In a typical factoring relationship, the client effectively outsources the management of their accounts receivable and protects against credit losses. In the role of factor, the factor acts as its client's credit, collections, and accounts receivable departments by conducting credit analyses, setting limits on credit exposure, collecting accounts receivable and recording accounts receivable transactions. By approving a specific account receivable, the factor agrees to absorb potential credit losses on that account. But a factoring relationship is like having a savvy partner with clout: receivables should turn much faster and cash is applied daily. Bookkeeping is always current and accurate, and approved credits relieve the financial and emotional burden of questionable receivables. With the factor as a partner, clients are often able to sell to customers that they might not consider selling to on their own.
A factoring relationship involves four key elements:
Credit approval/protection - If a customer whose credit has been approved is unable to pay its bills, the factor is responsible for payment to the client.
Collections - The factor follows up late or skipped payments and provides clients with rapid notification of claims and allowances. Payment of accounts receivable is made directly to the factor.
Bookkeeping - The factor tracks all invoices on its system, recording sales, cash payments, and credits.
Payment Arrangements - One of the following:
Advance - This is essentially a line of credit secured by receivables. The factor advances funds against accounts receivable before receiving payment, up to a specified percentage of receivables. The factor may also make over-advance lines (i.e., lines in excess of accounts receivable) available to finance inventory purchases.
Note This payment arrangement is supported by the software.
Collection - The factor deposits funds into the client's account as receivables are collected.
Maturity - The factor makes scheduled payments to the client's account, based on the average due date of sales.
For most factoring arrangements, the factor typically charges a commission based on an agreed-to percentage of sales volume. In the case of advance arrangements, interest is charged on the daily balance of the advances outstanding.
For more information, see Factoring Receivables FAQ.
To set up factoring receivables using the Advance payment arrangement:
In Account Element Maintenance, create a new account element value (this is optional, but recommended) for new Factor Receivable general ledger accounts.
In Account Maintenance, create a separate Factor Receivable general ledger account with a category of A/R Trade for each factor (do not commingle factors into one general ledger account), so that the format layout program used in Deposit and Payment Import Maintenance can be specific to a specific factor’s requirements.
In Customer Maintenance, set up the factoring company as a customer. Select Paying Customer Only for the Type field on the Main tab.
Note Factor Receivables Entry only allows for the selection of factors with this type.
In Customer Maintenance, if a customer is doing all of its transactions using a factor, enter the factoring company in the Paying Customer Code field on the A/R tab.
In Payment Terms Maintenance, if a customer only does some of its transactions using a factor, set up a finance terms payment terms code that links to a specific factor, and select this payment terms during order entry.
In Group Credit Rule Maintenance or Customer Credit Rule Maintenance, select the Approved for Finance Payment Terms check box on the Payment Terms tab (this prevents these payment terms from being accidentally selected in Order Entry).
In Deposit and Payment Import Maintenance, indicate the factor general ledger account (which should link to only one factoring company) and the custom program name (used to output transactions in a format required by the factoring company).
To process factoring receivables using the Advance payment arrangement:
In Order Entry, enter an order and select payment terms related to the factor (For information on authorizing customers for factor payment terms, see the setup steps above). The order automatically is put on credit hold pending an approval code from the factor.
If the factor requires you to transmit order information for approval, export the information in Factor Order Approval Export, and transmit the exported file to the factor. When the factor sends back approval information, import it in Factor Order Approval Import. Skip to step 4.
In Credit Task Management, when releasing the order from credit hold, you must supply the factor’s approval code (assuming you are getting specific approval codes for each order, placed by a customer who wants to finance its orders).
In Invoice Create and Print, when invoices are created, the receivables will post to the paying customer (the factoring company).
In Invoice Post, post invoices to the general ledger. The general ledger posting effect is as follows: Accounts Receivable (DR), Sales (CR).
In Factor Receivables Entry, for the Transfer type, mark invoices and resolved chargebacks as paid and transferred to the factor (a file is exported, which can be electronically sent to the factoring company).
In Accounts Receivable Post, post transfers to the general ledger. The general ledger posting effect is as follows: Factor Receivable (DR), Accounts Receivable (CR).
In Deposit Entry, record cash advances and payments from the factoring company (using the Miscellaneous type and crediting the appropriate Factor Receivable general ledger account).
In Accounts Receivable Post, post cash advances and payments for the factoring company to the general ledger. The general ledger posting effect is as follows: Cash (DR), Factor Receivable (CR).
In Factor Receivables Entry, enter chargebacks if customers take deductions on remittances to the factoring company, then go through the normal chargeback resolution process.
In Accounts Receivable Post, post chargebacks created for the factoring company/billing customer to the general ledger. The general ledger posting effect is as follows: Accounts Receivable (DR), Factor Receivable (CR).
In Chargeback Task Management, manage and resolve chargebacks. When the chargeback is resolved (where it is expected to be paid), it can be included in the next transfer.