Factoring Companies Guidebook

Any monies taken from the customers, by the Client in advance of work being carried out or goods being supplied. This amount may be for part, or all, of the job.

Alternative terms - Advance Payments, Prepayments.

See also: - "Advance Billing"

Concerns

Where the amount received in advance is for the whole job then no debt will arise at any time, even if the invoice is raised on completion. Where there is only a partial up front payment then the balance of the monies due will become a debt on completion. Where this is invoiced in full, less the Advanced Payment, then this would in theory be a factorable debt. However, there is an additional concern with these types of payment: should the Client cease to exist, there is likely to be a mix of completed invoices outstanding, together with Deposits received for future work, on many of the customers. This is certain to result in set-off being applied against what would otherwise be valid debts.

Identification

Review the Cashbook, Orders and Invoices. Enquire with the Client as to whether any of the customers pay up front or provide Deposits against future works. Review the trial balance for any Deposits Received accounts (Deposits are not always specific to jobs and are not always handled within the Sales Ledger). The type of industry should give some indication of the likelihood of such payments. An example would be deposits for a kitchen installation, but these are also likely to be excluded from our facility, as they normally relate to private individuals rather than legal trading entities.

Treatment

The full value of Deposits held should be reserved; however, a Client with high levels of these is unsuitable for Discounting. It may be possible, if the debtors to whom deposits apply are easily identifiable, for those debtors to be excluded from the Agreement.