Invoice factoring is also referred to sometimes as receivables factoring. It’s a method of raising money for your immediate cash flow needs by selling your outstanding accounts receivable at a discount - meaning, for less than the amount you need to collect from these accounts. The company (commonly called a factor) that buys your receivables and then collects them at their original full value, making some profit in the process.
While LivePlan doesn’t have a dedicated calculator or entry for factoring, there are ways to reflect it in your business plan. Below, you will find two possible methods; the one you use will depend on your own needs, and those of the people who might evaluate your plan.
Note: In both cases, you will also want to have Accounts Receivable activated in the cash flow assumptions of your plan.
Method #1: Reflecting the revenue
The simpler method is to create a revenue entry in your forecast, reflecting the amount you’ve collected from the purchaser of your receivables. This amount will usually be less than the full value of the receivables themselves. So for example, if you have $5,000 in accounts receivable in your company, but you have sold them at a 10% discount, the factor will pay you $4,500, and that should be the amount of your revenue stream. Entering a revenue stream
Method #2: Reflecting the expense
An alternate method is to use a direct cost entry in your forecast, reflecting the loss in value that resulted from the sale. In other words, If you sold $5000 in receivables to a factor, and they paid you $4500, you’ve lost 10% of their value in the sale. So your direct cost entry would be for $500, the amount of this factor expense. Entering a direct cost
Note: With either method, we recommend adding a note in the text of your plan that explains the nature of this factoring entry. You can add a custom topic for this purpose.