Definition
The reduction in invoice value from credits, returns, discounts or disputes.
Why it matters
High dilution lowers advance rates and eligibility.
Where it shows up in a deal
Dilution is measured during diligence from twelve months of billings against collections, then tracked continuously once the facility is live. It is the number a funder watches most closely after buyer credit, and it is the usual reason an advance rate is cut mid-term rather than at renewal.
What it affects
- It sets the floor under your reserve, which must cover ordinary shrinkage plus accrued fees.
- Volatile dilution is penalized harder than a consistently moderate level.
- Unreported credit memos surface during reconciliation and damage credibility as well as the number.
- Structurally high dilution can be priced if disclosed upfront and is punished if discovered later.
A worked example
Billings of $4,000,000 in a quarter against $3,840,000 ultimately collected gives dilution of $160,000 / $4,000,000 = 4%. With a 1.5% fee on top, the reserve needs to cover about 5.5%, which argues for an advance rate no higher than roughly 94.5%.
The common mistake
Related terms
- Advance RateThe percentage of an invoice's value a funder pays upfront.
- ReserveThe portion of an invoice held back by a factor until the customer pays.
- ChargebackA deduction a customer, often a retailer, takes from an invoice payment.
- Eligible ReceivablesInvoices that meet a funder's criteria for advancing.
Questions about how dilution affects your facility?
Call (929) 658-8087 or request a written quote — no obligation, no credit impact.
