A long time ago with a computer I no longer use, I produced a blog post and video on Factoring Receivables in QuickBooks. At that time I had encountered a series of clients who were factoring their receivables and struggling with the accounting.
I blamed the reports from the factoring companies. The blame was fair. The reports were awful. The real question was whether it was the factoring companies’ fault, of the companies that made the software they were using?
Perhaps it was both. The software companies for making software that produced horrible reports, and the factoring companies for not pushing back and insisting on something better.
One factoring company CEO reached out to me. My comments regarding factoring companies being the “dregs” of society in the accounting world incensed him. I was merely expressing my frustration about the fact that it was nearly impossible to reconcile the amounts paid on invoices with the amounts received from the factoring companies.
I have good news for people who are factoring receivables in QuickBooks Online
The reports are much better these days!
With better reports it is now much easier to record the accounting for factoring receivables in QuickBooks Online.
Here’s how factoring works broken down simply.
There are essentially two transactions
- The Loan – you sell invoices to the factor
- The Payoff – your clients pay the invoices, and the factor loan is paid off
There are several components that need to be tracked in the above two transactions
- The Loan / Liability
- Reserve / Escrow
- Accounts Receivable
- Factor Fees
The First Transaction When Factoring Receivables in QuickBooks Online
The first part is easy.
You sell your invoices to the factor.
The invoices have NOT been paid. So Your customers still owe you the money!
The only thing you record is a loan.
You receive the net amount that the factor pays you as a deposit into your bank account.
Your loan payable is the full amount of those invoices.
The difference between the gross amount of the invoices you sold, and the net amount you received is the reserve / escrow amount. This is an asset (like a receivable). This is because the factor eventually needs to pay you these monies, or use them to pay off their loan to you.
This brings up the first report you need from the factor. A list of the invoices you sold them with the Gross amounts, the reserve taken out, and the resulting net amounts.
The factor needs to itemize this by invoice # and totaled so it’s really clear.
Make sure your factor can show you a report that looks something like this. You will see an example in the video above, if you haven’t watched it already.
The Second Transaction When Factoring Receivables in QuickBooks Online
The second transaction is more complicated (but not much more).
At this point the client paid the invoice (usually directly to the factor).
The factor now sends you a settlement report.
The Factor should itemize this report by invoice, and it should show the following:
- The Gross Invoice Amount
- Advances made against that Gross Amount
- The Reserve
- The Factor Fee
- The Net Payout
As long as you have this information, you will be able to reconcile the invoice amounts paid with the net amount you received.
Two Other Reports to Consider When Factoring Receivables in QuickBooks Online
The Reserve Report
The factor will send you other reports. Among these, you should see a “Reserve Report.” This will show you the history of the reserves from selling invoices, and reserves paid out when invoices are settled. You should be able to reconcile this with your reserve asset account on your books.
When reviewing your factor’s reports, if you find your reserve asset doesn’t match the factor’s reserve report stop and research it until you can get it to match. Call your factoring company. They can help.
The Loan Report
Remember that from the Factor’s side this is money you owe them. Since your payable is their receivable, you should also reconcile this account to make sure you are in agreement with the factor.
Make sure you are completely up to date on all of your bookkeeping before you reconcile your reserve and loan accounts.
I know that goes without saying, but these are the days when we have to warn people that a cup of coffee is hot!
Want more help? Get a 1:1 session with me.