Invoice Factoring Advance Rates Can Be Restricted By Dilution, Here Is The Harsh Reality

 In Debtor Finance, Invoice Factoring, Invoice Finance

Dilutive items can hurt your advance rates.

What you will learn from this video:

1. What Dilution is

2. How Dilution effects Invoice Factoring advance rates

3. What Dilutive items are

4. How Dilution is calculated

Transcript below.

Hi guys, I’m Daniel from AR Cash Flow, and today we’re going to talk about
specific item in factoring and that is dilution. We’re going to look at
exactly how that affects invoice factoring advance rates.

So first thing’s first. What is dilution? Dilution is the difference
between the face amount of an invoice or a group of invoices and what
actually gets paid by the account debtor or the customer. So, in layman’s
terms, just because you issue an invoice for a $100 doesn’t mean that it
always gets paid in full. The reason for this is because of dilutive items.

Now, what is a dilutive item? Dilutive items could be advertising
allowances, early settlement discounts, credit notes for faulty goods, or
absolutely anything that seeks to reduce the amount of money that’s paid
against that invoice.

I want to move forward now to a real world example of a client of ours that
we had recently to illustrate exactly why it’s important to consider
dilution in your invoice factoring advance rates. So, this client was in
the fashion industry. They had issued a batch of invoices, let’s use round
figures, of roughly $100,000. Our advance rate to this client was 80%, so
we gave them $80,000 against their invoice.

When it came time to collect those invoices, there was a credit note on
there. Now, the credit note was for $25,000, and that’s the dilutive item.
The reason for this dilutive item was, in the fashion industry, sometimes
they pay commissions for selling goods, and that was the whole amount
there. The client didn’t disclose to us, or wasn’t aware themselves, of how
big that commission that they’re paying was going to be.

So the actual amount at the end of the day that was paid by the customer
was $75,000. When we went to collect those invoices, there was a small
balance left over of $5,000, plus our fees. Now the problem for the client
here and the problem for us is, with this short fall, we have to go and
collect that from somewhere. So, in this situation, the client had a decent
spread of customers. We were able to balance out their account using other

This creates two problems for the client going forward. The first one is
we’re going to have to take that $5,000 they’re short for, add to their
fees that they weren’t expecting. The second problem is that, going
forward, invoices to that customer will not be financed at 80% of the face
value. We have to take the dilution into consideration, which means we’ll
only be financing 80% of the $75,000, and that can have a bit of a
ramification to the client’s budgeting and cash flow forecast.

So there you have it. That’s why it’s important to consider dilution when
you’re looking and you’re factoring advance rates. Thank you.

For more information on Invoice Finance, call the office to book an appointment with a Product specialist on 1300 651 243

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