How to record factored accounts or invoice financing - Standard VAT

An example

As we work through the steps, we'll use the following example.

We have the following invoices with a combined total of £1000 that we've assigned to the factoring company:

The factoring company initially sends you 80% of the outstanding debts, using our example this is £800. But, they retain 20% of the debts until the customers pay the outstanding invoices. In addition to this, the factoring company also charge you a fee, in this example the fee is £100.

Create a factoring bank account

1. Click Bank accounts, click the New/edit drop-down then click New.
2. In the boxes provided enter the details for the new bank account, for example:
   

   A/C ref	Enter the nominal code you want to use for the Factoring bank account. If you're using the Sage default Nominal Ledger structure we recommend you use a number within the range of 1200 to 1299. If you enter a nominal code outside of the existing Chart of Accounts range, a warning appears.
   Nominal Name	Enter a description for this new bank account, for example, Factoring Bank Account.
   Current Balance	If required, to enter an opening balance, click OB then when prompted to save the record, click Yes.
   Minimum Limit	If required, enter an amount that you don't want the balance of this account to fall below. If the amount of money you have in this account falls below the amount specified here, then the bank appears in red in the Bank accounts window.
   A/C Type	From the drop-down list choose the type of account for the bank account.
   Currency	If you use the Foreign Trader option, choose the relevant currency for the account.
   No Bank Reconciliation	If you don't want to run a bank reconciliation for this bank account, select this check box.

   To add further details to your Bank Account, click the relevant tab from the Bank Record window and complete as required.
3. Click Save then click Close.

You've now set up the new bank account for the factoring company.

Create a factoring fees nominal code

1. Click Nominal codes then click New.
2. Complete the Nominal Record window as follows:
   

   N/C	Enter the nominal code number you want to use. This should be in the Overheads section of the Profit and Loss.
   Name	Enter the name for the nominal code, for example, Factoring Fees.

3. Click Save then click Close.

 NOTE: You should now check your Nominal Ledger Chart of Accounts to ensure that the nominal code you've created is included within the appropriate section of the Profit and Loss report. For further information about this, please refer to this guide.

Receive money from the factoring company

When the factoring company accepts the invoice they send you an initial payment, in our example this is 80% of the value of the invoice. We can't record this against the invoice as the invoice is yet to be paid, therefore we transfer the value from the factoring bank account to the business bank account to show the receipt of the money.

1. Click Bank accounts, select the factoring bank account then click Bank transfer.
2. Enter the relevant information into the Bank Transfer window, for example:
   

   From	The nominal code and name of the bank you selected to move your money from, for example, the factoring bank account appears here.
   To	Enter the nominal code of the bank you want to receive the money, for example, your main bank account.
   Date	Enter the date for the transfer.
   Details	Enter the details for the transfer, for example, 'Money from factoring company'.
   Payment Amount	Enter the amount you've received from the factoring company, in our example, 800.00.

3. Click Save then click Close.

 NOTE: You should repeat this procedure when your customers pay the outstanding invoices to the factoring company and you receive the balance of the factored transactions. In our example, this is the remaining £200.

Fees charged by the factoring company

When the factoring company makes the second payment to you, they may charge you the factoring fees separately, or they may deduct the fees from the invoice value they send you. The method they use determines which bank account you use to pay the fees:

• Business Current Account – Use this account if the full outstanding amount of the invoice has been received. 
• Factoring Bank Account – Use this if the net amount of the outstanding value minus the fees has been received

 NOTE: If the factoring company is set up as a supplier, you must post a supplier payment rather than a bank payment.

1. Click Bank accounts then from the Payments drop-down click Bank payment.
2. Enter the relevant information into the Bank Payments window, for example:
   

   Bank	Date	Ref	N/C	Details	Net	T/C	Tax
   Choose the bank account depending on how the fees are deducted.	Date	Ref	Factoring fees nominal code	Details	Net amount, in our example, 100.00	Tax code, for example, T2	VAT Amount, for example, 0.00

3. Click Save then click Close.

Post the customer receipts

When you receive the second payment from the factoring company this indicates that they've received payment from the customer and you can now mark the invoice as paid. The factoring company may send you a statement detailing the date they received payment from the customer which is the date you should use, if not then use the date that you receive the payment from the factoring company.

1. Click Bank accounts, select the factoring bank account then click Customer receipt.
2. Complete the Customer Receipt window as follows:
   

   A/C	Enter the account code of the required customer, in our example, ACC1. All of the customer's outstanding transactions appear.
   Date	Enter the date you want to appear on the customer receipt. The current software date automatically appears, but can be amended if required.
   Amount	Enter the value of the customer receipt, in our example, 200.00.

   To allocate the money entered into the Amount box, to the relevant invoices, enter the required value in the Receipt box of an invoice item. For example, enter 200.00 against the relevant outstanding invoice.
   
   Repeat these steps to process the receipts for any other customers who've paid their outstanding invoices, in our example, ACC2 and ACC3. You've now recorded the customer receipts against the outstanding invoices.
3. Click Save then click Close.

This method of recording factoring transactions gives you an up to date picture of your customer accounts, highlighting those accounts that are still overdue, and allowing you to determine if they're still eligible to purchase goods from you on credit.

Recourse factoring

If you have a recourse factoring agreement and your customer does not pay an invoice, the factoring company then re-assigns the invoice back to you. The original customer invoice is no longer outstanding on the customer's activity and the next payment from the factoring company is reduced by the amount advanced for the invoice.

If you need to repay the original money received from the factoring company, as this was recorded as a bank transfer from the factoring bank account to the business current account, you simply record another transfer from the business bank account to the factoring Bank account to reverse the payment.

 NOTE: This invoice may now qualify for bad debt relief.

Non-recourse factoring

If you have a non-recourse factoring agreement and your customer doesn't pay an invoice, the factoring company can't then re-assign the invoice back to you.

The original customer invoice remains outstanding on the customer's activity and you have received 80% of the invoice value which the factoring company can't claim back.

The suggested way to deal with this is to create a customer receipt for the value of the 80% received, paying it in to the factoring bank account, this will leave 20% of the invoice outstanding which in due course you can raise a credit note and write off to bad debt relief.

 NOTE: We would also suggest that you confirm with your accountant that this is how they wish this to be recorded.