Factoring creates a multi-step transaction that confuses a lot of business owners. You sell an invoice to a factoring company, they advance you most of the money immediately, hold back a reserve, then release the reserve minus their fee once your customer pays. Recording this correctly in QuickBooks requires a few accounts you probably don’t have set up yet.

Start by creating two new accounts. First, an Other Current Asset account called something like “Factoring Reserve” or “Due from Factor.” This tracks the money the factoring company is holding. Second, an expense account called “Factoring Fees” under your operating expenses. This is where the cost of factoring shows up on your profit and loss statement.

When you factor an invoice, record it in two steps. Step one happens when you receive the advance. Create a bank deposit for the amount the factoring company sent you. Then create a journal entry that credits your Accounts Receivable for the full invoice amount, debits your bank account for the advance received, and debits your Factoring Reserve account for the held-back amount. The invoice is now cleared from A/R because you sold it.

Step two happens when your customer pays the factoring company and they release your reserve. You will receive the reserve minus their fee. Record another bank deposit for the amount received. Then create a journal entry debiting your bank account for the deposit, debiting Factoring Fees for the fee amount, and crediting the Factoring Reserve account for the full reserve. This zeroes out the reserve and captures the fee expense.

The factoring fee is a legitimate business expense and fully deductible. It shows up as a cost of doing business, which is accurate. You paid for faster access to cash.

Keep a spreadsheet or log tracking each factored invoice with the original amount, advance received, reserve held, and fee charged. Trucking and logistics companies factor dozens of invoices monthly, and without a tracking system the reserve account becomes impossible to reconcile. Every time you get a reserve release, match it to the original invoice and make sure the numbers tie out.

Some factoring companies provide detailed reports showing exactly which invoices were paid and what fees were charged. Use these reports during reconciliation. If the reserve account balance in QuickBooks doesn’t match what your factoring company says they’re holding, something was recorded wrong.

Watch out for chargebacks. If a customer disputes a load or doesn’t pay, the factoring company will charge the invoice back to you. This requires reversing the original entries and putting the invoice back on your books as a receivable you need to collect.

The fees add up faster than most business owners realize. If you are factoring regularly, run a report on your Factoring Fees account quarterly to see what this access to cash is actually costing you. Sometimes the total is eye-opening.

If this process feels complicated, it is. Factoring transactions are one of the trickier things to record correctly. A Northwest Ohio bookkeeping service familiar with factoring can set up your accounts properly and handle the ongoing entries so your books stay accurate without you spending hours trying to figure out which invoice matches which reserve release.