retention rate

Understanding Retention Rate in Financial Factoring

The term retention rate is critical in the world of Financial Factoring. It refers to the percentage of a factor's earnings, which is withheld from the initial payment to the client until the debtor pays the invoice. To simplify, think of it as a safety net for factors. It ensures that they have a cushion to cover any unexpected costs or risks associated with the invoice.

Why Retention Rate Matters

In Financial Factoring, the retention rate is a key measure. It not only affects the cash flow of a business but also reflects the level of risk that the factor is willing to accept. A higher retention rate might mean more security for the factor, but it results in less immediate cash for the client. Conversely, a lower retention rate could indicate more trust and a stronger relationship between client and factor.

How Retention Rate Operates

When a business sells its invoices to a factor, the factor provides an advance payment. This advance is usually a percentage of the invoice's total value. The retention rate is the portion of this total not included in the advance. Once the invoice is paid in full by the end debtor, the factor releases the retained amount minus any fees or charges—that's when the business receives the remainder of their funds.

Calculating the Retention Rate

To calculate the retention rate, subtract the advance rate from 100%. For example, if the advance rate is 80%, the retention rate would be 20%. This means the factor holds back 20% of the invoice value and the client gets the rest once the invoice clears.