Last Updated October 7, 2025
Because the invoice factoring process is so unique in business financing, recording invoice factoring transactions can seem complicated at first.
Before recording factored invoices, business owners and stakeholders need to fully understand how the process works along with the ins and outs outlined in the factoring agreement.
You might be surprised at how simple factoring is, but it does take some time to get used to selling unpaid receivables for cash.
With that said, this article will outline how to record factoring transactions step-by-step and how to ensure complete organization in your bookkeeping so that nothing gets lost in the shuffle or overlooked.
How Invoice Factoring Works
If you’re new to factoring, here’s a brief summary of how the process works:
- Your business sells unpaid receivables to your invoice factoring company.
- The factoring company advances your business 80-90% of the face value of each invoice.
- The factoring company assumes collection responsibilities on your debtor’s invoice moving forward.
- Your debtor submits payment to the factoring company.
- Any remaining funds are released to your business through a secure lockbox.
Receivables-based financing solutions like factoring go a long way in helping businesses get an immediate cash flow boost while reducing credit risk. Plus, collection responsibilities are assumed by the factoring company, leaving business owners with fewer tedious accounting tasks.
How to Record Invoice Factoring Transactions
The process for recording factoring transactions isn’t much different than it is for recording accounts payable and receivable without a factoring company’s involvement.
The main difference is that – if you’re not factoring your whole ledger – you’re going to want to separate factored receivables and non-factored receivables prior to recording.
With that said, follow the simple steps below to record factoring transactions.
1. List All Factored Receivables in Your Account: List out all debtors whose invoices will be factored in your Chart of Accounts.
2. Invoice Your Debtors as Usual: The first steps of the invoicing process (creating and sending the invoice to your customer) isn’t going to change when factoring. Create the invoice and forward it to your customer.
3. Record the Initial Advance from the Factoring Company: Once you invoice your debtor, the factoring company will forward you the majority of the invoice value via a secure lockbox. Once you’ve received the funds, record this initial advance.
4. Apply Factoring Fees on the Invoice: Small factoring fees are applied to each transaction, typically between 0.75 and 3.50% of the invoice value. Make sure you’ve taken into account those dollars lost depending on the invoice value.
5. Record When Payment Has Been Received by the Factor: You will be notified once your debtor has submitted payment to the factoring company, and any remaining funds will be released to your account (minus the factoring fee). Make a final note when payment has processed and you have been paid the expected amount.
In-Summary: How to Record Factoring Transactions
Recording factoring transactions becomes second nature for many business owners and accountants once they get the hang of the process. Organization is key to smooth sailing when it comes to invoice factoring.
Hopefully, this alternative financing solution unlocks working capital and helps you quickly boost cash flow. Many small business owners and new business owners choose to factor their invoices as a way to grow their business, so there’s no reason you can’t reap the same rewards.
If you think your business might be a good fit for factoring or you simply want to learn more, feel free to reach out to one of our representatives at +1 (205) 607-0811 or fill out our free factoring quote form. We would be happy to answer any questions you might have.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.
