How do you account for factoring?

The business environment is constantly changing, often creating uncertainty and forcing companies to adapt their strategies or make compromises to ensure efficiency in their operational processes. In the current context, the main challenge companies have faced has been the inability to cover current expenses because of a lack of funds.

The fastest solution recommended in this situation is financing through factoring. It gives companies the ability to collect money on invoices issued to customers, regardless of the due date.

Even so, many companies do not use factoring services because they do not know enough about how this transaction works. One of entrepreneurs’ main concerns when it comes to factoring is how to record the transaction in their accounting records.

Read on to find out what you need to know about the factoring contract, the accounting treatment of factoring, and why it is worth using factoring for your business.

What is a factoring contract?

A factoring contract is an agreement concluded between the assignor (the client company) and the factor (a bank or non-bank financial institution), through which the client company assigns to the other party the receivables arising from commercial activities carried out with debtors. Following the assignment covered by the contract, the factor is obligated to finance the assigned invoices immediately or at a later agreed date.

What are the characteristics of a factoring contract?

A factoring contract has the following legal characteristics:

• It is concluded for consideration, meaning that any factoring transaction is carried out in exchange for the payment of a fee to the factor;
• It involves successive performance, because the relationship unfolds over time. The client company transfers the invoices accepted by the debtor as they arise from commercial relationships, and the factor is responsible for paying the amount due;
• It is synallagmatic, because both parties seek to obtain a benefit;
• It is commutative, meaning the parties know their rights and obligations from the moment the contract is concluded. Even so, it can also be aleatory in the case of non-recourse factoring, when the factor assumes the risk of the debtor’s insolvency;
• It is a contract of adhesion, in the sense that the factor is obligated to finance the client company with amounts corresponding to the value of the assigned receivables.

What transactions does an invoice factoring contract cover?

The factoring contract involves the following types of transactions:

• The client company issues the invoice and delivers the goods or provides the services in accordance with the commercial contract concluded with the debtor;
• The client company creates an account on the Instant Factoring platform to submit the factoring request and sell the receivables;
• The documents will go through a verification process, and the client company will receive a response within a maximum of 2 hours;
• The client company will inform the customer (if the contract so specifies) about the assignment of the receivables to the factor;
• The factor will pay the invoice amount within no more than 24 hours of acceptance;
• The debtor will pay the full amount of the receivables to the factor on the due date.

How is this service recorded in the accounting records?

From an accounting perspective, factoring can be recorded in several ways, depending on the specific features of the contract and the type of documents prepared. Even so, the most common accounting treatment involves the following entries:

• Delivery of goods

4111 (customers) = %

707 (revenue from the sale of goods)

4427 (VAT collected)

• Recording the assignment of receivables to the factoring company

461 (miscellaneous debtors) = 4111 (customers)

• Collection of the value of the assigned receivables

5121 (bank accounts) = 461 (miscellaneous debtors)

• Payment of the fee

627 (bank and similar service expenses) = 5121 (bank accounts)

What rights and obligations does the factoring contract involve?

The factoring contract involves a series of rights and obligations for both the client company and the factor. In this regard, the client company:

• Undertakes to transfer to the factor the invoices and other documents supporting the receivables, in accordance with the contract specifications;
• Is obligated to guarantee the availability of the receivable on the date of assignment;
• Undertakes to fulfill the obligations set out in the commercial contract toward the assigned debtor;
• Is responsible for providing the factor with all the details needed to collect the receivables.
• Is obligated to pay the fee to the factor for the factoring services provided;
• Has the right to receive the value of the invoices assigned and accepted by the factor within a maximum of 24 hours of acceptance.

On the other hand, the factor:

• Must pay the value of the receivables received, according to the contract;
• Will bear the risk of the assigned debtor’s insolvency, if the chosen type of factoring provides for this;
• Will create a current account for the client company in order to make payment for the assigned invoices;
• Has the right to receive from the client company the fee due for the services provided.

Why is it worth using the factoring service of a non-bank financial institution?

Unlike banks, the factoring service offered by non-bank financial institutions brings several benefits. These include:

• Instant access to financing, for example, Instant Factoring provides an online platform designed to speed up the approval process for financing requests (up to 2 hours) and the disbursement of the amounts due (no more than 24 hours);
• The ability to sell an unlimited number of invoices;
• No unnecessary bureaucracy;
• A financing option suitable even for small businesses or businesses that are just getting started, without a credit history;
• Healthy cash flow without building up debt, since factoring is not a loan, your balance sheet will not be burdened with additional debt;
• Freedom to manage the cash obtained through factoring, the money obtained from factoring invoices can be invested or used for your business needs. The factoring service does not require the purchase of equipment or other assets, as is the case with other sources of financing;
• Less stress, because when you can collect money from invoices issued to customers, whether they pay on the due date or not, your company will be able to cover its current expenses on time, preventing financial bottlenecks. In addition, entrepreneurs can focus on streamlining operational processes to achieve business performance;
• Complementary services, such as customer credit checks, receivables management (receivables tracking, efficient collection control), or consulting services;
• No hidden costs, at Instant Factoring, all expenses are included in the financing fee, which covers the analysis cost, receivables collection costs, interest, administration costs, etc.;
• The factoring service is intended for companies in various industries (construction, transport, local manufacturers, retail, etc.).