With factoring, you sell your trade invoices to a factor, which advances most of the invoice value immediately and collects payment from your customer. This is different from invoice discounting, where you keep collecting the debts yourself. For a cafe, factoring will usually only work for your invoiced wholesale or catering accounts, not for till sales paid by card or cash.
For VAT, factoring does not change your own sale. On the normal invoice basis, VAT is due on the full invoice value when you issue the invoice, not only on the advance you receive. So for a 1,000 pounds sale plus 200 pounds VAT, you account for 200 pounds VAT even if the factor initially advances only, say, 85 percent of the 1,200 pounds total. If you use the cash accounting scheme, the timing rules are different, so check your scheme before signing. The factor's charges are a separate cost to you. Do not automatically reclaim VAT on every factor charge: the VAT treatment depends on the nature of each charge, so use the factor's invoice and, if in doubt, ask your accountant.
Bookkeeping should keep the customer debt and the factor loan separate. Record the sale normally: debit trade debtors 1,200 pounds, credit sales 1,000 pounds and VAT 200 pounds. When the advance arrives, debit bank and credit a factor loan or factoring account, not sales. For an 85 percent advance that is 1,020 pounds. When the customer pays the factor, clear the debtor and the factor account, and record the factor's fees as an expense. In that example, if fees are 60 pounds, the final settlement could be bank 120 pounds, factor fees 60 pounds, and the factor account cleared, with debtors reduced by the full 1,200 pounds.
Check the agreement carefully. With recourse factoring, you must repay the advance if the customer does not pay. Watch for minimum fees, charges on disputed invoices, concentration limits, and whether the factor requires all invoices or only selected ones. Also consider the customer relationship: in disclosed factoring, customers will know a factor is involved and must pay the factor, not you. A short trial with clear reconciliations each month will show whether the cash-flow benefit outweighs the fees.
