Dilution reserve
A reserve for expected credits, returns, allowances, or other reductions to invoice value.
Why it matters
A dilution reserve is an additional holdback above the standard reserve percentage, applied when the factor determines that the historical credit and return rate on a seller receivables portfolio is high enough to warrant extra protection. It reduces the net amount the seller receives per invoice. If measured dilution decreases over time, the factor may reduce or eliminate the dilution reserve, freeing up working capital. Sellers can accelerate dilution reserve reduction by improving invoicing accuracy and reducing credit memo frequency.
How it appears in contracts
Dilution reserve provisions appear in the Reserve Account or Pricing section of the factoring agreement. The agreement may define a specific dilution threshold above which the dilution reserve applies, or may leave it to factor discretion. Common language gives the factor the right to increase reserve requirements in response to elevated dilution without triggering an event of default. Sellers with high historical dilution should negotiate whether the dilution reserve is calculated based on historical rates or periodic reassessment of the current portfolio, since improvements may not be reflected if only historical data is used.
Related terms
Related reading
Sources
- International Factoring Association - International Factoring Association. Accessed 2026-05-19.
- Secured Finance Network - Secured Finance Network. Accessed 2026-05-19.