Accounting For Factoring

Factoring is a service in which a factoring company will advance the invoice amounts due to a company minus a factoring fee. When accounting for this we need to consider the following:

• The advance from the factoring company creates a new liability
• The accounts receivable balance remains open until the customer pays directly to the factoring company, therefore leaving the asset unimpacted at the time of advance.
• There is a factoring expense which must be recorded
• The advance deposit must match the bank feed 
• When the invoice is paid by the customer it reduces A/R and the factoring liability

If we don't record this properly the usual impact is understated A/R, factoring fees (expense), and short term liabilities. It creates a problem with reconciliations against reserve balances and open balances that are due to your factoring company which will result in ignorance about risk. It may also impact your ability to maintain the relationship with your factoring company and client contracts if it perceived that this isn't properly reported on your financial statements. 

The solution is to have a best practice standard which will allow you to easily, systematically, and accurately record transactions involving factoring. The approach should effectively record the front end advance and the payment obligation to the factoring liability on the back end.

When recording the front end the advance is recorded as a split deposit transaction where money is received from the factoring company for the full amount of the invoice, minus the factoring fee. This is a two line deposit transaction in which the first line contains the full amount of the invoice advanced from the factoring company, and where the second line will be a deduction from the entire balance equal to the amount of the factoring fee. The total amount of the deposit will match the actual amount received net of fees. 

When the invoice is paid on the back end there are two transactions. The first is the receive payment to Undeposited Funds. The second is to create a zero dollar deposit transaction using a clearing account. The received payment is selected for deposit, and a negative of the same received payment is added to the deposit and mapped/categorized to the factoring liability. 

When done correctly this will keep your financial reporting spot on when it comes to factoring.