The first thing to understand is who is taking the risk under your factoring agreement.

• If your factor has recourse to force you to buy back any unpaid invoices, YOU are taking the risk.
• If your factor has no recourse to force you to buy back any unpaid invoices, THEY are taking the risk.

This is important because it determines how to record the money you receive.

1. If YOU are taking the risk, the money is an advance. It can only be considered payment once the customer pays the factor. You have a liability to the factor when you record the funds received.
2. If THEY are taking the risk, the money you receive can be considered payment no matter what the customer does. You can pay down your Customer Invoices when you record the funds received.

Follow these steps:

A. Create an expense account in your Chart of Accounts where you book the costs of factoring. This account will be used on the monthly Vendor Bill from your factor, as well as during recording of the payment where you will need to write off the 3% you won't receive for each Invoice.

If you are taking the risk, create a current liability account where you book a credit each time you record cash or payment received from your factor. You will use this in step 6.

Note: create and validate the monthly Bill from your factor when it comes in, and pay it as normal.

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B. Create a Sales Journal that you can use for Invoices you plan to factor. Use a different short code so that it is easy to differentiate Invoices you don’t plan to factor (Customer Invoices journal) from those you do (Factored Invoices journal).

Note: you have up to the point you confirm the Invoice to decide if you want to factor it or not, if you change your mind simply choose the correct journal before confirming.

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C. Create a customized Invoice Report so that when your Customers receive your Invoice, they are directed to pay the factor instead of you.

Note: an alternative to creating a customized Invoice report, you can also create a conditional user defined default for the narration field on the Customer Invoice so that when the Factoring Invoice journal is chosen, the field contains verbiage to pay the factor.

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D. Create and send Invoices as normal, choosing the correct Journal and report. 

Note: you have until you CONFIRM the Invoice to decide if you want to factor it or not. If you change your mind, just select the other Journal before you confirm the Invoice. If you elect the customized report, you will also need a second email template that uses that report, so you can select the correct template when emailing the Customer. Attach the customized report to the second email template.

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E. Your Aged Receivable report will show all Customer Invoices and you will see from the numbers which ones are regular and which ones are factored. Enter no Customer Payments at this time, since nothing has been paid and you need a record of what you are owed. 

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F. When you receive your initial funds from the Factor, they will issue a report with each payment so you know which Invoices they are paying for and how much they are paying (the initial 80%).

1) If they are taking the risk, create a Journal Entry that debits the bank outstanding receipts account for the amount you get, with a credit to AR for each Customer Invoice you are being paid for:

2) If you are taking the risk, create a Journal Entry that debits the bank outstanding receipts account for the amount you get, with a credit to the Liability account created for each Customer Invoice you are being paid for: 

Note: the debit line will be available during bank reconciliation to match with the payment you receive from the Factor, shown on the Miscellaneous Matching tab:

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G.When you receive your remaining funds from the Factor, they will issue a report with each payment so you know which Invoices they are paying the final amounts for (the 17%).

Create a Journal Entry that debits the bank outstanding receipts account for the amount you get, with a credit to AR for each Customer Invoice you are being paid for:

Note: Whether you are taking the risk or not, by the time you receive the second payment, there is no longer a risk you the entry is the same. The debit line will be available during bank reconciliation to match with the payment you receive from the Factor, shown on the Miscellaneous Matching tab:

If you took the risk, you will also need to create an entry to debit the liability account and credit AR for each of the prior payments made for the same Invoices you are receiving final payment on now.  The easiest way to do this is to select the credit Journal Items representing the 80% payment and use the Automatic Entries option from the Action Menu:

Use the Change Account option and select the AR account so that every selected debit from the liability account becomes a credit in the AR account:

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H. Now you can match the initial and final payments for each Customer and write off the remaining 3% to the expense account.  Do this via the Aged Receivable report: 

For each Customer, select the 80% and 17% payment, and write off the difference to the expense account:

Note: you can speed this process up by creating a reconciliation model that allows you to write off the expense in a single click. 

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Final Note: In either step (F) or step (G) if you receive a payment from your factor with a mix of 80% and 17% balances, you can still create a single Journal Entry and credit each line for the correct amount. Just make sure to enter a single line for each Customer.