Traditional Invoice Finance Workflow Shakeup

Simplifying the Invoice Finance Accounting Process

Published: 14/07/2021

Although invoice finance is a relatively easy business finance solution for SMEs, it does come with a specific workflow that its users have to incorporate into their business operations, as well as specific accounting entries with which accountants need to be familiar.

Traditional Invoice Finance Workflow

In general, there are 5 steps to the invoice finance workflow from the client’s side.

  1. The business issues invoices to its customers after the sale of a product or completion of a service, and then the invoice details are sent to the finance provider. Normally, this is done by extracting the sales ledger, or the list of invoices from the accounting system at the end of each day and uploading this list to the finance provider’s platform.
  2. A percentage of the sales ledger total is made available upfront to the SME. The business can choose to drawdown up to that amount on any given day. Essentially, it is borrowing funds secured against the accounts receivable.
  3. The business’s customers pay directly into a bank account that the finance provider sets up. These payments repay the borrowed funds.
  4. The finance provider will charge a discount/interest rate and some fees; these are automatically deducted from the funds available for drawdown.
  5. Reconciliation is the last step, and can be done on a daily, weekly or monthly basis by the business owner/finance manager or an accountant. This involves comparing the balance and transactions on the finance provider’s platform to the accounting records of the business.

There are specific accounting entries that need to be made when a business is using invoice finance. Accounting entries are made in the following instances.

Funds drawn against ledgerBank
(Current Asset)
Short term loan
(Current Liability)

When funds are drawn from the facility, this is similar to a short-term loan, secured against the unpaid invoices. The accounts receivable balance remains unchanged.

Debtor makes paymentShort Term Loan
(Current Liability)
Accounts Receivable
(Current Asset)

Interest and fees should be posted as an expense in the income statement, balanced with an increase in the amount owed to the finance provider.

Interest & Fees ChargedExpenses
Short Term Loan
(Current Liability)

After making these entries, the liability on the balance sheet will be reflective of what is owed to the invoice finance provider at that time. This should align with the balance shown on the client statement sent by the finance provider.

Another reconciliation step, which should be done at least monthly, is to match the accounting system to the client statement balance with the following calculation.

Another reconciliation step, which should be done at least monthly, is to match the accounting system to the client statement balance with the following calculation.

Drawdowns + Fees – Customer Receipts = Client Statement Balance.

Automation Shakes up the Invoice Finance Accounting Process

Grapple’s innovative platform automates the steps outlined in the previous section. By linking directly with accounting software, the workflow is streamlined and reconciliation made easy. Grapple’s clients benefit from reduced time and money spent on the admin process of invoice finance while receiving tailored finance solutions and outstanding customer service