Getting to Grips with Invoice Factoring

Closeup of filing invoices


Invoice factoring is a type of finance normally used for B2B sales invoices, where you sell accounts receivable or invoices to a 3rd party or factoring company to allow for a quick and immediate cash injection into your company. Basically, you get paid faster than you normally would. But it will cost you.

Although there are a number of variants to this theme, it normally works on a basis that the factoring company gives you a percentage (70-90% normally) of the invoice value upfront. When the full payment is finally received by the factoring company, they give you the remainder, either minus any fees or a bill for all fees owed. So, you have effectively sold the debt on and they will be receiving and chasing for the monies owed.

There are two main types of factoring – “whole ledger” and “spot factoring”, which we will briefly discuss in this blog before explaining how invoice factoring works in Brightpearl’s own retail accounting system.


Whole Ledger Factoring vs Spot Factoring

Whole ledger factoring is where you submit all invoices for a set of specific customers. Whereas, “spot factoring” (also known as single invoice discounting), lets you decide which invoices you want to pass over to the factoring company. You will find many businesses prefer the latter due to the flexibility of spot factoring. One point to note: this normally does come at a price of a higher premium or fee.

When thinking of picking a factoring company, always do your due diligence. Look to a number of companies to make sure you get the optimal combination of features, flexibility and terms that you require and are best for your business, and always read the contracts and fine print. Factoring companies may want you to sign a contract for a period longer than you need their services for.


Invoice Factoring in Brightpearl

Within Brightpearl, you have the flexibility to deal with factoring of invoices through this best practice workflow:

The first step is to create a factoring bank account. This will allow you to take payments for invoices to one central bank location. Once created, you can go to each invoice and make payment for the percentage value that the factoring agency is giving to you. Each individual value will go to the new factoring account, so this now shows that you have received a number of part payments and your bank now has the value the factoring company will be transferring to you.

Next up: bank transfers. When the factoring company has paid you, process a bank transfer from the factoring bank account to your main bank account. This block payment allows you to reconcile your main bank account, but also lets you reconcile the factoring company payments to its corresponding statement as well.

Then, you will need to pay off the invoice. When the final payment from the invoice is removed, you can again pay the full value of the invoice off within Brightpearl.

There are now some options on what should happen, depending on how your factoring company deals with their fees.

Some factoring companies will pay you the remainder, minus their fee. In Brightpearl, pay the remaining invoice off fully and then you can post a single large fee deduction from the factoring bank account to your factoring fee account code as a cost to the business.

Or, if they invoice you for the fee as a separate supplier invoice, you can take the final payment for the invoice and then process the factoring company invoice to be paid off as normal.

If there any additional fees, these are dealt with either on the factoring company invoice, or as bank payments from the factoring company bank account to the relevant accounting code. Again, letting you reconcile these as needed.

Overall, you have now shown the invoice as being fully paid, and you are able to reconcile the factoring and main bank accounts with the correct values paid, while also dealing with the factoring company fee as well.

Want to find out more about Brightpearl and invoice factoring? Book a demo today!