Why You Should Know About Receivables Factoring

Receivables factoring is seldom heard of, it refers to a financing activity where a company buys receivables. Companies that face difficulties in collecting debts would receive a help from the receivables factoring company. In short, the receivables factoring company would take over the role as the debt collector.

Although it sounds unfamiliar, receivables factoring businesses have been around in Indonesia since 1988 and it is formally regulated through a decree of the Indonesian Ministry of Finance no. 1251/KMK.013/1998. In this business, the receivables factoring company would purchase the invoice of a company’s receivables with an agreed upon additional fee. Following is the explanation.

User of receivables factoring services

From this definition, the user of receivables factoring services is very useful for small or newly formed companies, especially those with receivables older than 60 days. This is because they commonly face difficulties in debt collections. The later it is paid, the more congested the business operation would be. This would lead to a loss on the company’s side.

Therefore, receivables factoring companies are required to deal with unpaid debts. They would purchase the receivables invoices with an agreed upon price, with an additional fee and commission. Receivables factoring companies, or can be referred with the term factor, would give a percentage of the total debt to the company and collects the debt to the payor. 

Requirements of receivables factoring

Like other financing businesses, receivables factoring also come with a set of requirements to assess their potential clients. Even so, the requirements can be different depends on the receivables factoring company. You need to know roughly what requirements are generally used in a factoring receivables agreement. Following is the requirements.

1. Discount or a nominal fee

Discount can be likened as a fee for the receivables factoring company. It is in a form of percentage with varying value and can be termed weekly or monthly.

2. Advance rate

This is a percentage from the total invoice which would be paid by the receivables factoring company to the clients.

3. The company’s credibility

Candidate client companies have to be a legal company, which possess a good organization structure and an ability to repay the loan. 

4. Receivables’ documents

The receivables factoring company will require the client to hand over all the documents related to the receivables that have been taken over.

Naturally an agreement between the receivables factoring company and its clients would cover more than the list mentioned above. However, these four requirements are the most commonly mentioned in such agreement. The agreement is made to protect the receivables factoring company from loss and as a guarantee to the client that all the receivables related issued would be handled.

Types of receivables factoring

In its operations, there are four types of receivables factoring service which are offered to the clients. These services are chosen by the clients depend on their condition and ability.

Every receivable factoring company has their own chosen service. However, generally there are two types of receivables factoring service which are commonly found. From the two, the receivables factoring company would still charge a fee and a commission.

1. Financing service

As its name, this service requires the receivables factoring company to commit a payment to the client in advance, in an agreed upon amount. After the client hands over all the invoices and related documents, then the receivables factoring company would pay around 60-80% of the total receivables

2. Non-financing service

Different from the financing service, this service includes all the administration related issues with the client’s receivables. Starting from the credit worthiness analysis, credit supervision and control, up to the credit risk protection which would be taken care of by the receivables factoring company.

Benefits of receivables factoring

Receivables factoring business itself includes three parties: a receivables factoring company, a client as a creditor, and a third party as a debtor. Receivables factoring itself is a profitable business not only for the receivables factoring company, but also for the creditor and the debtor.

For a receivables factoring company, profits are earned from the nominal fee and the commission. Clients would be helped by receivables factoring through some benefits such as: diminishing the risk of loss and a more current business operation without demanding receivables. For the debtors, they would be motivated to repay their receivables as soon as possible because of a third-party intervention.

Receivables factoring companies have to focus on the needs of each client, especially regarding the purchased receivables issue. CONFINS, a cloud-based core system multifinance, is a correct solution to aid your factoring receivables business to be more current. You can choose a specific service based on your needs, complete with sophisticated features and modules which can be access from anywhere, anytime. Trust your receivables factoring business operations with CONFINS.