sell to your factor are being advanced to you in part. Anywhere from 85 to 97 percent would be typical. The remaining amount is held in a reserve account until the invoice is paid. Some factoring companies may release reserves as invoices are paid, but release reserves only once monthly.

In the event that you find yourself  in need of funds and do not yet have any new invoices ready to send in to your factoring company, all is not lost. The two most common reasons I was given for needing an early reserve release were fuel for the trucks or needing to meet payroll. When we got pleas such as is, we almost  always gave in.  much more went into the decision to hold or release those funds early. Try to keep in mind that factor relies solely on this reserve as a safety net should any of your customers not pony up the dough. So before you make your request, here is the information you will want to have at the ready:

1. Total outstanding A/R compared to total A/R over 60 days - Many factors have a 90 day recourse rule. If an invoice is not paid back within 90 days by your customer, you buy it back with that reserve. If your portfolio is upside down (more over 60 than current) they may hold that reserve indefinately.
2. On average, are most  of your customers paying in a timely manner and do they have a good relationship established with your factoring company?
3. Do you have any upcoming orders that you will be planning to factor? If so, your factoring company may be take that into consideration when making their decision.

In my old office, the Portflio Manager often based his decisions on whatever his mood was for the day. If you encounter this type of personality, keeping your cool and having a better understanding of not only the best explanations to give to backup your request, but also the information as to why would not put the factor in jeapordy of eating the costs of any unpaid fees for invoices.

Before you sign up with a factor, have an exit strategy!

If you are looking to sign up with a factoring company, I strongly recommend that you do so with a clear exit strategy. Ideally, you are planning on using invoice factoring in order maintain some positive cash flow during your business' current rapid growth. At some point, your growth rate will slow and when that happens, you do not want to be stuck in the vicious factoring cycle.


If you are looking to sign up with a factoring company, I strongly recommend that you do so with a clear exit strategy. Ideally, you are planning on using invoice factoring in order maintain some positive cash flow during your business' current rapid growth. At some point, your growth rate will slow and when that happens, you do not want to be stuck in the vicious factoring cycle. Please understand that this post is not a cookie cutter solution for every business. With that in mind, take comfort that the relationship with your accounts receivable factoring company may be a short one.

Most factoring companies lock in their clients with an automatically renewing contract. When I worked for Acme Factoring, we had verbiage in our security agreement that any client who wished to terminate the contract agreed to an early termination fee whenever we did not receive a written 90 day notice. That fee was equal to your average monthly fees paid over the next three months. Depending on your volume, that could be an astronomical amount of cheese.

My first tip in this series is to submit your written 90 day notice immediately after your first funding. Doing so will ensure that in three months, you will have the option available to you to end the contract without ensuing any fees. If you need longer that 90 days, just submit your written notice to rescind the notice to terminate the week of your last day. Be sure to carefully read over your security agreement for any language that suggests your factor will not releases due during that 90 day period. The portfolio at my company always used our security agreement as a deterrent to this tactic. We reserved the right to release or hold reserves at our discretion and he would claim that during the 90 days there was too much uncertainty for us to be able to release any reserves held that were due.

If you are still in the negotiating stage with your sales rep for the factoring company you've chosen, try to land a fee structure with a flat rate and fee rebates based on volume and the average days your A/R turns. Having a flat fee rate (90/10 advance 5% flat) would mean that on average, you will little to no reserves due each month anyways. More on that in a later post.

I had a client present written 90 day notices every three months for this same reason when I was with Acme Factoring. As an Account Executive, I can say that I found thoroughly frustratingghhg and finally confronted my client. Once I understand the reason, I realized it was really just a sound business move to give them an opportune exit strategy every 90 days.