Dealing with Factoring

Summary

This article explains how best to deal with factoring in your Platinum system.

More Information

Factoring is a process where you raise an invoice to a customer, but assign the debt to someone else - a factoring company. The factoring company pay you a large percentage of the total amount of that invoice once they have received a copy of that invoice. Your customer then has to pay the Factoring Company the full amount stated on the invoice. Once your customer has paid the full amount to the factoring company, they will pay you the balance less their charges, which can be quite steep.

The advantages of this arrangement are :-

1. You don't have to chase your debts - the factoring company do it all for you, statements, phone calls etc.
2. Your cash flow is greatly improved.

The disadvantages are :

1. It can be expensive.
2. Not all your customers may have a good enough credit rating to be adopted by the factoring company.

Generally speaking, if you deal with large organisations that don't pay all that promptly, this can be highly advantageous. In other circumstances, it can be an expensive way of improving your cash flow.

Configuration

You will need to create Nominal Codes for the amount that you have assigned to the factoring company, and for the charges that they make. You will only have to do this bit once of course!

Go into " Nominal Ledger Maintenance Options Centre Maintenance Add or Edit Nominal Centres".

• Create a new centre called 'Factoring Control Account' and set this as a Current Asset on the Balance Sheet. In the standard nominal structure for Platinum, a suitable code would be around '19700'. This is for the amount assigned at any one time.
• Create a new centre for 'Factoring Charges' and set this as an Overhead on the Profit & Loss. In the standard nominal structure for Platinum, a suitable code would be around '15300'.

Day to Day use

• Pay off the customer's invoice to the Factoring Control Account using " Sales Ledger Receipts". This clears them as a debtor to you.
• When the payment arrives from the Factoring Company, credit the Factoring Control Account, and debit the Bank Account using " Nominal Ledger Journal Entries". At the "Entry mode:" select 'Multiple'.
• For the factoring charges, credit the Bank Account and debit the Factoring Charges Centre using " Nominal Ledger Journal Entries". At the "Entry mode:" select 'Multiple'. Watch out because there may be some V.A.T. involved, in which case, make sure you log this Vat in the appropriate manner.

See also

• How do I create a nominal code?
• Posting payments received
• Posting journals

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Keywords AND Misspellings

factoring, payments