Howtoaccountforaniffacility

How to account for an invoice finance facility

We work with many accountants to help their clients with their cashflow, it’s a key part of our business and all parties benefit from it.

However, we know that although many businesses use invoice finance, they might not necessarily know how to account for it correctly.

We want to help both existing and future clients get it right from the outset, there’s nothing worse than guessing because you aren’t sure about the right way to proceed.

This is precisely why we have such a good relationship with the accountants we work with, we see it as a true partnership that will only benefit our mutual clients.

We will therefore be creating a series of ‘how to’ blogs to clarify confusing issues and clearly explain the benefits of using invoice finance for any business looking to access funding.

  

Five steps to accurate invoice finance accounting:

Do you have the responsibility of accounting for invoice finance or perhaps do bookkeeping for a factoring facility?

If you are new to invoice financing, accounting for an invoice finance facility can be confusing.  We have therefore produced a guide to help ensure you get it right from the outset.

Our five-point guide will ensure anybody can approach bookkeeping for a factoring facility with confidence.

 

  1. When your business uploads an invoice, no accounting entries need to be made onto your accountancy package.

 

  1. The first accounting entry is needed only when you draw down from the facility. This is effectively a short-term loan.

Firstly, you must debit the bank.

You must then credit the short-term loan, which is the current liability. Please note that the debtors figure should not change. This is just as a short-term loan secured against debtors.

 

  1. When the debtor pays the full amount to the invoice financier, your debtors will reduce as normal, but your bank account balance will be unaffected as the cash has been paid to the lender’s trust account. Therefore, this will class as a reduction of the short-term loan you have previously posted onto your accounts package.

Now you must debit the short-term loan (current liability).

Your next step is to credit the debtors now that payment has been made (collection report often available on a lender’s portal)

Please note it is worthwhile setting up a nominal code for the facility as another bank account on your accounts package. That will allow you to post receipts from other debtors that potentially aren’t included in the invoice finance facility as normal.

 

  1. The invoice financier’s charges such as interest and service fees should then be posted as an expense in the profit & loss account.

First you must debit expenses and then credit the short term loan (current liability)

VAT is also applicable on the service charge for most facilities. This is input VAT which you can reclaim quarterly when you file your VAT return.

  1. 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 financier at any one time. Invoice finance lenders often refer to this as the current account / funds in use.

You can check this is current by your monthly client statement from the invoice financier.

Drawdowns + charges – collections = client statement balance

Your accountant will of course be able to assist you when it comes to posting accurately, but if you follow the above steps you will be able to account for your invoice financing confident in the knowledge that you are getting it right.

We hope you have found our ‘how to’ guide useful and informative.  If you do have any queries about invoice finance and factoring in general, we are always pleased to help you make the right decision for your business. Please feel free to give us a call.