Reserve Account

A reserve account (sometimes called a retention or buffer account) is maintained by an invoice finance provider to protect against dilution, credit notes, disputed invoices, and other reductions in the collectible value of the sales ledger. Rather than advancing 100% of the eligible invoice value, the provider advances the agreed percentage (typically 80-90%) and retains the balance in the reserve account.

When a customer pays in full, the reserve amount is released to the client after deducting any service and discount charges. If dilution occurs, such as through a credit note issued to the customer, the reduction is absorbed from the reserve rather than creating an immediate cash call on the client.

The reserve level fluctuates with the usage of the facility. In a well-run, low-dilution business, the reserve account will typically reflect the unapplied margin of the advance rate. In businesses with higher dilution, the reserve may be set at a higher percentage to give the lender adequate protection.

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