How to Account for an Invoice Factoring Arrangement
Table of contents
- How to Account for an Invoice Factoring Arrangement
- Invoice Factoring Facts for Your CPA
- What is Invoice Factoring?
- How Does Invoice Factoring Work?
- How Quick Are Funds Available From Invoice Factoring?
- Is There Credit Risk With Invoice Factoring?
- How Affordable is Invoice Factoring?
- How Are Customers Dealt with in Factoring?
- How Is Invoice Factoring Different From a Bank Loan?
- Why Choose Bankers Factoring?
Invoice Factoring Facts for Your CPA
As trusted advisors to business owners, CPAs (Certified Public Accountants) must understand invoice factoring as a financial tool. It is crucial for CPAs to grasp the essential aspects of invoice factoring when ensuring the financial health of businesses.
What is Invoice Factoring?
Invoice factoring is a financial tool that helps businesses with long payment terms and growing expenses. It converts open or unpaid invoices into quick cash, providing a reliable cash flow. With Bankers Factoring, businesses can receive a cash advance on the same day after approval, ensuring no gaps in cash flow and injecting working capital quickly.
How Does Invoice Factoring Work?
Invoice factoring companies, like Bankers Factoring, will buy your invoices and provide an 80-93% cash advance against the invoice amount. Payment collection from your customer is now in the hands of the factoring company, and once we have collected the payment from your customer, we will issue you the rest of the reserves, minus a small factoring fee. Your business bank account always receives wired monies on the same day.
Read our Invoice Factoring FAQ to learn more about the process and the differences between invoice factoring and invoice financing.
CPAs will want to know how to account for and record factoring transactions in accounting software like QuickBooks and Sage. Read our article about journal entries for factoring receivables for a detailed description, example factoring transactions, and a tutorial.
How Quick Are Funds Available From Invoice Factoring?
When accountants are looking to help a business gain cash flow as soon as possible, they will be happy to know that A/R factoring is one of the quickest financial services available. When working with Bankers Factoring, the approval process is simple, straightforward, and fast. Once this process is completed, there is a remarkably short turnaround time of same-day funding after approval. With such fast services, your company is able to keep up with operations expenses and work at its full potential, continuing to create opportunities to grow and thrive.
Learn about how factoring companies verify invoices.
Is There Credit Risk With Invoice Factoring?
A CPA may worry about credit risk with invoice factoring and the factoring company checking their credit score, which could harm their credit file. However, invoice factoring does not examine the businessโ credit score for approval, and instead checks the customerโs credit score. This provides greater accessibility for companies who may have credit issues and keeps their credit file safe.
Invoice factoring with Bankers Factoring also provides the benefits of bad debt protection. We are a non-recourse factoring company, meaning that we will take on the credit risk for you, eliminating the worry of non-payment. If your customer fails to pay their invoice, we protect you from this loss and absorb it ourselves. CPAs are able to breathe easy, knowing that if the businessโ customer falls through, the business will be safe.
Learn more about recourse-factoring vs non-recourse factoring and which is the best for your business’s situation.
How Affordable is Invoice Factoring?
Accounts work hard to protect their clients from high-interest rates and fees that could end up harming businesses more than protecting them. This worry does not need to be present when working with invoice factoring, and especially Bankers Factoring: we have some of the industryโs lowest fees that you can find and no hidden fees. Our rates start at a low .9-1.6% per 30 days, a cost similar to swiping a credit card. This also includes a unique sliding scale where fees drop as your business grows.
Learn more about our invoice factoring rates and the true cost of receivable factoring.
How Are Customers Dealt with in Factoring?
CPAs may be concerned about customer interactions and potential confrontations during payment collection by the invoice factoring company. However, with Bankers Factoring, clients can trust our professional and customer-friendly approach. We will treat your customer as our own, and provide respect, professionalism, and courtesy. You can also read why your customers send payments to a factoring company.
Read about collection agencies vs invoice factoring companies.
How Is Invoice Factoring Different From a Bank Loan?
Bank loans and invoice factoring are both financial tools, yet there are some essential differences between the two. A bank line of credit is based on a borrowing base formula looking at your eligible accounts receivables. Banks off accounts receivable financing while invoice factoring is a true sale of your receivables. You can also read invoice factoring versus and A/R based line of credit.
Accessibility
Bank loans often have strict requirements, and many small businesses face challenges like insufficient credit, lack of collateral, and limited business history, which hinder loan approval. However, the requirements for invoice factoring are much more accessible. The client’s credit is checked instead of the business, requiring less documentation. Because of this, banks and credit unions even send us their loan turndowns for us to fund via invoice factoring.
Time of funding
Being approved for a bank loan is a long process and can often take weeks and up to months. Invoice factoring, on the other hand, is a quick and simple process, and with Bankers Factoring, there is same-day funding after approval. You can also read how to obtain financing when turned down by the banks.
Collateral requirements
Bank loans typically require collateral to secure the loan, causing concern about the possibility of the collateral being seized if the business cannot make payments. However, when working with Bankers Factoring, there is no risk of collateral seizure. This is because, under the factoring agreement, Bankers have bought the accounts receivable, alleviating any worries about collateral.
Restricted flexibility
Invoice factoring does not have any restrictions on where you can use the funds they provide. You can use the working capital that invoice factoring provides wherever your company needs it.
Risk of bad debt
When you take on a bank loan, you take on debt, which can prove to be potentially risky and stressful to pay back. However, with invoice factoring, there is no debt on the balance sheet and no worries of bad debt. In fact, with Bankers Factoring, we use non-recourse factoring, and will protect your business from credit risk and bad debt.
Learn more about invoice factoring vs loans.
We ensure transparent and easily comprehensible factoring fees, with hassle-free transactions that can be calculated effortlessly.
Please read the pros and cons of invoice factoring.
Why Choose Bankers Factoring?
Bankers Factoring, awarded FactoringClub’s Best of Factoring 2022 and 2023, offers safe unlimited factoring credit lines. Since 1998, we have been working with businesses like yours and have gained extensive experience. We understand your financing needs and are committed to offering flexible options for your growing business.
We want you and your CPA to understand the factoring process in exchange for cash flow, with factoring costs being cheaper than swiping a credit card. With our non-recourse agreement, we are one of the most flexible forms of business financing available.