There can be subtle differences in how different factoring companies work - for example whether they 'buy' the debt (as I believe Venture Finance do, for example) or whether they simply advance you x% of the debt and then collect it on your behalf, at which point they pay you the balance less any charges and interest (as I Lloyds do, IIRC, for example).

The way I handled it with Lloyds some years ago:

1) Create a bank account to represent the factoring company.

2) When they advance you money, 'transfer' it in Sage from the factoring account to the bank account.

3) When they say money has been collected from a customer, post a customer receipt to the factoring account.

4) Post any charges and interest (discount) as bank payments, using the factoring account.

5) Each month reconcile the factoring account to the paperwork they provide (or you get off their online system). If everything is factored, the sales ledger should agree with theirs.

Where the debt itself is actually purchased, it should be possible to take a modified approach:

1) Create a bank account to represent the factoring company

2) When any given debt is purchased, post a customer receipt to the factoring account

3) When they pay you, post a transfer from the factoring acount to the bank account

4) Charges and interest (discount) as above.

5) Reconciliations as above.

You might want to fine tune that to match the exact requirements of the factoring model in use, but something along those lines should do the trick.

Step 4 in what I said above.

There are usually two fees: their charges, and what they describe as the 'discount'.

When I dealt with this for a company using LTSB factoring, the charges and discount were shown on the month-end statement - it gets added to the amount the company effectively owes them (which comes from the money advanced minus the debts collected, and is what the factoring 'bank account' represents.

Their fees, therefore get posted as a payment from that account.

As I said, though, it's possible that neither sequence given above fits your exact requirements, because there are some slightly different approaches in use - but the basic prinicples are the same; you just need to look at your needs based on the way the company in use, and adapt what I've suggested.

A particular thing to look out for, given they supposedly 'buy' the debt, is their small print regarding what happens if they are unable to collect the money from the customer - does it get 'sold' back? If that's the case (and if they give you an 'aged debt' report each month) I'd be inclined to treat the purchase as an advance, and only post a sales receipt to the customer account when they say they've collected. ie lean towards my first model.

(If they truly purchased the debt, you wouldn't need to know whether any given debt has been collected - if they're telling you that, and if they have a clause allowing them to sell it back to you, IMO they're just loaning you funds in leiu of collecting your debts, not buying them off you.)

Is there an online illistration e.g. example via screen shots / quick video which shows how to account for this in Sage.

I need to make these adjustments in Sage but am a little cautious as I do not want to make any mistakes.

Vince, following on from your 'earlier' email response - how is that 'internal bank account' treated on the BS at year end?

Creditor?

Should it not be a debtor as the money is owed to you, and you do not owe the money to anyone?

Thanks Shaun - i beleive the debt is sold with recourse

Hello,

I am reading through the posts on here and I got a little confused. I am new to the forum and new to factoring so please let me know if I am doing anything wrong.

I read through and understood VinceH's reply but Shaun's reply seemed to contradict it. So Shaun, how would you then account for and balance the transactions?

Hi Melanie,

I don't think that I contradict Vince but rather emphasise that factoring could be one of two things, either a sale of a debt or a loan against a debt.

A sale of a debt (without recourse) accepts the factored amount as full payment for a debt. (although most factors will also withhold part payment as an additional fee if they are unable to recover the debt.

For example.

Here is an initial transaction that we will use througout the explanation

Dr Accounts Receivable £50k
Cr Revenue £50k

The factoring company takes 5% (£2500) and holds a reserve of 10% (£5000)

Without recourse (sale of a debt - the simple one)

You will generally need two new accounts
A debtor account for the amount due from the factor
An expense account for the factors fee

Dr Bank £42500
Dr Factor Reserve Account (a debtor) £5000
Dr Factor Fee (Expense) £2500
Cr Accounts Receivable £50000

When (if) the customer pays the factoring company
Dr Bank £5000
Cr Factor Reserve Account (debtor) £5000


With recourse (a loan against a debt - the one with potential complexity)
This is more complex and the example here is only one of many variants of factoring arrangements. However, it should give you some indication as to how factoring works (Someone like Jo would probably be better at explaining factoring as she was front line banking where I was back office).

Right, roles up sleeves and hopes that the explanation translates to paper the same as it's going around my head.

Let's take the same arrangement as above but this time with recourse factoring and lets also assume as is generally the case that the factor adds a loss contingency (let's say £4000) based on the factors prior experience of the business type concerned.

You will generally need three new accounts (four if you hold the fee's separately)
A debtor account for the amount due from the factor
A recourse liability account for an estimate of uncollected receivables
An expense account for the factors fee's and recourse liability


Dr Bank £42500
Dr Amount due from factor (withheld funds - a debtor) £5000
Dr Loss on factoring £6500 (made up of the Factor Fee Expense of £2500 and expected loss of £4000)
Cr Accounts Receivable £50000
Cr Factor Recourse Liability (Creditor) £4000

Note that the £4k expected shortfall seems to extend the balance to £54k. This is caused by the company needing to show the contingent liability (creditor) of a potential buyback any bad debts from the factoring company. That figure could just as easily be the full £50k rather than just £4k but it will not be more than the £50k so in our example the maximum pseudo balance would be £100k. Remember that the expected loss is not real, it's contingent on future events. The only figures that are real rotate around the £50k as discussed further below.

Ok. imagine that within a time specified in the agreement the factoring company is able to collect only £47k of the £50k that it advanced against.

The factoring company in the example above still holds £5000 of the purchased debt as a creditor (of the factoring company) so the double entry would be

Dr Bank £2000
Dr factor recourse Liability £4000
Cr Amount Due from Factor £5000
Cr Loss on factoring £1000

So, balancing all of that off we end up with the following trail of events

Company has £50k of debts
Debts sold to a factoring company who advance £42,500 immediately for a fee of £2500 leaving £5k as an outstanding debtor
Factoring company retrieve £47k of the debt from the factored companies customers (a shortfall of £3k)
The factoring company forwards the remaining £2k (of the retained £5k) leaving the balances as :

Company has received £44,500 on a debt of £50k
It has suffered an expense of £2500 in factoring fee's
It writes off through the P&L £3k to bad debt (the loss on factoring)
The remaining liability (£1k) has been resolved by crediting it back

Factoring company has made :
£2500 in fee's
The loss of £3k was sold back to the company by way of retained advance.


In real terms the company is £2500 worse off using the factoring company due to the additional fee's and this needs to be weighed up against cashflow (as we all know, money tied up in debtors kills seemingly healthy companies). Of course the factoring companies credit collection team may be considerably better than the companies internal team so one way to look at factoring is outsourcing credit control so there's also a time and potential manpower saving linked to the fee's.

Where a companies debtors are doubtful it is generally better to use non recourse but such tend not to be available to the sort of companies that need that sort of insurance against bad debts. In fact, if you are large enough for without recourse to be available to you then you probably don't need it anyway.


I'll have money on it that something in the above has not transferred from my head to paper as I intend it to read.

Hope that it helps anyway though,

kind regards,

Shaun.

p.s. just saw your reply Vince (been dabbling with this reply whilst also doing stuff that pays). Totally agreed.... On the last line though I'm thinking that my above reply isn't doing anything to support any claim that I write in simple terms. Also, with all the talk of Debtors peppering the above I make it even more difficult to spot that I'm still talking about the with recourse relationship being that of a creditor. lol. (read it through a couple of times Melanie and you will see what I mean).

"On the last line though I'm thinking that my above reply isn't doing anything to support any claim that I write in simple terms."

Well, although I said I try to explain things in simple layman's terms, plenty of people are out there who will tell me that I fail more often than not.

.  Posted on wrong link

-- Edited by Cheshire on Tuesday 7th of August 2018 04:37:13 PM