Dilution rate

What fraction of submitted invoices end up not being fully paid, expressed as a percentage over a set period.

Why it matters

Factors use dilution rate to set advance rates and eligibility thresholds, and high rates can result in reserve increases or program restrictions. Dilution is calculated as the total credits, returns, and adjustments divided by total invoices funded over a period. A business with frequent credits, adjustments, or customer returns will have a higher measured dilution rate, signaling that the funded invoice values are less reliable. Improving invoicing accuracy and reducing credits before starting a factoring program can lower measured dilution and improve program economics.

How it appears in contracts

Dilution rate thresholds appear in the Eligible Receivables or Program Terms section of the factoring agreement. Some agreements specify that if measured dilution exceeds a stated percentage, the factor may increase reserve percentages, reduce advance rates, or declare an event of default. Dilution is typically measured over a rolling period such as three or six months. The agreement should define the measurement window and the dilution components: whether returns, settlement credits, early payment discounts, and billing errors all count toward the dilution calculation.

Related terms

Related article: Understanding dilution in invoice factoring

Related reading

Sources

  • International Factoring Association - International Factoring Association. Accessed 2026-05-19. Industry association source for factoring terminology and industry context.
  • Secured Finance Network - Secured Finance Network. Accessed 2026-05-19. Industry education source for secured finance and asset-based lending context.
Financial disclaimer. This page is educational only and is not financial, legal, tax, accounting, or credit advice. Factoring terms vary by provider and contract. Read the full disclaimer.