How to account for invoice finance?
It may sometimes be important to check if the invoice finance is recourse or non-recourse. Examples of lenders are Market Invoice, Bibby, Lloyds etc.
But for smaller businesses, the typical accounting treatment will involve:
- sales invoice is raised: debit trade debtor and credit sales as normal
- invoice finance received: debit cash and credit liability for invoice lender
- customer pays the invoice: debt cash/liability for invoice lender and credit trade debtor
Step 3 depends on whether the customers pay the business or to the invoice lender directly (for example into a trust account)
Care should be taken to ensure that the full detail of the above transactions are recorded, and not just a shortcut. For example, unwitting clients/bookkeepers may post the cash received from the invoice lender against the trade debtor. But this would mean that the liability is omitted.
During the monthly/annual accounts preparation the interest and fees on the invoice finance should also be calculated and reconciled to a statement from the invoice lender, along with the period end liability.
