Accounting for invoice factoring - Accounting and Audit ...www.mondaq.com › credit-control-and-cashflow › acc...
What is invoice factoring?
Invoice factoring (or receivables financing) is a legitimate form of financing that allows a company to sell its accounts receivable (i.e. unpaid invoices) to a third party financial institution or investor (known as a factor) for a lump sum amount, to improve the company's working capital. This provides the company with immediate funds that can be used to alleviate cash flow pressures and pay expenses.

Traditionally used as a short-term solution for companies under financial stress, invoice factoring is also appealing to companies wanting to grow their business, as it allows for working capital to flow more consistently and provides access to funds that would otherwise be tied up in ledgers. It is particularly attractive for companies with slow paying customers and/or extended payment cycles, and offers an alternative to traditional finance.

Recovery of debts—the contractor could owe amounts to the Commonwealth (e.g. liquidated damages, royalties, or refundable non-recurring engineering costs) and many Commonwealth contracts contain provisions allowing a reduction in contract price commensurate with debts due by the contractor. Assigning invoices to the factor may prevent the Commonwealth from exercising any right to "set off". The Commonwealth may need to pursue payment of contractor debts through more traditional means, which may lead to other issues should the contractor enter external administration.

Final thoughts
Invoice factoring is gaining popularity for companies that require enhanced cash flow to strategically grow their business or avoid financial distress, so it looks like it's here to stay. While it bears some similarity to traditional financing by securing accounts through general security agreements, the outright transfer of the receivables attracts its own unique issues.

Though unlikely to offer complete protection, the Commonwealth would be well-advised to retain the "no assignment without consent" provisions in contracts, so the contractor remains obliged to seek approval of any factoring arrangement. It would also be prudent to ensure regular searches of the PPSA register are undertaken (in conjunction with any audit powers concerning the financial information of the contractor) to get a better picture of a contractor's financial position. Other notice and negative covenant clauses may also be appropriate depending on the particular circumstances.