Factoring Receivables Journal Entry Example

Factoring your accounts receivables gives you instant cash and puts the burden of collecting payment from slow or non-paying customers on the factor. If you sell the accounts without recourse, the factor cannot look to you for payment should your former customers default on the payments. On the other hand, factoring your receivables could result in your losing customers if they assume you sold their accounts because of financial problems.

• If the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.
• Factoring companies will usually focus substantially on the business of accounts receivable financing, but factoring, in general, a product of any financier.
• Many lenders find recourse factoring more advantageous because the owners have provided them with a guarantee of payment when accounts receivable becomes non-performing.
• In a notification deal, the borrower’s buyer would be notified of the transaction, meaning that the company’s payable team would be contacted with new payment instructions by the factoring company.
• If the factor cannot collect the money from the buyer, it can demand the money back from the seller who transferred the receivables.
• The factor does not have to deal with risks of non-performing accounts receivable.

In this case, the company needs to make the factoring receivables journal entry whether the factoring receivables is with recourse or without recourse. On January 1, 20X5, Impatient Inc. factored its accounts receivable of $100,000 at a fee of 8%. Under the terms of the agreement, the company received $82,000 in cash and the rest of the amount was retained by the factor as a security for any bad debts that may arise. Any excess of this security sum over the total bad debts was agreed to be returned by the factor at the end of the accounting period i.e.

What is factoring with recourse?

When a client is looking to add a customer or sell more to an existing customer, it can check with the factor to see how much risk the factor is willing to take on that particular account. The client can use that information to inform its ongoing business decisions including how much business to carry out with that customer. Factoring is a form of financing in which your company sells its Accounts Receivable (collectible debt owed to you by customers) to another business known as the «factor» at a discount.

• A business should factor all of the Accounts Receivable that are within 90 days old.
• Settlement is to be made on 1 April 20×2, which will involve making a payment to Sample Company of any excess cash and the return of the uncollected accounts.
• He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
• New startups in Fintech, like C2FO, are addressing this segment of the supply chain finance by creating marketplaces for account receivables.
• In other words, the additional loss on bad debts under non-recourse factoring is borne by the factor.
• A company that factors with recourse is one that works with a Factor that lends against the accounts receivable using them as collateral to advance funds.

It is important to consider the benefits and drawbacks of both recourse and non-recourse when factoring your invoices to decide which will better meet your business needs. Factors can help your business deal with customers with poor payment histories due to their experience in collecting receivables. As such, these funds due are of potential value for lenders and financiers.

Why You Can Trust Finance Strategists

Recourse Factoring involves pledging a company’s invoices in exchange for an immediate cash advance. Any non-performing accounts receivable must be paid off by the company or the owners should the factor request payment of the non-performing accounts. The process of assignment of accounts receivable, along with other forms of financing, is often known as factoring, and the companies that focus on it may be called factoring companies. Factoring companies will usually focus substantially on the business of accounts receivable financing, but factoring, in general, a product of any financier. With an assignment of accounts receivable, the borrower retains ownership of the assigned receivables and therefore retains the risk that some accounts receivable will not be repaid. In this case, the lending institution may demand payment directly from the borrower.

It is useful to note that as the factor bears a much higher risk on the factoring receivables without recourse, so the fee it charges to the company is also much higher. Hence, in practice, the two examples above would come with different fee charges if one is factoring receivables with recourse while another is without recourse. The $13,000 of loss on sale of receivables comes from the fee charges of $5,000 plus the estimated loss due to uncollectible receivables (recourse liability) of $8,000. The due from factor in this journal entry is the amount that the factor withholds in order to cover the risk of bad debts that may occur. Likewise, the factor will pay this withheld amount to the company when those amounts in invoices are collected.

What Is Assignment of Accounts Receivable?

In the amount section, record the full dollar amount of the invoice as a negative number. This will create a net zero deposit that records the loan as paid off. In your Chart of Account, create a liabilities account just for factored invoices. You’ll use this account for the advances from your factored invoices. New startups in Fintech, like C2FO, are addressing this segment of the supply chain finance by creating marketplaces for account receivables. Liduidx is another Fintech company providing solutions through digitization of this process and connecting funding providers.

Both FastGrowth company and Ample Finance will need to make journal entries in their accounting software for the above information, but we’re only going to focus on FastGrowth. Follow the same steps as above to create an expense account for the factoring fees. The articles and research support materials available Factor Accounts Receivable Assignment Without Recourse on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The factor will charge a separate fee for its services when it purchases your Accounts Receivable.

Basically, you’re not obligated to pay the invoice back in the unlikely event that your customer doesn’t pay the invoice. You can raise cash fast by assigning your business accounts receivables or factoring your receivables. Assigning and factoring accounts receivables are popular because they provide off-balance sheet financing. The transaction normally does not appear in your financial statements and your customers may never know their accounts were assigned or factored. However, the differences between assigning and factoring receivables can impact your future cash flows and profits. The factored receivables meet the conditions for a sale while the assigned receivables do not.

Factoring of accounts receivable is the practice of transferring the ownership of accounts receivable to a company specialized in receivable collection, in exchange for immediate cash. In other words, the company that originally owns the receivables, sells them to another company called “factor” and receives immediate cash. https://quickbooks-payroll.org/ Spot factoring, or single invoice discounting, is an alternative to «whole ledger» and allows a company to factor a single invoice. The added flexibility for the business, and lack of predictable volume and monthly minimums for factoring providers means that spot factoring transactions usually carry a cost premium.