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Dilution
Also called AR dilution, dilution rate.
The gap between what a business invoices and what it eventually collects, caused by credits, returns, allowances, disputes, short-pays and customer offsets.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Measured over a trailing period as the non-cash reduction of receivables divided by gross sales for the same period. If a million dollars of invoices produce nine hundred forty thousand of cash and sixty thousand of credit memos, dilution is six percent.
Factors and asset-based lenders measure it because it sets the ceiling on the advance rate. Advancing more against a ledger than the ledger reliably converts to cash puts the lender underwater on collection, so the advance rate is set below a hundred percent minus dilution with a margin on top.
Causes are usually operational rather than financial: billing errors, unapproved shipping variances, standing volume rebates taken as deductions, promotional allowances, and customers who simply short-pay freight every time and are never challenged.
Where this one catches people
Dilution is not bad debt and is not measured against write-offs. A customer who pays every invoice in full except for a routine freight deduction is a perfect credit and a dilution problem, and it costs you advance rate exactly as if they were late. Businesses complaining about a low advance rate are frequently being priced for a billing practice they could fix in a month.
Worked through
Gross sales of $1,000,000 in a quarter, credit memos and allowances of $60,000, giving 6% dilution. A factor advancing 85% against that ledger has real headroom. Take dilution to 20% through unresolved short-pays and an 85% advance rate no longer works, so the advance rate drops and the business gets less cash from the same invoices.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Dilution — common questions
What does dilution mean?
The gap between what a business invoices and what it eventually collects, caused by credits, returns, allowances, disputes, short-pays and customer offsets.
Where does dilution catch people out?
Dilution is not bad debt and is not measured against write-offs. A customer who pays every invoice in full except for a routine freight deduction is a perfect credit and a dilution problem, and it costs you advance rate exactly as if they were late. Businesses complaining about a low advance rate are frequently being priced for a billing practice they could fix in a month.
Is dilution the same as an interest rate?
Dilution is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does dilution apply to?
Invoice Financing, Asset-Based Lending.
Is there a worked example of dilution?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside dilution?
Advance rate, Borrowing base, Chargeback, Days sales outstanding, Eligible receivable.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.