Invoice factoring gives businesses the power to ensure growth without diluting. for income tax and VAT purposes.įrom a business management perspective, our view is that factoring should be regarded as a way of raising working capital at a certain cost and should therefore be regarded as debt, irrespective of the legal, accounting or tax status of the transaction. Invoice factoring is the purchase of accounts receivable for immediate cash. The business owner receives cash for the invoice amount, usually less fees, ahead of the payment terms. A business owner sells invoices to a factoring company. The legal nature of the transaction may be entirely different from the accounting treatment of that transaction, which may also be different to the tax treatment, e.g. Invoice factoring definition Also called receivable factoring, invoice factoring is a financial tool designed to provide a quick cash advance. Whether or not the financier has recourse to the business if the debtors don’t pay also plays a role in determining how the transaction should be seen. A company and a factor enter into an agreement in which the factor purchases a companys accounts receivable (such purchased accounts are called factored. However, these general statements may be overridden by accounting regulations or legislation applicable in a particular country. If the debtors are only used as security for finance, it is legally regarded as debt. If the debtors, or more specifically their obligations to make payment in terms of the invoices, are sold to the financier, it is legally considered to be a sale and purchase and not a loan or a debt. The factoring fee for the invoice is obtained by multiplying the face value of the. This depends on the legal structure used to raise finance against a business’s debtors, not the terminology. pays the 100,000 invoice after 30 days exactly.
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