Invoice Factoring for QuickBooks Guide

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Contents hide
1 Invoice Factoring and Why Businesses Use It
2 How do you Record Factoring Transactions in QuickBooks?
3 Conclusion

Last Updated February 21, 2023

You want to grow your business, but you’re finding it difficult to get the cash flow that you need. You’ve tried asking for a loan or getting an additional credit card, but the banks say you don’t have enough collateral or enough credit history. What do you do?

Invoice factoring can be a solution to this problem. Invoice factoring is a process in which a company with sales invoices that they can’t collect sells those invoices at a discount to another company (the factor) in exchange for immediate cash.

Learn more about how you can use invoice factoring with Quickbooks and why it may help your business secure the funds it needs to continue growing.

Invoice Factoring and Why Businesses Use It

Invoice factoring is a fairly common practice used by businesses to help meet their cash flow needs. You can use invoice factoring for various reasons, but the main reason is that businesses need money to pay their employees and suppliers.

The process works through a third-party company called a factor. The factor buys the receivables from the business at a discount and then collects on those invoices for the full value, minus fees.

Factoring companies typically charge a percentage of the invoice amount as an origination fee and charge interest on the unpaid invoices. This means that the business selling its receivables will receive less money than their customers owe them, but they also receive cash immediately rather than waiting months or years to get paid.

How do you Record Factoring Transactions in QuickBooks?

There are multiple ways that you can record invoice factoring transactions in QuickBooks.

  1. Use the sales invoice and sales order forms to record the sale of your invoices.
  2. Use the purchase order form and purchase invoice form to record the purchase of your invoices.
    • For example, you have two customers, each with an outstanding $5,000 receivable balance. You have a $10,000 line of credit with a factoring company, and they agree to buy 80% of your outstanding balances at an 80% discount for a total cost of $2,000 ($10,000 x 20% = $2,000). Then that one customer pays their bill in full before the factoring transaction. Now you have one remaining customer who owes you $4,000 but has their account factored by 80%.

The following is an example of how you might record these transactions in QuickBooks.

  1. Customer A pays off their entire $5,000 balance. You would record this transaction by creating a sales invoice for $5,000 and then recording an invoice payment the same way that you usually would. You would also record the A/R balance as $0 on the balance sheet and remove the customer from your list of customers (this is optional).
  2. Customer B has their account factored by 80%. You would create a sales order for $4,000 and record it as an open sales order. Then you would create a purchase invoice for $2,400 and record it as an open purchase invoice. The total will be equal to 80% of $4,000 which is $3,200 ($4,000 x 80%).
    • The balance sheet will show an increase of accounts receivable of $2,400 and accounts payable of $2,400. The income statement will show an increase of accounts receivable of $2,400 and a decrease of accounts payable of $2,400. The customer will be shown as owing $4,000 on the balance sheet and $3,200 on the income statement

What are the Pros/Cons of using QuickBooks Alongside Factoring?

The benefits of using QuickBooks alongside factoring include the following:

  • You can use QuickBooks’ cash-based accounting system to record all sales transactions and then use factoring to convert open invoices into real cash.
  • You can decide when to convert an invoice into real money (e.g., when you have enough cash on hand or a client is willing/able to pay quickly).
  • You can use QuickBooks’ inventory management system to track inventory levels and then use factoring to convert inventory into real cash.
  • Again, you can decide when to convert inventory into real money (e.g., when you have enough cash on hand or a client who is willing/able to pay quickly).
  • You can use QuickBooks’ payroll system for tracking employee hours and wages, etc. You only need one accounting system for everything instead of two separate systems.
  • QuickBooks’ cash-based accounting system, inventory management system, and payroll system are simpler to use than factoring’s cash-based accounting system, inventory management system, and payroll system.

Cons

The biggest downside of using QuickBooks alongside factoring is that it complicates the financial reporting process because you have two separate sets of books (i.e. FactorSQL or whatever factoring software is used, and QuickBooks). However, it’s possible to combine the information from both sets of books into a single set of reports so that you can compare data from the two systems. It’s also possible to use one system to track cash flow and the other system to track income and expenses.

What are Some Alternatives to QuickBooks for Small Business Accounting?

There are many accounting software options for small businesses. These options range from free to hundreds of dollars per month. Here are some alternatives to QuickBooks that you might want to consider:

  1. You can use Excel or Google Sheets for free, but these options aren’t perfect for managing your business finances. They’re fine if you’re doing a little bit of bookkeeping and don’t mind doing your financial reporting, but they don’t offer the features necessary to manage a growing business.
  2. You can use Freshbooks, an excellent option if you don’t need advanced features like inventory management and accounts receivable factoring. It’s very affordable (about $120 per year), and it has all the features that most small businesses need for basic accounting and invoicing.
  3. NetSuite is another very similar option to QuickBooks Online in terms of functionality, but it has more sophisticated inventory management capabilities than QuickBooks Online does.

Conclusion

QuickBooks Online is an excellent option for small businesses looking to use invoice factoring to boost cash flow. It’s easy to set up and use, affordable, and has all the features you need for basic accounting and factoring transaction recording.

If you’re a small business that needs more than what QuickBooks Online offers, or if you don’t want to pay for an online accounting solution, then consider using Freshbooks or NetSuite. These solutions have all the features of QuickBooks Online at a fraction of the cost.