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Proper way to balance books when factoring invoices.

Forum|Forum|4 years ago
June 18, 2022
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I am a trucking company that uses factoring for all my invoices and am struggling with how to properly set this up to where my books balance out correctly. Example:

Broker owes me $1000 for flat rate line haul on Net 30 terms.

Factoring Company loans me $950 usually next day for my invoice from broker.
Factoring is paid but broker technically still owes me $1000 but is obligated to pay my factoring company on my behalf.

The $1000 will never be received by me but needs to be documented as paid when the broker pays my factoring company.

I also need to document the $50 fee from the factoring company for the loan on the invoice.

Thanks in advance of any help with this.

QuickBooks Online

Best answer by Rainflurry

@Crusader

From your description, it sounds like you retain ownership of the receivable, correct? If that's the case, then in your chart of accounts you need to set up a bank clearing account, a loan payable liability account, and a factor fee expense account. Then, set up a service product called 'Factor fee' or something similar and under 'Income account' select the newly-created 'Factor fee' expense account.

Then,

1) Create an invoice to your broker for the $1,000 haul and add a line item for the factor fee entered at -$50.

2) When you receive the $950 funding from the factor, create a bank deposit and assign the deposit to the loan payable liability account. At this point, you have the broker's outstanding receivable and the outstanding loan from the factor.

3) When the broker pays the factor, receive a payment on the broker's invoice and under 'Deposit to' select the newly-created bank clearing account.

4) To apply that "payment" to reduce the loan payable to the factor, create a bank transfer (+ New > Transfer) and under 'Transfer Funds From', select the bank clearing account. Under 'Transfer Funds To', select the loan payable account.

If you sell ownership of the receivable to the factor, that's a different process.

MichelleBh

You're in the right place for an answer, @Crusader.

Keeping your books accurate is my priority here. I have a way how to set up your factory invoices in QuickBooks Online (QBO).

Let's create two accounts for your factory transactions. One is a Liability for the invoice and an Expense for the fee. Let me show you how:

Go to the Accounting tab and choose Chart of Accounts.
Click the New tab.
In the Account Type drop-down, pick Other Current Liabilities.
In the Tax form section, select the detail type that best fits the transactions you want to track.
Type a unique name in the box, then click Save and close.
Repeat the steps for expenses.

See this article for more guidance: Add an account to your chart of accounts in QuickBooks.

Next, create an invoice just as you usually would. Then deposit the fund to the liability account you created.

Do the following:

Go to the Plus icon and select Bank deposit.
Choose the account you want to put the money into from the Account drop-down.
Go to the Add fund to this deposit section, then select the liability you created in the Account box.
Enter $950 in the Amount.
In the second line, add the expense account and the fee amount with a negative sign.
Click Save and close when done.

For complete steps, see this link: Record and make bank deposits in QuickBooks.

Once the customer has paid the factoring company, you'll need to receive the funds manually. Follow the steps below:

Go to the New icon and pick Received Payment.
Select the customer name in the field.
Choose Undeposited Funds in the Deposit To box.
Complete the necessary information, then click Save and close.

After that, let's go back to the bank deposit page to finish the process. Do the following:

Select the transaction you just recorded in the list.
Under the Add funds to this Deposit, pick your liability account.
Record the dollar amount of the invoice as a negative number. This will create a net-zero deposit that records the loan as paid off.
Click Save and close.

On top of that, I'd recommend reaching an accountant. They may have another way how to handle your factory loan.

Furthermore, check out these articles below on how to manage your chart of accounts and reconcile them in QuickBooks:

If you'd like further help with invoices in QuickBooks, feel free to reply to this thread. I'd be happy to assist you with anything related to the program. Keep safe!

RainflurryAnswer

@Crusader

From your description, it sounds like you retain ownership of the receivable, correct? If that's the case, then in your chart of accounts you need to set up a bank clearing account, a loan payable liability account, and a factor fee expense account. Then, set up a service product called 'Factor fee' or something similar and under 'Income account' select the newly-created 'Factor fee' expense account.

Then,

1) Create an invoice to your broker for the $1,000 haul and add a line item for the factor fee entered at -$50.

2) When you receive the $950 funding from the factor, create a bank deposit and assign the deposit to the loan payable liability account. At this point, you have the broker's outstanding receivable and the outstanding loan from the factor.

3) When the broker pays the factor, receive a payment on the broker's invoice and under 'Deposit to' select the newly-created bank clearing account.

4) To apply that "payment" to reduce the loan payable to the factor, create a bank transfer (+ New > Transfer) and under 'Transfer Funds From', select the bank clearing account. Under 'Transfer Funds To', select the loan payable account.

If you sell ownership of the receivable to the factor, that's a different process.

AlcaeusF

Hello @Rainflurry,

I have reviewed the solution you’ve shared and it's correct and accurate. Thank you for sharing your inputs to help address the issue.

We love to see members supporting one another! Have a great day.

Tena_Lewey

What I find to be easiest when handling trucking company factoring of receivables is below. Some factoring can be a bit more confusing when the factoring company is holding back a portion of invoices in case they do not receive payment but in most cases there are no issues and factoring of trucking invoices is pretty straight up.

The real issue when you are the broker and your vendors are factoring and you have to pay the factoring company instead of the vendor yet you still have to keep up with all payments so you can 1099 the vendor at year end and not the factoring company.

I will assume that you are issuing all invoices inside QBO and not some outside system.

1) Let's assume you completed a run for your broker Atlas Broker for 1000.00 and issued invoice #100 for same.

. You then get notice from ABC Factoring that they paid 950.00 for Inv #100 for Atlas.

.2) Inside QBO receive payment from Atlas for 1000.00 using a cash account called Cash Clearing.

.3) Then go to Make deposits, ensuring this is directed towards your checking account, then under account in the line item area choose Cash clearing, in description enter Atlas #100 factored or whatever, then in amount choose 1000.00. You could put the ABC Factoring name in received from (as this does not go back and do anything to receivables if you wanted to for clarity but I would just use description.

.4) On the next line choose Factoring Fee Expense and a description and then -50.00. The total deposit to actual checking will then be 950.00 and the clearing account will be 0 as you put in 1k and took out 1k.

The clearing account then gives you a record of what was paid, etc., in case that is ever needed. If someone we were to default at some point it could easily be found and journal issues made for the situation.

This is all done rather fast really without needing journal entries.

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