Dilution

The portion of an invoice that will not be collected because of credits, disputes, returns, or offsets.

Why it matters

High dilution reduces the effective yield on invoices and can trigger reserve holds, ineligibility, or chargebacks over time.

How it appears in contracts

Dilution appears in the 'Representations and Warranties' section, where the seller warrants that each invoice represents a bona fide, undisputed obligation and that the debtor has no rights of offset, deduction, or counterclaim. Breach of this warranty—through credits, returns, or disputes that reduce the collectible amount—converts the affected invoice into an ineligible receivable subject to chargeback. Some contracts also include a 'Dilution Reserve' trigger: if your rolling dilution rate (total credits and adjustments divided by gross sales) exceeds a defined threshold such as 5 percent, the factor may increase the reserve percentage across all active invoices.

Related terms

Related article: What is 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.