debtor is asset or assets of the second most liquid company (easily settled), second only to cash (cash) and cash equivalents When there are short-term debts that are collected while cash and cash equivalents are insufficient to pay off The company can settle accounts receivable with other parties or conduct transactions known as factoring or factoring. Factoring.
Definition of Factoring
Factoring (Factoring) is the transfer of ownership of the debtor from one party to another. This transfer of ownership is carried out by purchasing accounts receivable at a discounted price.
In addition to being able to pay off debt, these transactions in Indonesia are generally used for financial transactions. This is regulated in Presidential Decree (Kepres) No. 61 of 1988, clause 2.
For example, your company supplies raw materials to another company. Often, partner companies will collect the goods directly from you once a week. but pay once a month Factoring transactions occur if you sell receipts or take the partner company’s goods to the bank for cash. So the task of collecting these debtors is no longer in your hands. But it’s in the hands of the banks involved.
So in the example transaction above, there are 3 parties involved: Your company is a seller.Bank, also known as factor As a debtor buyer you and your business partners or lender or customer as a debtor to you.
Benefits of Factoring
Here are some benefits of this transaction:
1. Increase the amount of cash of the company
When you sell debtors to the bank You will earn additional cash. Therefore, this transaction is recorded as a decrease in accounts receivable in the credit column and a cash increase in the debit column. You can then use this available cash to spin the wheel of the company’s business or pay off short-term debt.
2. Risk reduction
The transaction is also a way to mitigate risk by transferring customer risk to the bank or debtor buyer. Because in this transaction, all dependents in the debtor become the buyer’s rights.
For example, your business partner is experiencing financial difficulties that are serious enough to require additional time to pay off debts. Because you need extra cash and are afraid the partner will not be able to pay off the debt. So you sell the partner’s receipts to the bank. Therefore, the partner has to pay the debt to the bank and if the partner does not pay the debt, the bank bears the risk.
3. Flexibility in the production process
with increased cash and reduced risk The production of goods and services in your company will go more smoothly, for example, with the money received from this transaction. You can pay employee salaries. Repair broken machines buy new raw materials, etc.
4. Change billing tasks
It’s not often that a bill-selling company does not accept it because they need cash or fear of default. but because there is not enough time to collect debt from partners With this transaction, debt collection is no longer the job of the company. And it is the responsibility of the debtor buyer. (Bank or other financial institutions)
Accounts Receivable Factoring Mechanism
The mechanics of this transaction are relatively simple in theory. For example, A has a debtor from B for whatever reason. A needs cash, but B has a hard time keeping it. To solve this problem, A sells the bill of receipt that he and B signed to C, so A receives cash and C has the right to collect debt from B.
In practice, when applying for factoring with a bank, The factoring applicant (A) must meet certain requirements. because as a financial institution Banks certainly do not want to take on receivables from high-risk companies, so defaults in this transaction may affect BI audits.
For example, how to apply for factoring Bank BCA SyariahIn this single bank, both the applicant and the client must have been established as a company for at least 3 years. In addition, the client and client must have transacted in the last 6 months and intend to conduct long-term transactions.
There are different types of factoring transactions depending on the type of service provided by the bank or debtor. Here are some of them:
1. Full factoring service
Full Factoring Service is a factoring service that accepts all receivables filed by the applicant. Including the case where the debtor is at high risk (bad debt). The buyer of the debtor using this transaction is entitled to collection. issue an invoice and receive money from lender (Borrower). Still, full-service factoring is one of the most widely available factoring transactions today.
2. Factoring resources
Banks will not accept high-risk debtors. even if they admit it All risks of default shall be borne by the applicant.
3. Mass Factorization
Bulk factoring is a type of factoring contract that includes only prepayment (DP) and recurring billing. lender (Borrower).
4. Factoring due
In this type of factoring The bank or debtor buyer does not act as the collecting party of the debtor. But it’s just a transaction supervisor. Administrative management and credit protection only
5. Factoring agent
in contract type factoring agencyThe applicant is entitled to issue invoices on behalf of the bank. (Purchaser Debtor) However, all technical matters. From management to billing still in the hands of the applicant
6. Invoice discount factoring
Another type of factoring contract is invoice discount factoring. In this contract, the bank actually purchases receivables from the applicant. But the applicant must collect the debtor from the customer himself. If the customer has already paid The applicant’s duty is to send the payment to the bank.
7. Undisclosed Factoring
The last type of factoring transaction is undisclosed factoringIn this contract, the bank accepts high-risk debtors and even provides protection against those risks. However, the bank generally accepts only 80% of the high-risk debt.
In addition to factoring You can also get additional cash by using the accounts receivable you have by filing. invoice finance. The difference with factoring is in invoice financing Banks or financial institutions will not buy your receivables. But it will give you a loan based on these debtors.
Which transaction would you choose to add cash to? Write your opinion below.
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