Factoring vs Credit: One Goal, Different Accounting Meaning

Factoring and credit provide businesses with working capital but create different entries in financial reporting. Credit creates a new liability to the bank. Factoring works with accounts receivable that have already arisen after the sale of goods, performance of work, or provision of services.

Under a loan agreement, the enterprise receives money regardless of specific customer invoices. Under a factoring agreement, the company transfers the right to collect from one or several debtors to the factor. This difference determines the entries, tax consequences, debt burden indicators, and cash flow structure.

A business should not compare only the stated rate. An accountant must compare the full cost of money, timing of expense recognition, VAT, impact on the balance sheet, and financing return risk.

How Factoring Works Under the 2026 Rules

Since July 30, 2026, Ukraine has been governed by the Law of Ukraine “On Factoring” No. 4466-IX. Simultaneously, Law No. 4863-IX amended Article 1077 of the Civil Code and excluded Articles 1078-1086. Now, a special law regulates the contract, assignment of monetary claims, parties’ rights, registration of assignment, and debtor notification.

Under the contract, the factor transfers or commits to transfer money to the client by paying the price of the monetary claim right for a fee. The client assigns the factor the right to demand payment from the debtor. This is not a usual loan secured by invoices, although factoring with recourse often economically resembles short-term financing.

Types of Factoring and Accounting Risk

The new law distinguishes several models. For an accountant, the contract name matters less than risk allocation between parties.

• factoring without recourse – the factor assumes the risk of non-payment by the debtor, and generally, the client does not repay the received financing due to ordinary buyer default;
• factoring with recourse – the client must repay the factor if the debtor fails to meet the payment requirement within the contract’s stipulated term;
• confidential factoring – a type of factoring with recourse where the debtor is not notified about the claim’s assignment, and the client makes settlements with the factor;

Recourse does not automatically cover every problem with the invoice. The contract may separately assign risks of goods returns, discounts, offset, quality disputes, invalid claims, or initial document errors to the client.

Claim Registration and Debtor Notification

Assignments under a factoring contract, except confidential, are registered in the Register of Assignment of Monetary Claims. Registration timing affects priority if one claim is transferred to several parties. After registration, the factor sends a payment notification with payment details to the debtor within three working days.

An accountant needs not only the contract but also confirmation of registration, debtor notification, and factor’s report. Without these documents, it is harder to define the asset derecognition date, close settlements, and confirm cash movements.

Companies providing factoring services can be found in the corresponding section of Poshuk.info. Before signing a contract, verify the institution in the NBU registers and clarify if it has the right to perform such activities.

Non-Recourse Factoring in Accounting

Accounts receivable belong to financial assets. Their accounting is regulated by NP(S)BO 10 “Accounts Receivable” and NP(S)BO 13 “Financial Instruments”. More details about accounts 36, 37, allowance for doubtful debts, and net realizable value can be read in the accounts receivable accounting article.

Under the non-recourse model, the enterprise transfers not only the right to receive money but also the primary credit risk to the factor. If the client loses control over the claim, the accounts receivable are written off the balance. The difference between the book value and the amount the factor pays affects financial results.

Typical Non-Recourse Journal Entries

NP(S)BO does not contain a single universal scheme for each factoring contract. The enterprise establishes account correspondences in accounting policies based on the economic substance of the transaction.

1. Recognize income from transferring another current asset by debiting the factoring settlement account and crediting subaccount 712.
2. Write off the accounts receivable book value by debiting subaccount 949 and crediting account 36.
3. Record cash receipts from the factor by debiting account 311 and crediting factoring settlement account.
4. Recognize separate services and commissions in accounts 92, 949, or 95 depending on their nature.

The financial result from transferring the claim equals the difference between recognized income and the book value of accounts receivable, considering separate service fees. A simple entry like “Dr 311 – Cr 361” may conceal income, expenses, and the real cost of factoring.

Non-Recourse Factoring under IFRS

Companies reporting under IFRS apply derecognition rules for financial assets from IFRS 9. The term “non-recourse” in the contract is not enough. The enterprise assesses whether it has transferred practically all risks and rewards, retained control, and if it has continuing involvement in the claim.

If risks transferred to the factor, accounts receivable are written off. If the enterprise retains significant risk through guarantees, delay compensation, mandatory repurchase, or broad recourse grounds, the asset may remain on the balance sheet alongside a financial liability.

Factoring With Recourse in Accounting

With factoring with recourse, the debtor remains an economic risk for the client. The company gets money now but may have to return funds to the factor. Due to the principle of substance over form, such an operation is often accounted as financing.

Accounts receivable remain reported as an asset until payment, write-off, or another event terminating the right to the claim. Simultaneously, the enterprise recognizes a financial liability to the factor.

For a banking factor, basic entries might look like:

• debit 311 – credit 601 for the amount of received short-term financing;
• debit 951 – credit 684 for interest fee on funds used;
• debit 92 or 949 – credit 685 for a separate commission for verification, administration, or servicing;
• debit financial liability – credit customer settlement account after confirmed debtor payment;
• debit 684 or 685 – credit 311 when paying interest and commissions;

If the factor is a non-bank financial company, subaccount 601 may not correspond to the creditor’s nature. Then, the enterprise opens separate analytics under other current financial liabilities. The chosen model is fixed in accounting policies.

How Accounting Reflects Credit

Credit is not related to selling accounts receivable. The enterprise receives funds and simultaneously recognizes debt to the bank. Short-term bank loans are current liabilities under NP(S)BO 11; loans over 12 months are long-term with current portions highlighted.

Main Entries for Short-Term Credit

Credit transactions usually have a simpler accounting model. The payment schedule allows advance allocation of principal, interest, and commissions.

1. Receive credit funds – debit 311, credit 601.
2. Accrue interest – debit 951, credit 684.
3. Pay interest – debit 684, credit 311.
4. Repay principal – debit 601, credit 311.
5. Transfer part of long-term credit due within 12 months to current liabilities.

Principal does not become income upon receipt nor expenses upon repayment. Profit is affected by interest, bank fees, currency exchange differences for foreign currency credit, and borrowing-related costs.

When Interest Is Not Immediately Written Off

NP(S)BO 31 defines interest and other borrowing costs as financial expenses. Usually, they are recognized in the accrual period. If the enterprise creates a qualifying asset, part of expenses may be included in its cost.

Credit for working capital replenishment usually does not form a qualifying asset. Its interest is expensed in the period. For long-term construction loans or production line creation, the model may differ.

How to Calculate the Real Cost of Factoring and Credit

The factor might name a 2% commission, and the bank an 18% annual rate. These numbers can’t be compared without considering the term, financing amount, and additional fees. The factor’s commission often accrues on the entire invoice face value, although the client immediately receives only 70-90%.

The calculation of the full cost includes all payments:

• discount from the nominal value of the monetary claim;
• interest fee for each day of financing;
• commission for invoice processing or limit maintenance;
• fee for debtor verification;
• insurance or guarantee payment;
• loan issuance and maintenance commission;
• costs for collateral appraisal, notary, and insurance;
• VAT if included in payment and not forming deductible tax credit;

The accountant compares not advertised rates but the sum of expenses in hryvnias for the same period. Then the annual equivalent and impact on the margin of a specific order can be calculated.

Calculation Example for UAH 1 Million

The enterprise shipped goods for UAH 1,000,000 with a 60-day deferral. The factor immediately pays 80% of the nominal, i.e., UAH 800,000. The commission is 2% of the invoice, or UAH 20,000. After buyer payment, the factor transfers the remaining UAH 180,000.

The simple annual cost of such financing excluding VAT is:

20,000 / 800,000 × 365 / 60 × 100% = 15.2%.

The bank offers a credit of UAH 800,000 at 18% annual rate with a one-time 1% commission. For 60 days, the enterprise will pay UAH 23,671 interest and UAH 8,000 commission. The total cost is UAH 31,671, with a simple annual equivalent of about 24.1%.

In this example, factoring is cheaper by UAH 11,671. If the factor’s commission rises to 3.5% of the nominal, expenses reach UAH 35,000, and the annual equivalent exceeds 26%. Then credit becomes less expensive.

Calculation is conditional. The real contract may provide daily interest fees, minimum commissions, different payment terms, and recourse. Bank loan costs are also affected by NBU decisions, as discussed in the article “How NBU Decisions Affect the Economy”.

VAT: Where Factoring Differs from Credit

VAT poses the most questions. Subparagraph 196.1.5 of the Tax Code distinguishes regular assignment of claims, factoring operations, and specific types of debt assets.

Receiving and repaying credit funds is not a supply of goods or services. The loan principal does not generate VAT liabilities. Interest on credit usage is a financial operation; however, related bank services must be checked for their nature.

For factoring, the rule is more complex. The DPS clarification dated February 12, 2026 states that factoring operations where the debt objects are the currencies, securities, mortgage-backed loans, and other instruments directly listed in subparagraph 196.1.5 of the Tax Code are not VAT objects. Other factoring operations are considered VAT taxable.

An accountant should separately analyze:

• what exactly the factor buys under the contract;
• how parties determined the price of the monetary claim;
• whether the fee for the financial service is separately identified;
• whether there are separate verification and administration services;
• the amount comprising the VAT base;
• whether the factor registered a tax invoice;
• whether the client has the right to include VAT in tax credit;

Do not automatically apply VAT rules for regular assignment to factoring. If sums are significant or the contract combines discount, interest fee, and service payments, the enterprise may seek an individual tax consultation.

Profit Tax

For a profit tax payer, the basis remains the accounting financial result adjusted for tax code differences. The code does not establish a special universal difference for each factoring operation.

For non-recourse factoring, income from transferring the claim, book value of accounts receivable, and certain service expenses affect the financial result. In the recourse model, expenses often are interest and commissions, as the transaction economically resembles borrowing.

Credit interest reduces the accounting financial result in the accrual period or is included in the cost of a qualifying asset. Certain debt operations with non-residents may be subject to withholding tax differences under Article 140 of the Tax Code.

Primary documents must confirm expense links to business activities. A bank statement alone is insufficient if the contract stipulates multiple commissions with different economic substance.

Factoring and Credit in the Cash Flow Statement

Credit proceeds are financing activities. Repayment of principal is also shown in financial cash flows. Classification of paid interest depends on reporting standard and accounting policy.

Non-recourse factoring of trade receivables is usually related to the operating cycle. The company merely receives payment earlier than the usual term of sale. Recourse factoring may be financing in nature; the accountant checks if proceeds must be shown as financing cash flows.

IFRS require cash flows to be classified by operation nature. If the claim remains in the balance sheet and received funds form a financial liability, the financing classification has stronger grounds.

Impact on Balance Sheet and Financial Ratios

Credit increases cash and liabilities simultaneously. This can worsen the debt-to-equity ratio, increase current liabilities, and reduce covenant headroom.

Non-recourse factoring can reduce accounts receivable without producing new debt. The turnover ratio rises, and collection terms shorten, but discount reduces profit.

Recourse factoring does not guarantee balance sheet relief. If non-payment risk remains with the client, the enterprise shows accounts receivable and financial liability. Under these conditions, total assets and debts may rise almost like under credit.

When Factoring Is Accounting Justified

Factoring suits companies whose money shortage arises due to payment deferrals, not recurring losses. It works best with confirmed supplies and solvent debtors.

• the enterprise sells goods or services with 30-120 day deferral;
• substantial quality accounts receivable have accumulated on balance;
• funds are needed immediately after shipping;
• buyers have better credit history than the supplier;
• the company prefers not to provide real estate or equipment as collateral;
• non-recourse contract allows real transfer of credit risk;
• faster cash turnover brings more profit than factoring costs;

If the contract margin is 8%, and factoring takes 4-5% of the invoice nominal, the deal may lose economic sense. Decision should be made on a specific client, invoice, and payment term basis.

When Credit Is More Convenient for Business

Credit does not depend on the presence of customer invoices. It can be directed to purchasing inventory, equipment, repairs, marketing, or covering seasonal gaps before sales start.

• the company needs a fixed sum for several months or years;
• business does not work with deferred payments;
• debtors are small, unstable, or do not meet factor requirements;
• bank offers lower full cost of financing;
• the enterprise has acceptable collateral;
• the credit schedule matches projected cash flows;
• notifying the buyer about factoring may harm commercial relations;

Credit requires discipline. If the buyer delays payment, the next bank payment still must be made. Factoring linked to invoices better synchronizes financing with the operating cycle.

Documents an Accountant Should Check

An error in the claim transfer date changes the accounts receivable balance, amount of liabilities, and expenses for the reporting period. Therefore, document packages should be agreed on before the first payment.

1. Verify the basic contract with the buyer, primary documents, and the monetary claim amount.
2. Determine the factoring type, presence of recourse, and list of events triggering client repayment.
3. Define claim price, advance payment, reserve, discount, interest, and all commissions.
4. Obtain confirmation of assignment registration and copy of debtor notification.
5. Agree with the factor on form and frequency of reports on debtor payments.
6. Identify the date of loss of control over the financial asset.
7. Fix account correspondences and VAT model in the accounting memo.
8. Check how the operation affects financial covenants and management reporting.

For contracts with many invoices, a separate analytical accounting register is needed. It records claim nominal, financing amount, withheld reserve, commission, debtor’s payment date, and final factor settlement.

If no in-house specialist has worked with such operations, accounting services for sole proprietors and LLCs can be engaged (link). Companies planning to independently provide factoring or lending require a proper financial services license.

Common Mistakes When Choosing Between Factoring and Credit

The most costly errors arise not from the rate but from incorrect transaction classification and incomplete cost calculation.

• comparing the factor’s monthly commission with the credit’s annual rate without recalculation;
• calculating factoring cost from received advance without considering commission from full nominal;
• writing off accounts receivable while retaining significant recourse risk;
• accounting non-recourse assignment as ordinary credit;
• combining income and expenses in one entry;
• ignoring VAT on factoring services;
• lack of reconciliation between buyer invoices and factor reports;
• assigning to the factor a claim that has already been assigned, challenged, or settled;
• not considering returns, bonuses, and credit notes;
• absence of separate analytics for each debtor;

Factoring does not automatically correct weak payment discipline. Credit also does not eliminate working capital shortages if the company sells below cost or continuously finances buyers with its own funds.

Frequently Asked Questions About Factoring and Credit

Is Factoring Considered a Loan?

Legally, they are different contracts. Factoring involves financing by transferring the right to a monetary claim, whereas credit is repaying received funds with interest. In accounting, factoring with recourse may be reflected similarly to credit if the enterprise retains the non-payment risk.

Can Accounts Receivable Be Written Off Immediately After Signing?

Not always. The moment of claim right transfer must be determined, and whether the client lost control over the financial asset. Recourse, guarantees, and mandatory repurchase may prevent derecognition.

Does Factoring Reduce Profit Tax?

Factoring can generate accounting expenses through discount or commission. Simultaneously, claim transfer creates income from realization of a financial asset. Tax depends on net effect of the transaction and tax differences of the enterprise.

Can a Sole Proprietor or Legal Entity on a Single Tax Use Factoring?

There is no universal direct answer for all contracts. It is necessary to check settlement procedures, nature of received sums, and DPS position regarding the specific model. For significant transactions, obtaining an individual tax consultation is advisable.

Which Is Cheaper – Factoring or Credit?

The cheaper instrument is the one with the lower full cost for the same term and amount. Factoring can win due to speed, absence of collateral, and debtor evaluation. Credit often costs less for a company with stable reporting, sufficient security, and longer funding needs.

Regulatory Framework

The relevance of the accounting model depends on contract conditions and financial reporting standards. The following sources are used for verification:

• Law of Ukraine “On Factoring” No. 4466-IX;
• Law No. 4863-IX amending Civil Code;
• national accounting regulations and Chart of Accounts;
• Instructions on Applying the Chart of Accounts No. 291;
• DPS clarification on VAT for factoring operations;
• IFRS 9 “Financial Instruments”;

Norms and tax clarifications are verified as of September 1, 2026.