How do you account for an invoice finance facility?
- When you upload an invoice, no accounting entries need to be made
- The first accounting entry needed is when you drawdown from the facility. This is effectively a short term loan
a) Debit the bank
b) Credit the short term loan (current liability)
Please note that the debtors figure should not change. This is just as a short term loan secured against debtors.
- When the client pays the full amount your debtors will reduce as normal but your bank account balance will be unaffected as the cash has been paid to the lenders trust account. Therefore, this will class as a reduction of the short term loan you have previously posted.
a) Debit the short term loan (current liability)
b)Credit the debtors
It is worthwhile setting up a nominal code for the facility as another back account on your accountancy package. That will allow you to post receipts from other debtors as normal.
- Charges such as interest and service fees should then be posted as an expense in the profit & loss account.
a) Debit expenses
b) Credit short term loan (current liability)
- If you have followed the steps and accounting entries above. This should leave you with the total liability on your balance sheet. This is the total amount you owe the invoice finance lender at any one time (referred to be lenders as the current account / funds in use).
Drawdowns + charges – collections = client statement balance
If you have any additional questions or wish to talk about the specific requirements of your business, please contact us and we will be pleased to help you make the decision that is best for you.