Anyone know what 'factoring' is?

[jasdlm]

I have done this client's taxes for several years. This year, among the usual information he drops off, there are stubs from checks totaling over $30,000, payable to him. He is out of town; wife says these are 'factoring' checks from his brother in law's company. The checks are each attached to a sheet entitled 'factoring schedule'. It lists 'amount of invoice, which is huge in each case (around $150,000), 'factored principle', which is around $7,500, and 'amount of invoice advanced', which is the amount that matches the check stub. If this is income, it's a large amount of untaxed income, I'm assuming, and my client is going to be in for a big surprise. If it's not income, what is it?

Thanks in advance.

[JRS]

The only "factoring" in accounting I am at least familiar, but don't know how to handle, is the "selling" of accounts receivable at a discount. My father would do it for his grocery stores. He would take a day's receipts and sell them to a supplier.

[Alpha]

I have a client that does this. Basically they are selling the A/R usually to a bank. It sounds like his brother-in-laws company is buying his A/R at a discount. This is not income to your client but it is an expense because the amount of the discount is interest paid for getting the money now instead of waiting for the invoice to be paid. You will need alot more information to track this. It usually takes me about4 hours a month to track this kind of activity and make sure all the interest rates and such are correct. But that is on a huge account with almost 1 million going through each month.

[jasdlm]

Wow. Thanks, both of you. I have some work to do.

[diligentbiz]

I factored many years ago when I owned an aircraft parts manufacturing biz. Factoring is "selling" the invoice to the factor at a discounted rate. The factor pays you the difference in a shorter period of time than the invoice is due, enabling you cash flow sooner. The factor collects the invoice. Factor is the one who actually gets the real advantage because of the high rate they charge ("discount"). If the invoice isn't paid, it all comes back on you, the seller. Simply, another way to get caught in a credit crunch.