Our small but growing business has recently started using invoice financing with our bank. We invoice our customers, send a copy to invoice financing and I put a copy onto the solar accounts as a sales invoice. Invoice financing then pay us a percentage of the invoice whilst waiting for our customer to pay the invoice in full to invoice financing. So we receive most of the money before the invoice is paid by the customer to enable us to carry on with cash flow.
However, I have no idea how to show this on my accounts - Before it was straight forward because I posted the invoice to the account then when the customer paid us I marked it as paid and all was good. I would be grateful for any advice please.
Hi Zoe,
The rules on invoice factoring are a little tricky, particularly if your business is registered for VAT. Here's how I would enter the transactions:
Let's say that you issue an invoice for £1,200 including 20% VAT, and send it to your bank (ie. the 'factor'). Your bank pays you £900 immediately and a further £240 when they receive payment from your customer. They keep the remaining £60 as the 'discount' charge.
In Solar Accounts firstly create a new liability account called 'Factor Control Account'. Then create two transactions with the same date:
1) An invoice for £1200 as normal
2) A General Transaction from the Factor Control Account to the Cheque Account for £900
When your bank collects payment from your customer, create three further transactions:
1) An invoice payment for £1200 deposited into the Factor Control Account
2) A General Transaction from the Factor Control Account to the Cheque Account for £240
3) A Money Paid Out transaction for £60 from the Factor Control Account to an appropriate expense account such as 'Interest Charges'. (You could create a separate expense account specifically for these types of charges if you prefer). The Type of the Money Paid Out transaction should be 'General Payment'. In this case the VAT rate should be 0% because the bank describes the fee as a discount charge. Other types of fees may require you enter a VAT rate of 20% - see section 5.5 on this page for details:
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000111&propertyType=document#P259_32131
But what happens if your bank is unable to collect payment from your customer? In that case it depends on whether you have a 'recourse' agreement with your bank - that is, whether the bank comes back to you and says, "the customer will not pay, give us back the £900". If you have such an agreement then record three transactions:
1) A credit note writing off the bad debt as described here:
http://www.solaraccounts.co.uk/help/how-to-write-off-a-bad-debt.php
2) Allocate the credit note to the invoice as described in the above link
3) Record a General Transaction from the Cheque Account to the Factor Control Account for £900
Otherwise if you have a non-recourse agreement with your bank and your customer doesn't pay, record these transactions:
1) An invoice payment for £1200 deposited into the Factor Control Account. The date of this 'payment' should be the date the bank writes off the debt owed by your customer.
2) A Money Paid Out transaction for £300 from the Factor Control Account to the appropriate expense account.
Please note that I am not an expert on this topic - please check the above approach with your accountant.
Regards
