When receivables are factored, businesses will receive an advance of 80% of the invoice amount from their buyers. Factoring receivables allows businesses to free up cash flow. A fee is deducted from the remaining 20% after the invoice has been collected.

accounts receivable factoring example

If you don’t receive payments for your invoices, you can factor them to free up cash flow. The company generally collects the payments for you.

This post will explain everything you need to know about factoring receivables so that you can decide if this type of small business loan is right for you.

Accounts receivable factoring, also known as invoice factoring or business receivable factoring, is a method of business financing that companies sometimes use to help manage cash flow and meet expenses. Factoring receivables involves a different process than taking out a bank loan, but the general goal for both is often the same: to provide the business with needed cash.

Below are the definitions of some key words we will be using in this article.

  • Company or business: The company that needs funding to meet their financial obligations.
  • Customer: We’re the invoicing division of the company/business.
  • Factoring company or factor: A company that offers loans to businesses in exchange for a percentage of the company’s invoices.

How Accounts Receivable Factoring Works?

We should take a closer look at how accounts receivable factoring works. After all, you ought to feel comfortable with the process and know how it will benefit your company.

A factoring company buys receivables at a discount of 50% to 90%. Until the invoice is paid, the factor will charge an additional 1% every week.

There are some lenders who offer non-recourse factoring, which means they assume the credit risk of nonpayment. If your client is not paying, other lenders can seek “recourse” by repurchasing the invoice.

Read More: How to Create a Custom Invoice in QuickBooks?

Accounts Receivable Factoring Example:

You can better understand accounts receivable factoring by examining a practical example: If you’re like most SMB owners, you are likely too busy to collect your outstanding invoices, but you can’t let your cash flow suffer as well.

Accounts receivable factoring companies can help you collect your unpaid invoices. In our factoring strategy, the factoring business buys 85 percent of the invoice value whereas the lender gets 15%, which means you’ll get $170,000 in your bank account while the lender keeps $30,000. You’ll keep $20,000 and the lender will keep $10,000.

Few More Examples of Accounts Receivable Factoring:

Transfer without recourse example:

DateAccount TitleDebitCredit
05-06-2021Cash$200,000 
05-08-2021Intrest Expense$400,000 
05-10-2021Account Receivable $600,000
Example – Transfer without recourse

Transfer with recourse example:

DateAccount TitleDebitCredit
05-06-2021Cash$300,000 
05-08-2021Due to factor (Holdback)$400,000 
05-10-2021Short term debt $700,000
Example – Transfer with recourse

How Many Types Are :

They Are of 2 Types: Recourse Factoring and Non-Recourse Factoring

Factoring of receivables can be done without recourse or with recourse. Here’s how they compare:

  • In a transfer with recourse, the factor may claim money from the company that transferred the receivables if it cannot collect from the customers.
  • In a transfer without recourse, a factor assumes the full risk of uncollectible receivables, and the company transferring the receivables is not liable for said receivables.

What is the Factoring Companies’ Method of Pricing Accounts Receivables?

There is a fee associated with factoring, called the factoring fee. The factoring fee is a percentage of the receivables being factored. It is determined by the following factors:

  • Business sector of the company
  • Amount of receivables to be factored
  • Amount of receivables to be factored Companies’ creditworthiness
  • Number of days outstanding (average number of days outstanding)

Furthermore, factoring companies usually charge a lower rate for recourse factoring than they do for non-recourse factoring.

A higher rate is charged as compensation for the risk involved in non-recourse factoring when the factor is the sole bearer of bad debts. A company that sells its receivables to a factoring company still has some liability if some of those receivables are not collected.

To put it simply, the lower the factoring fee, the easier the company feels it will be to collect the receivables.

What is Accounts Receivable Turnover Formula?

Divide the beginning and ending balances by 2 to calculate the average accounts receivable for the period in order to calculate the accounts receivable turnover. Divide that figure by the net credit sales for the year for the average accounts receivable turnover. Formula is:

  • Beginning receivables + ending receivables / 2 = net receivables
  • The turnover in accounts receivable is calculated by taking the net credit sales / accounts receivable ratio.

How to Reconcile QuickBooks When Factoring Invoices?

Factoring Invoices in QuickBooks: Three Steps

  • The first step is to create an Accounts Receivable account: Create a new Accounts Receivable Account called “Factored A/R” in your Chart of Accounts. This account must be used to create all invoices submitted to your factoring company. For invoices not factored, use the original account.
  • The second step is to determine if you owe a balance: Check your eFactor account to see which invoices have already been paid if you are factoring with A company. You should do this every day. You will go to Customers Receive Payments in QuickBooks and receive payments for the factored debts, rather than adding the payment to the standard “Undeposited Funds” account, you will post to a new “Other Current Asset” account called “Due from Factor,” which will show that A company Funding owes you a balance.
  • The third step is to deposit the funds in a checking account: Make sure to select “Due from Factor” as the “From Account” when making a deposit from your factoring company.

How Are Factor Fees Calculated?

Factors will look into a number of things to determine the percentage fee that they will charge your business. A factor might take into consideration the industry your business is in, how many invoices you receive, and your customers’ payment histories when determining what rate to charge you.

There are a variety of invoicing fees. Generally speaking, these fees are between 1% and 3%. However, the fee can be as high as 5%. Furthermore, a factor may charge an additional flat fee if the invoice is not paid—2% the first week, 2% the second week, and so on. Another type of invoicing fee is tiered, meaning that they might increase if the invoice isn’t paid right away—2% the first week, 3% the third week, and so on.

Frequently Asked Questions:-

Is invoice factoring a better option than a loan?

Depending on the circumstances. Factoring may be an option to consider. In order to determine if invoice factoring is right for your business, consider your business goals, your financing requirements, and the value of your unpaid invoices. Here you can understand how to record a loan receivable in QuickBooks.

What will happen if customer fails to pay after using recourse factoring service?

You might be required to buy back an invoice if your client fails to pay the balance back and you are utilizing a recourse factoring service. You won’t be held responsible for the customer’s failure to pay if you work with a non-recourse-factoring service.

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