S Corporation CPA explains Accounts Receivable Factoring and Receivables Assignment| Form 1120-S

Accounts Receivable Factoring is a slippery form of asset based financing. In chess, this would be an end play move. Consult your S Corporation CPA as each case is unique.

Asset based financing differs from a traditional loan. Here the value and quality of your S corporation’s assets, as collateral, outweigh your credit rating. In this case the asset is your company’s Accounts Receivables (A/R). Factoring is the purest form of asset based financing, and the most problematic. Again, consult your S corporation CPA. Hopefully there’s a better solution to your cash flow problem.

Other examples of asset based lending are Purchase Order financing and Revolver lines of credit. These techniques use a blend of your credit history, track record and value/quality of your assets.

Factoring:

• Is a financing technique where your S Corporation sells its accounts receivable to a third party called the Factor.
• I isn’t a loan. You’re selling A/R, there’s no future cash flow on those sold accounts.
• The Factor analyzes your accounts receivables for expected value. Aging is one component examined.
• The Factor buys your accounts receivable (A/R) at a discount. Perhaps 80%.
• Your customers may not know there’s a Factor involved. But usually there’s a lockbox; the customers send payments directly to an account controlled by the Factor.
• There are usually administration fees on top of the Discount.
• Usually, you get the cash now.
• Sometimes you get the cash as the A/R is paid.

“The S Corporation is still responsible for un-collectable debt in Factoring. The deck is stacked against you.”
- Gary Bode, S Corporation CPA

If your business can be turned around with a capital infusion, Factoring is seldom the best financing solution. But if you’re going under, maybe it’s a better deal. Be dubious of the advantages touted by Factors even though they’re true.

Invoice Discounting aka Receivables Assignment

Sometimes a true loan or line of credit is granted against a pledge on your S Corporation’s accounts receivable. This is more likely if your customers have strong reputations, like say GE for example, instead of Joe down the street.

I hope you never need Factoring. Better to consult with an S Corporation CPA for help navigating through a financial crisis. If you don’t have a local S Corporation, consider calling us at (910) 399-2705 for a free phone consult. We are a CPA firm that operates as an S Corporation ourselves. So we stay tight on all S Corporation issues and of course Form 1120-S.