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 a business owner’s trusted advisor, it is important for CPAs (Certified Public Accountants) to understand invoice or accounts receivable factoring as a financial tool. When CPAs are working to ensure the financial health and well-being of businesses, understanding the essential aspects of invoice factoring is crucial.
What is Invoice Factoring?
When businesses are stuck with 30 to 60 days payment terms and expenses are growing, invoice factoring is a financial tool that solves these issues by taking these open or unpaid invoices and turning them into quick and reliable cash flow. With Bankers Factoring, businesses are able to receive a cash advance as soon as the same day after approval, eliminating worries of gaps in cash flow and injecting quick working capital.
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. Monies are always wired the same day into your business bank account.
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 have concerns that there may be credit risk associated with invoice factoring and that the invoice factoring company will pull the business’ credit score, harming their credit file. However, invoice factoring does not examine the business’ credit score for approval, and instead checks the customer’s 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 business’ 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 industry’s 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?
The fact that the invoice factoring company communicates with the customer or account debtors may create worries for CPAs about how the customers will be dealt with, and whether the invoice company could be confrontational in collecting the invoice’s payment. However, with Bankers Factoring, accounts can rest assured knowing that we will always use our famous Bankers’ light touch with clients. 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.
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.
Bank loans often have strict requirements, and many businesses, especially small businesses, often have issues like insufficient credit, no access to collateral, and little time in business that will prevent them from being approved. However, the requirements for invoice factoring are much more accessible. The business’ client’s credit is checked instead of the business, and much less documentation is required. 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 often require collateral to secure the loan, creating worry about this collateral being seized if the business becomes unable to pay. When working with Bankers Factoring, there is no risk of collateral being seized as under the factoring agreement, the accounts receivable have been sold to Bankers, and worries of this are able to be put to rest.
- Restricted flexibility
Some bank loans may put restrictions on where the funds they provide can and can’t be used. With invoice factoring, there are no restrictions on where the funds are used, and the working capital that invoice factoring provides can be used wherever the 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 work to make sure that our factoring fees are clear and easy to understand, with transactions so simple you can calculate them on a napkin.
Please read the pros and cons of invoice factoring.
Why Choose Bankers Factoring?
Named FactoringClub’s Best of Factoring 2022 and 2023, Bankers Factoring wants to work for you and offer you a safe unlimited factoring line of credit. Since 1998, our owner-employees have been working with businesses like yours, and as fellow business owners ourselves, we are eager to provide your growing business with flexible and simple financing options.
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.