Factoring your invoices is a major way a lot of small businesses finance themselves, and also rid themselves of the hassle of having to go to collections. It’s also a great way to ensure proper cash flow that doesn’t depend on your customers paying you on time.
But some owners have the need to deliver financial statements to another party for a variety of purposes. So, many of them ask: “do I have to disclose that I’m factoring my invoices on my business’s financial statements?”
There are three specific types of financial statements where this would come into play: income statements, cash flow statements, and your balance sheet.
The balance sheet shows the business’s assets, liabilities, and equity at a given point in time. An income statement shows how a business is profitable (or not profitable) over a given period of time; a cash flow statement shows how cash is coming in and going out of the business over a given period of time, as well.
Together, these three documents seek to provide an accurate picture of the financial health of the business, which will be impacted by factoring.
Factoring Accounts Receivable and Financial Documents
Most factoring methods have a business sell the factoring company invoices at a discount. Invoices are accounts receivable. Ordinarily, these would go on a balance sheet, but factoring is called off balance sheet financing, and isn’t listed on the balance sheet itself.
That doesn’t mean you can leave factoring off altogether, though, since full disclosure standards often require that all financing arrangements be listed in some way. Most businesses have the off balance sheet financial arrangements in the footnotes of the balance sheet.
All things considered equal, factoring will improve your balance sheet and your cash flow statements, because it’ll show that your converting an asset – your AR – into cash, thus generating more cash flow once you factor in the discounted value from customers who won’t pay – and thus won’t ever generate revenue for you.
So, even though you may not always directly and completely disclose AR factoring on financial statements, it can be a very powerful way to finance your business.
Corporate Billing provides invoice factoring options for a variety of small businesses.
Contact us to get a quick quote. Our team has decades of experience helping trucking companies and service providers get paid on time and grow their businesses.