What Happens After the Invoice Is Paid?

When your customer pays the invoice, the factor releases your reserve — the portion that wasn’t advanced up front — minus the factoring fee, and the invoice is closed. On a $10,000 invoice where you received $8,000 upfront and the fee was $300, you’d get approximately $1,700 more for the invoice, ultimately collecting $9,700 of the $10,000. Knowing what happens at the end takes the mystery out of factoring and helps you reconcile your books cleanly.

It also helps to know you’re not locked in — you can pick and choose which invoices to factor.

The Two Pieces of Money

Remember the two pieces of money in factoring: the advance you received upfront (up to 80% of the invoice), and the reserve that was held back (the balance). The reserve has been sitting there, waiting for this moment.

How the Invoice Closes Out

When your customer pays the invoice — sending payment to the factor, as instructed — the cycle completes in a few clean steps:

1. The factor receives the payment from your customer for the full invoice amount.
2. The factor applies the payment against the invoice you factored, closing it out.
3. The factor releases your reserve (net of fees) for that invoice. The reserve portion held back when the factor originally purchased the invoice is now returned to you.
4. As a side note, the factor will net out any overages or shortages at this time. This truing of the payment should be very transparent in the factor’s collection report to you.

What the Fee Actually Buys You

In the example above, the $300 is simply the cost of getting the bulk of your money weeks early rather than waiting out the customer’s payment terms.

The invoice is now fully settled, your reserve is reconciled, and that transaction is done. You move on to the next invoice, and the cycle repeats.

A Couple of Practical Notes

The exact timing of when your reserve is released can depend on your agreement — some factors release it as soon as the payment clears, others on a set schedule. Ask so you can plan your cash flow.

That’s the back end; if you’re wondering about the front end, here’s how fast you can get cash from factoring.

Also, if a fee was tiered (increasing the longer the invoice stayed unpaid), the final fee depends on how long your customer took to pay — another reason faster-paying customers are cheaper to factor.

Keeping Your Books Clean

For your bookkeeping, the clean way to think about it: the advance and the later reserve rebate together equal your invoice amount minus the fee. Keeping good records of each invoice’s advance, fee, and reserve release makes month-end reconciliation simple. A good factor provides clear statements that show exactly this for every invoice, so nothing is ever a black box.

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Related Reading

• How to Record Factoring Transactions and Keep Your Books Accurate
• Recourse vs. Non-Recourse Factoring: What’s the Difference, and Which One Is Right for You?
• How Much Does Invoice Factoring Cost — and How Is My Rate Determined?
• Do I Have to Factor All My Invoices, or Can I Pick and Choose?

READ MORE FROM AMERICAN COMMERCIAL CAPITAL

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