You have to wait for payment until the credit period is over if you run a small or mid-sized business.If you factor your receivables, you can bring in immediate cash and not increase your debt burden.If your customers want long credit periods, this option is helpful.A "factor" is the sale of accounts receivables to another company.The factor will advance you a major portion of the receivable amount, retain the rest until the account is paid, and then charge a mutually agreed fee.Factoring can be done with or without recourse, meaning either the buyer assumes full responsibility in the event of nonpayment, or the seller takes some responsibility.The process of reflecting transactions in the account books may seem very complex.You can easily account for it by following these steps.
Step 1: An agreement can be reached with the company.
You will want to know what percentage of the receivables they will advance to you in cash and what their service fee is.The company will charge a high fee if the accounts aren't paid because they have to take full responsibility.The factoring company will give you a percentage based on the quality of the receivables and how long it has taken to collect payments.1st PMF Bancorp, American Receivable, and DSA Factors are some of the major factoring companies.BlueVine does not offer non-recourse factoring.
Step 2: The receivables can be sold and recorded.
You will need to record the transaction in a journal.Imagine selling $10,000 worth of receivables to a company that will give you an 80 percent cash advance and charge you a 10 percent fee.The calculations will work well in other currencies.To record the journal entry, you have to take Cash, Due from Factor, and Loss on Sale.Credit accounts receivables for $10,000.When you collect the accounts in full, the Due from Factor account is used to show the amount that the factor will pay you.The service fee is recorded as a loss in the account.
Step 3: When the accounts are collected, record a journal entry.
The retainer will be paid when the company is paid.The previous example involved crediting due from factor for $1000 and debiting cash for the same amount.
Step 4: If a customer defaults, record a journal entry.
You will have to record a loss if the customer does not pay, as you will not receive the retainer back from the company.Imagine that the accounts are not collected.To record the journal entry, the loss on sale and the credit due from factor for $1000.
Step 5: Get an agreement with the company.
You want to know how much of a cash advance you will get and what fee you'll be charged.If accounts can't be collected, your company is liable.You have to record a liability on the sale of the receivables.
Step 6: Record the journal entry when you sell the receivables.
Imagine selling $10,000 worth of receivables to a company that will give you an 80 percent cash advance and charge you a 2 percent fee.The recourse obligation is worth $500, based on historical data.About $500 of these accounts will not be collected, and you will have to record the associated loss.To record the journal entry, you have to deduct Cash for $8000, Due from Factor for $1800 and Loss on Sale for $700.Credit Recourse Liability for $500 and Accounts Receivable for $10,000.The expected loss due to doubtful accounts is now included in the Loss on Sale account.The conservatism principle of accounting states that the loss is recognized before it is incurred.If the accounts are actually collected, a gain will be recorded.
Step 7: When the accounts are collected, record the journal entry.
The retainer will be paid when the factoring company is paid.Assume all accounts are collected.Credit Due from Factor for $1800, credit Gain on Sale for $500, and credit Recourse Liability for 500 are included in the journal entry.
Step 8: In case of customer default, record a journal entry.
If some of the accounts are not paid, you have to buy them back from the factor.Assume that $9500 of the accounts were collected and $500 was not.Credit Due from Factor for $1800 is required to record the journal entry.
Step 9: There are positive aspects to factoring.
If your customers take a long time to pay, or you need to spend a large amount of money on raw materials before you even start a job, Factoring may be able to help.You have to pay a small fee to get cash in exchange for your receivables.
Step 10: There are negative aspects to factoring.
If you are paying fees to the company, you may be losing money over time.It may be more profitable to get a line of credit from a bank to help with cash flow, secured with your receivables.Factoring is the best solution if you have bad credit, a business venture, or nothing to offer.
Step 11: Determine the online marketplace for factoring.
Companies such as The Receivables Exchange allow you to post your receivables on their private website, and then companies bid on them.You could get better financing rates as a result.