97% advance rates are often advertised to entice businesses to inquire of a factoring company or sign up with them. Generally a true 97% advance rate is too good to be true. An overall 97% advance rate is almost unheard of because the amount of funds employed fluctuates with invoice purchases and invoice payments. Even if the contractual advance rate on a new invoice schedule purchase is 97% other factors may lower this. Advance rates are often (sometimes secretly) lowered by special reserve accounts and regular reserve accounts. They can be lowered by restricting when reserves are disbursed as well.
If you see or are offered a 97% advance rate it is always good to be skeptical and have someone familiar with factoring contracts review any contract before signing. Factoring companies in some industries have perfected managing the risks associated with buying an invoice so well that they will offer very high advance rates. A good rule of thumb is about any factoring advance rate is that an advance rate:
- is based on risk
- protects a factoring company from losing principal
- varies based on the quality or the collateral such as the credit quality of the account debtors and factoring client themselves
97% advance rates look great in sales copy but once you dig a little deeper you often find the real advance rate is not so generous. A good factoring company will start out at a lower advance rate and gradually honor requests to raise it as payment and relationship history dictate.
