Journal Entries for Factoring Receivables
Accounting for Factoring Accounts Receivable with a Financing Company
Invoice Reconciliation Steps with Invoice Factoring Bookkeeping
Table of contents
- Journal Entries for Factoring Receivables
- Accounting for Factoring Accounts Receivable with a Financing Company
- Invoice Reconciliation Steps with Invoice Factoring Bookkeeping
- Accounts Receivable Factoring Accounting
- What is Factoring Receivables?
- How to Record Factoring Transactions in QuickBooks & Sage
- Journal entries for accounts receivable factoring
- Step 1- Initial Funding by Bankers Factoring
- Step 2- Receipt of Customer Payment to Bankers Factoring
- Here is an accounts receivable factoring transaction example:
- Step 3- Partial Payment of Invoice(s) by Customer
Accounts Receivable Factoring Accounting
What is Factoring Receivables?
Factoring receivables or invoice finance/factoring is a fast way for companies to turn their open invoices or accounts receivable into same-day working capital. When we buy invoices, you receive 80-93% of your money upfront. Non-recourse invoice factoring is a true sale of a company’s invoices or accounts receivable to an invoice factoring company where the factor takes the credit risk and manages your A/R.
Invoice factoring is a tool for start-ups, fast-growing small businesses, and small business owners with less than a good credit score, and not-yet-bankable companies to safely offer credit terms. You can sell your invoices at a slight discount to face value under a factoring arrangement and still offer payment terms of net 30 to net 90 days to credit-worthy companies and government agencies. Invoice factoring is all about having solid accounts receivables for us to purchase from you.
Recourse versus Non-Recourse Invoice Factoring
There are two types of invoice factoring, recourse factoring, and non-recourse factoring. Bankers Factoring (Bankers) is a non-recourse factor finance company which means we take the bad debt or payment risk based on the credit risk and bankruptcy risk on your customers, the account debtors. A recourse factor can charge the invoice back to you for any reason. A recourse factoring company assumes zero risk. You will also hear the term invoice discounting, accounts receivable financing, receivables factoring, or A/R factoring when it comes to factor finance companies. Non-Recourse Factoring from Bankers Factoring is cheaper than many credit cards and one of the more desirable financing options if you have B2B or B2G sales on terms.
At the end of the day, invoice factoring or invoice financing turns outstanding invoices into same-day working capital, improving small business cash flow. Invoice factoring is also based on your customer’s credit history, not yours. This makes invoice factoring an outstanding tool for start-up companies up to your customer’s credit limit.
Read our article on how do you factor accounts.
How to Record Factoring Transactions in QuickBooks & Sage
Journal entries for accounts receivable factoring
The following example will provide a way to record journal entries for factored receivables with Bankers Factoring. Remember that your journal entries should be booked only once per day on a daily summary basis. You should use daily funding reports from Bankers Factoring as the source document for these journal entries. But make sure you double-check your journal entries by auditing the factoring purchase and factoring fee report(s) you downloaded from Bankers Factoring.
Whether you use Quickbooks Online, Sage, or another accounting software, these entries should work for you when entering your invoice factoring or invoice financing transactions.
Invoice Factoring Example and Assumptions:
Four general ledger accounts need to be created and added to your chart of accounts to account for your factoring relationship with Bankers Factoring:
FIS – Factored Invoices Sold: a contra asset account of the full amount or the invoice amount.
FIR – Factored Invoice Reserve: an asset account that shows the unearned factor reserves. Please read what are factoring reserves.
FFE – Factored Fees Expense: an expense account that shows the cost of factoring receivables typically based on days outstanding. I.e. Your factoring fees.
WFE – Wire Fees Expense: an expense account (or use your existing Bank Charges account).
For more information, read A/R Financing terms and glossary.
Step 1- Initial Funding by Bankers Factoring
To account for the initial funding (when Bankers Factoring selects the invoices from the Schedule to advance funds), make the following entry:
Assuming a $100,000 receivable with an 80% advance rate:
Step 2- Receipt of Customer Payment to Bankers Factoring
And now you wait for your customer’s payment on unpaid invoices. Once your customers pay your invoice factoring company (Bankers Factoring), your earned reserve is due from the factor (the remaining balance). You can get additional cash flow from that last 20% or $20,000 (minus the factoring fees) referenced in your factoring agreement when the invoice factoring company pays you your earned factoring reserve. Some factors charge both interest rates and factor fees. Bankers Factoring typically only charges a factoring fee of .9-1.6% per 30 days per our invoice factoring agreement.
Accounting for customer payments will require using your Collections Report, which you can download daily. Once Bankers receives payment, you identify each invoice, and the net earned reserve (the extra $20,000 minus the factoring fee charged) or outstanding balance is remitted by Bankers Factoring, apply the payment to the invoice in the accounts receivable journal by debiting the FIS account.
Here is an accounts receivable factoring transaction example:
Assuming a $100,000 payment in full by the customer:
In booking the journal entries this way, your cash balance will increase by $98,430 at the end of the transaction cycle. And the other $1,570 will show up as factor fees & wire expenses on the P&L statement. Upon full payment, “zero out” both the A/R (asset account) and the FIS (contra asset account).
Step 3- Partial Payment of Invoice(s) by Customer
If your customer pays short or takes a discount, then only apply the amount paid to the invoice in the journal in the manner above. We hope this helps you reconcile your invoice factoring funding schedules with your accounting system. If you are using QuickBooks online, we can look at your accounting package setup as we also use QuickBooks online, and so do many of our other invoice finance clients.
Please read our guide on funding your business with A/R financing.
Factoring receivables accounting without recourse and the proper journal entries are not hard to make, and we stand ready to help you understand how accounts receivable factoring works. We know you have many choices when it comes to factoring companies. Please pick Bankers to be your accounts receivable factoring company to receive safe and immediate cash from an award-winning factor company.
We are industry leaders in invoice financing and want to help you safely grow your business. Please call Bankers Factoring with any questions about how you properly account for factoring accounts receivable and make a proper journal entry for the factoring of receivables reserves.
Struggling with cash flow needs from slow-paying customer invoices? We also have special receivable factoring programs for start-ups and fast-growth small business owners from one of the few award-winning invoice factoring companies. And remember, invoice factoring with Bankers Factoring is cheaper and safer than swiping a credit card and a great financing option for business owner cash flow problems.
Ready for the owner-employees of Bankers Factoring to fund your entrepreneurial dreams through non-recourse receivable financing? Call 866-598-4295 or go to Bankers-Factoring-Application.
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