Many banks and other financial institutions offer factoring, invoice discounting, and other invoice based lending facilities together with claims that this also takes care of the sales ledger and credit control functions so the client (borrower) no longer needs to worry about this.
Our experience is quite the reverse since the client needs to continue to keep track of which customers have, and have not, paid in order to chase debts passed back to them by the lender when these debts are beyond terms, and to keep track of how much they owe the lender at any time.
Our suggested approach is that you:
1. create a new bank account for the loan from the factoring institution – let’s call it the ‘factoring bank account’;
2. treat any monies drawn down as a bank transfer from the factoring bank account to the normal business current account;
3. treat any customer payments made to the factoring institution as receipts into the factoring bank account – the factoring institution will normally provide you with a regular schedule of who has paid and how much;
4. treat the factoring charges as bank charges to the factoring bank account, and the discount rate as interest paid on that account.
In this way you can still run an Aged Debtors report to show which customers still owe you money, and the factoring bank account will be the net of monies you have borrowed, plus charges and interest, less what has been paid off by your customers, which is of course, the current value of what you owe the factoring institution.