How to Account For Factoring
Negotiate an agreement with the factoring company., Sell and record the receivables., Record a journal entry when the accounts are collected., Record a journal entry if a customer defaults.
Step-by-Step Guide
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Step 1: Negotiate an agreement with the factoring company.
You will want to know what percentage of the receivables they will advance to you in cash, and you will want to know what their service fee is.
On a non-recourse basis, the factoring company must take full responsibility if the accounts aren't paid, so they will charge a relatively high fee.
The percentage the factoring company will give you depends on the quality of the receivables (Home Depot vs.
Joe Blow) and historical data on how long it has taken to collect payments.Major factoring companies include 1st PMF Bancorp (who will also provide international factoring services), American Receivable, and BlueVine. -
Step 2: Sell and record the receivables.
After selling your accounts receivable to a factoring company, you will need to record the transaction in the appropriate journal entry.
For example, imagine you sell $10,000 worth of receivables to a factoring company that offers you an 80 percent cash advance and charges a 10 percent fee. (Note that these calculations will work equally well in other currencies.) To record the journal entry, debit Cash for $8000, debit an account called Due from Factor for $1000, and debit Loss on Sale for $1000.
Credit Accounts Receivable for $10,000.Due from Factor is an asset account, and is used to indicate the amount that the factor will pay you upon collecting the accounts in full.
The factor's service fee is recorded as a loss in the Loss on Sale account. , When the factoring company is paid, they will pay you the retainer.
In the previous example, the journal entry would involve debiting Cash for $1000 and crediting Due from Factor for $1000., If the customer does not pay the amounts owed, you will not receive the retainer back from the factoring company and will have to record a loss.
Using the previous example, imagine the accounts are not collected.
To record the journal entry, debit Loss on Sale for $1000, and credit Due from Factor for $1000. -
Step 3: Record a journal entry when the accounts are collected.
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Step 4: Record a journal entry if a customer defaults.
Detailed Guide
You will want to know what percentage of the receivables they will advance to you in cash, and you will want to know what their service fee is.
On a non-recourse basis, the factoring company must take full responsibility if the accounts aren't paid, so they will charge a relatively high fee.
The percentage the factoring company will give you depends on the quality of the receivables (Home Depot vs.
Joe Blow) and historical data on how long it has taken to collect payments.Major factoring companies include 1st PMF Bancorp (who will also provide international factoring services), American Receivable, and BlueVine.
After selling your accounts receivable to a factoring company, you will need to record the transaction in the appropriate journal entry.
For example, imagine you sell $10,000 worth of receivables to a factoring company that offers you an 80 percent cash advance and charges a 10 percent fee. (Note that these calculations will work equally well in other currencies.) To record the journal entry, debit Cash for $8000, debit an account called Due from Factor for $1000, and debit Loss on Sale for $1000.
Credit Accounts Receivable for $10,000.Due from Factor is an asset account, and is used to indicate the amount that the factor will pay you upon collecting the accounts in full.
The factor's service fee is recorded as a loss in the Loss on Sale account. , When the factoring company is paid, they will pay you the retainer.
In the previous example, the journal entry would involve debiting Cash for $1000 and crediting Due from Factor for $1000., If the customer does not pay the amounts owed, you will not receive the retainer back from the factoring company and will have to record a loss.
Using the previous example, imagine the accounts are not collected.
To record the journal entry, debit Loss on Sale for $1000, and credit Due from Factor for $1000.
About the Author
Brittany Hayes
Writer and educator with a focus on practical organization knowledge.
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