Factoring is a financial transaction and type of debtor financing in which the business sells its receivables (ie, invoices) to a third party (called a factor) at a discount. A business will sometimes be a factor of its receivables assets to meet current and immediate cash needs. Forfaiting is a factoring arrangement used in international trade financing by exporters who want to sell their receivables to forfaiters. Factoring is often referred to as factoring receivables, factoring receivables, and sometimes accounts receivable. Accounts receivable financing is a more accurate term used to describe an asset-based loan to receivables. The Commercial Finance Association is the premier trade association of lending and asset-based factoring industries.
Factoring is not the same as the invoice discount (so-called assignments of accounts receivable in American accounting - as distributed by the FASB in GAAP). Factoring is the sale of accounts receivable, while the invoice discount ("assignment of accounts" in American accounting) is a loan involving the use of the receivable assets as loan collateral. However, in some other markets, such as the UK, invoice discounts are considered a form of factoring, which involves "assignment of accounts receivable", which is included in factual factoring statistics. It is therefore not considered a loan in the UK. In the UK the arrangement is usually confidential because the debtor is not informed of the assignment of accounts receivable and seller receivable collecting the debt on behalf of the factor. In the UK, the main difference between factoring and invoice discounts is confidentiality. Scottish law is different from that of the United Kingdom, in which case notice to the account debtor is necessary for the assignment to take place. The Scottish Law Commission is reviewing this position and is seeking to propose reform by the end of 2017.
Video Factoring (finance)
Ikhtisar
There are three parties directly involved: the factor that buys the receivable, the party that sells the receivable, and the debtor having the financial liability that requires it to make payment to the invoice owner. Accounts receivable, usually associated with invoices for work performed or goods sold, are essentially financial assets that provide the owner of a legal right to collect money from debtors whose financial liabilities are directly consistent with acceptable assets. Sellers sell accounts receivable with a discount to a third party, a special financial organization (aka factor) to earn cash. This process is sometimes used in the manufacturing industry when an urgent need for raw materials outweighs available cash and the ability to buy "on account". Both invoice discounts and factoring are used by B2B companies to ensure they have the immediate cash flow required to meet current and immediate obligations. Factoring invoices are not a financing option that is relevant to a retail or B2C company because they generally have no business or commercial clients, the conditions required for factoring.
The sales of the receivables transferred ownership of the receivable to the factor, indicating the factor obtaining all rights associated with the receivable. Accordingly, the receivable becomes the factor asset, and the factor obtains the right to receive payments made by the debtor for the amount of the invoice, and is free to guarantee or exchange the assets of the receivable without limitation or unreasonable restrictions. Typically, the account debtor is notified of the sale of accounts receivable, and the debtor's billing factor and make all collections; However, factorization without notice, where the client (seller) collects accounts that are sold to factors, as factor agents, also occur. The arrangement is usually confidential because the debtor is not informed of the assignment of receivables and the sellers of receivables collecting debts on behalf of factors. If factoring transfers receivables " without liability ", the factor (buyer of receivables) must bear the losses if the account debtor does not pay the invoice amount. If factoring transfers receivables " by other means ", the factor has the right to collect the amount of unpaid invoices from the switch (the seller). However, returning any merchandise that may reduce the amount of invoices that can be collected from accounts receivable is usually the responsibility of the seller, and that factor will usually hold the seller to pay a portion of the receivables sold ("Suspension of factor receivables ") to cover the return of merchandise relating to accounts receivable which are calculated until the privilege of returning the goods expires.
There are four main sections for factoring transactions, all of which are recorded separately by the accountant responsible for recording the factoring transactions:
- "cost" is paid to a factor,
- Interest Expense is paid to factors for down payment,
- "bad debts expense" relating to the portion of receivables that the seller expects will remain unpaid and can not be withdrawn,
- the amount of the "factor restraint balance" to cover the return of the item, and (e) any additional " loss " or " profit " to which the seller should associate with the sale of the receivable. Sometimes factor costs paid by the seller (the "client" factor) include discounted fees, additional credit risks that must be assumed, and other services provided. The overall profit factor is the difference between the price paid for the invoice and the money received from the debtor, less the amount lost for not paying.
Maps Factoring (finance)
Rationale
Factoring is a method used by some companies to earn cash. Accounts of certain company factors when the available cash balances held by the company are insufficient to meet current obligations and accommodate other cash needs, such as new orders or contracts; but in other industries, such as textiles or apparel, for example, financially sound companies take into account their accounts simply because this is a method of historical financing. The use of factoring to obtain the cash necessary to accommodate the immediate cash needs of the company will enable the company to maintain an ongoing smaller cash balance. By reducing the size of the cash balance, more money is available for investment in corporate growth.
Factoring is also used as a financial instrument to provide better cash flow control especially if the company currently has many receivables with different credit terms to manage. A company sells its invoice at a discount to its face value when calculating that it would be better to use the proceeds to increase its own growth rather than effectively functioning as a "customer bank." Thus, factoring occurs when the rate of return on the proceeds invested in production exceeds the costs associated with the factoring. Therefore, the trade-off between returns generated by companies on investments in production and the cost of factor use is crucial in determining both factor factors used and the amount of cash the company has.
Many businesses have varying cash flows. Perhaps relatively large in one period, and relatively small in other periods. Therefore, businesses feel the need to maintain cash balances, and to use methods such as factorization, to enable them to cover their short-term cash needs in periods where these needs exceed cash flow. Every business then has to decide how many want to rely on factoring to cover shorts in cash, and how much cash balance it wants to keep to ensure that it has enough cash during periods of low cash flow.
Generally, variability in cash flow will determine the size of the cash balance to be held by a business as far as possible depending on financial mechanisms such as factorization. The cash flow variability is directly related to two factors:
- The cash flow rate may change, and
- The cash flow duration can remain at a level below the average.
If the cash flow can decrease dramatically, the business will find it requires large amounts of cash from existing cash balances or from factors to cover its liabilities over this time period. Similarly, the longer the relatively low cash flow can last, the more money it needs from other sources (cash balances or factors) to cover its liabilities during this time. As indicated, a business must balance the opportunity cost of losing cash on revenues otherwise it can be invested, against the costs associated with the use of factoring.
The cash balance a business has is essentially a demand for transaction money. As stated, the size of the cash balance that the company decides to hold directly relates to its reluctance to pay the costs necessary to use a factor to finance its short-term cash needs. The problem faced by the business in determining the size of the cash balance to be maintained in the hands is the same as the decision it faces when deciding how much physical inventory to keep. In this situation, the business should balance the cost of obtaining cash from a factor against the opportunity cost of losing the Return Rate it gains from investing in its business. The solution to this problem is:
dimana
- adalah saldo kas
- adalah arus kas negatif rata-rata dalam periode tertentu
- adalah [tingkat diskon] yang menutupi biaya anjak piutang
- adalah tingkat pengembalian aset perusahaan.
The current rationale of factoring now includes the financial task of raising funds to fast-growing companies selling to more credit-worthy organizations. Although it almost never has the items sold, the factors offer different combinations of money and support services when fund raising.
Factors often give their clients four major services: information about the creditworthiness of their prospective domestic and international customers, and, in nonrecourse factoring, acceptance of credit risk for "approved" accounts; maintaining a payment history by the customer (ie, accounts receivable ledger); daily management reports on collections; and, make the actual billing call. Expanded credit functions extend to small markets that can be handled effectively and isolate them from the destructive impact that threatens the survival of a bankruptcy or financial hardship from major customers. The second key service is the operation of accounts receivable functions. This service eliminates the need and cost for permanent skilled staff found in large companies. Although today even they outsource such back-office functions. More importantly, the service guarantees the entrepreneurs and owners to the main source of liquidity crisis and their equality.
Process
Factoring processes can be broken down into two parts: initial account settings and ongoing funding. Setting up a factoring account typically takes one to two weeks and involves sending apps, client lists, receivables age reports and invoice samples. The approval process involves detailed guarantees, during which time the factoring company may request additional documents, such as merger documents, financials, and bank statements. If approved, the business will be set up with the maximum credit limit from which they can withdraw. In the case of notification factoring, the arrangement is not confidential and its approval depends on successful notice; a process whereby factoring companies send business clients or account debtors an Assignment Notice. Assignment Notification works for
- informs the debtor that the factoring company manages all accounts receivable,
- risking claims on financial rights for accounts receivable, and
- update your payment address - usually the bank lock box.
Once the account is set up, the business is ready to start paying for invoices. Invoices are still individually approved, but most invoices can be funded within one or two business days, as long as they meet the factor criteria. Receivables are funded in two parts. The first part is "face" and covers 80% to 85% of invoice value. This is saved directly to a business bank account. The remaining 15% to 20% is reduced, less the factoring cost, as soon as the invoice is fully paid to the factoring company.
Accounts receivable discount
Non-recourse factoring is not a loan . When the lender decides to extend credit to the company based on assets, cash flow, and credit history, the borrower must recognize the obligations to the lender, and the lender recognizes the borrower's pledge to repay the loan as an asset. Unsecured factoring is the sale of a financial asset (receivable), in which it assumes ownership of the asset and all risks associated with it, and i> the seller releases all ownership of assets sold . An example of factoring is a credit card. Factoring is like a credit card in which the bank (factor) buys customer debt without the help of the seller; if the buyer does not pay the amount to the seller, the bank can not claim money from the seller or the merchant, just as the bank in this case can only claim money from the debt issuer. Factoring is different from invoice discounts, which usually does not mean informing debt issuers about the assignment of debt, whereas in the factoring case the issuer is usually notified in what is known as factoring facts. Another difference between factoring and invoice factoring discounts is that in the case of factoring the seller specifies all of the buyer's particular receivable (s) to the factor while in the borrower's discount invoice (the seller) determines the receivable balance, not the specific invoice. Therefore, factors are more concerned with the creditworthiness of corporate customers. Factoring transactions are often structured as purchases of financial assets, ie accounts receivable. The non-recourse factor assumes a "credit risk" that the account will not collect solely because of the financial inability of the account debtor to pay. In the United States, if the factor does not bear the credit risk on the purchased account, in many cases the court will reaffirm the transaction as a secured loan.
When a company decides to factor receivable accounts for principal or brokerage factors, it is necessary to understand the risks and rewards involved with the factoring. The amount of funding may vary depending on the specific receivables, debtor and industry factors that occur. Factors can limit and limit funding in circumstances where the debtor is found to be unfit for credit, or the amount of invoices represents to be too large of the portion of the business's annual revenue. Another point of concern is when the invoiced factorization cost is calculated. This is a combination of administrative fees and interest earned overtime as the debtor takes time to pay back the original invoice. Not all factoring companies charge interest on the time it takes to collect from debtors, in this case only administrative costs that need to be taken into account even though this type of facility is relatively rare. There are major industries that stand out in factoring industries that:
1. Distribution 2. Retail 3. Manufacturing 4. Transportation 5. Service 6. Construction
However, most businesses can apply factoring invoices successfully to their funding model.
Generic term
The discount rate or factoring fee
The discount rate is the fee that a factoring company charges to provide factoring services. Because formal factoring transactions involve the direct purchase of invoices, the discount rate is usually expressed as a percentage of the face value of the invoice. For example, a factoring company may charge 5% for invoices due in 45 days. Conversely, companies that do receivable financing can be charged per week or per month. So, an invoice financing company that charges 1% per week will result in a 6-7% discount rate for the same invoice.
Advance Level
The advance rate is the percentage of invoices paid by the factoring company in advance. The difference between the face value of the invoice and the down payment rate serves to protect the factors against losses and ensure coverage for their costs. After the invoice is paid, the factor provides the difference between the face value, the amount of down payment and the cost of returning to the business in the form of factoring rebates.
Backup account
While the difference between invoice and advance value serves as a reserve for certain invoices, many factors also hold a sustainable reserve account that serves to further reduce the risk for the factoring company. This backup account is typically 10-15% of the seller credit limit, but not all factoring companies have a backup account.
Minimum and long term contract
Although factoring costs and terms are wide ranging, many factoring companies will have a minimum monthly and require long-term contracts as a measure to ensure a profitable relationship. Although shorter contract periods are now becoming more common, contracts and monthly minimums are typical of "whole ledger" factoring, which requires factoring all corporate bills or all company invoices from a particular debtor.
Physical factor
Spot factoring, or a single invoice discount, is an alternative to "the entire ledger" and allows the company to factor a single invoice. The added flexibility for businesses, and the lack of predictable and minimum monthly volumes for factoring providers means that factual factoring transactions usually carry a cost premium.
Secret Invoice Discount
Where it may be beneficial for a company not to notify their customers about their invoice financing facility, many financial brokers and providers now offer secret invoice discounts. This allows the facility to progress without notifying any third party.
Treatment under GAAP
In the United States, under the Generally Accepted Accounting Principles (GAAP), accounts receivable are deemed "sold", under FASB ASC 860-10 (or under the Statement of Financial Accounting Standards No. 140, paragraph 112), when the buyer has "no recourse". In addition, to treat transactions as GAAP-based sales, the seller's monetary liabilities under the terms of "other road" shall be readily estimated at the time of sale. Otherwise, financial transactions are treated as secured loans, with receivables used as collateral.
When nonrecourse transactions take place, the outstanding receivables are removed from the statement of financial position. The corresponding debit includes the costs recorded in the income statement and the results received from that factor.
History
The origin of Factoring lies in trade finance, particularly international trade. It is said that the factorization comes from ancient Mesopotamian culture, with factoring rules maintained in the Code of Hammurabi.
Factoring of business life is underway in England before 1400, and comes to America with pilgrims, around 1620. It seems closely related to the early merchant banking activities. The latter however develops with extensions for non-trade related financing such as state debt. Like all financial instruments, factoring evolved over the centuries. This is driven by changes in corporate organizations; technology, especially air travel technology and non-face-to-face communication began with telegraph, followed by telephone and then computer. It is also accelerating and is driven by modifications to the common legal framework in the UK and the United States.
The government is late in conducting trade facilitation which is financed by factors. English common law originally states that unless the debtor is notified, the assignment between the invoice seller and the factor is invalid. The Canadian Federal Government law governing the assignment of money owed by it still reflects this attitude as well as the provincial government regulations that model it. Until this century, the court has heard the argument that without notice from the debtor, the assignment is invalid. In the United States, in 1949 the majority of state governments had adopted the rule that debtors should not be notified, thus opening the possibility of factoring factoring without notice.
Initially the industry takes possession of physical goods, provides advance payments to producers, finances extended credits to buyers and insures buyer credit force. In Britain the control over the trade gained resulted in the Law of Parliament in 1696 to reduce the monopoly power of these factors. With the development of big companies that build their own sales force, distribution channels, and knowledge about the financial strength of their customers, the need for factoring services is reshaped and the industry becomes more specialized.
In the 20th century in the United States, factorization was still the main form of working capital financing for the textile industry at high growth rates. In part this is due to the structure of the US banking system with a myriad of small banks and consequent restrictions on the amount that can progress wisely by one of them to the company. In Canada, with national banks its limitations are much more stringent and hence factorization does not expand widely as in the US. Even then, factoring is also the dominant form of financing in the Canadian textile industry.
In the first decade of the 21st century, the rationale of public policy for factoring remains that the product fits perfectly with the rapidly evolving demands of innovative companies critical to economic growth. The second reason for public policy is to enable a fundamentally good business to avoid costly and time-consuming courts, as well as bankruptcy protection woes for suppliers, employees and customers, or to provide financial resources during the company's restructuring process so as to survive. and grow.
Modern shape
In the second half of the twentieth century the introduction of computers ease the burden of accounting factors and then small companies. The same thing happens because of their ability to obtain information about the creditworthiness of the debtor. The introduction of the Internet and the web has accelerated the process while reducing costs. Today credit information and insurance coverage are instantly available online. The web also allows factors and their clients to collaborate in real time on collections. Acceptance of signed documents provided by facsimile as legally binding has eliminated the need for "genuine" physical delivery, thereby reducing the delay time for employers.
Traditionally, factoring has become a relationship driven business and factoring transactions are mostly manual and often involve the face-to-face component as part of the relationship building process or the due-diligence phase. This is especially true for small business factors, where factoring firms tend to be locally or regionally focused. Geographic focus helps them to reduce risk better because of the smaller scale, they can not afford to take it.
To make the arrangements economically profitable, most factoring companies have minimum revenue (eg at least $ 500,000 in annual income) and require monthly and annual contracts. Recently, several online factoring companies have emerged, utilizing aggregation, analytics, automation to provide factoring benefits with the ease and ease provided by the internet. Some companies use technology to automate some aspects of risk and back-office factoring and provide services through a modern web interface for added convenience. This allows them to serve a variety of small businesses with lower income requirements without the need for monthly and long-term contracts. Many of these companies have direct software integration with software programs like Quickbooks, which allow businesses to instantly receive funding without apps.
The emergence of these modern forms is not without controversy. Critics accurately point out that none of these new players are experiencing a complete credit cycle and thus, their underwriting model has not been tested by the market economy contraction. What's more, some of these new models depend on the market lending format. It is unclear whether this source of capital will stabilize over time, as other companies, especially Lending Club, have a difficult time attracting investors in early 2016, although net returns appear to be higher on invoicing financing platforms such as MarketInvoice and FundThrough than on lending platforms businesses like Funding Circle.
Custom factories
With technological advances, some invoice factoring providers have adapted to specific industries. This often affects additional services offered by factors to adjust the factoring service to business needs. Examples of this include specialist recruitment factors that offer payroll and back office payments with factoring facilities; major distribution factors or/or may not offer this additional service. These differences may affect facility costs, the necessary approach factors when collecting credits, administrative services included in the facility and the maximum size of invoices that can be accounted for.
Real estate
Since the 2007 US recession one of the fastest growing sectors in the factoring industry is the progress of the real estate commission. Commission progress works in the same way as facts but done with licensed real estate agents in their pending and future real estate commissions. The progress of the commission was first introduced in Canada but quickly spread to the United States. Typically, this process consists of online applications from real estate agents, who sign contracts that sell future commissions at a discount; the factoring company then distributes the funds to the agent bank account.
Factoring medical facts
The health care industry makes a special case where factorization is urgently needed due to the long payment cycle of government, private insurance companies and other third parties, but difficult due to HIPAA requirements. For this reason medical factoring companies have been developed to specifically target this niche.
Construction
Factoring is commonplace in the construction industry because of the long payment cycle that can extend up to 120 days and beyond. However, the construction industry has a risky feature for the factoring company. Because of the risks and exposures of the mechanical lien, the danger of "paid-when-paid" terms, the existence of progress billing, the use of deductions, and the exposure of most economic cycles "generalists" the factoring firm avoids construction receivables entirely. It has created another niche of a factoring firm that specializes in construction receivables.
Freight
Factoring is often used by freight companies to cover upfront costs, such as fuel. Factoring companies that serve these niches offer services to help accommodate drivers on the road, including the ability to verify invoices and fund copies sent through scans, faxes or emails, and the option to put funds directly into a fuel card, which functions like a debit card. Transporting factors also offer fuel-enhancement programs that provide advance payments to operators once confirmed shipment loads.
Invoice collector (debtor)
Companies and large organizations such as governments typically have a special process to deal with one aspect of factoring, transferring payments to the following factors the receipt of notices from third parties (ie, factors) to whom they will make payments. Many, but not all such organizations have knowledge of the use of factoring by small companies and clearly differentiate between their use by firms and fast-growing turnaround.
Distinguish between assignment of responsibility for doing work and assignment of funds to factors is the process center of the customer or the debtor. The company has purchased from the supplier for a reason and thus insists that the company is fulfilling its work commitments. Once the work has been done, however, it is a matter of paid indifference. For example, General Electric has a clear process to follow that distinguishes between work and the sensitivity of payments. A direct contract with the US government requires the assignment of a claim, which is an amendment to a contract that allows payments to a third party (factor).
Risk
Risks for factors include:
- The risk of counter-party credit associated with clients and borrowers is covered by risk. Debtors who are covered with risk can be reinsured, which limits the risk of a factor. Accounts receivable are low-risk assets due to their short duration.
- External fraud by clients: fake invoices, misdirected payments, pre-invoices, unspecified credit notices, etc. Fraud insurance policies and subjecting clients to auditing may limit risk.
- Legal, compliance and tax risks: a large number of laws and regulations applicable in different countries
- Operational risks, such as contract disputes
- Uniform Commercial Code (UCC-1) that secures the rights to the asset.
- IRS lien associated with payroll tax, etc.
- ICT risks: complex, integrated factoring systems, extensive data exchange with clients
Reversing factor
In a reversed factoring or supply chain financing, the buyer sells the debt to that factor. That way, the buyer secures invoice financing, and the supplier gets a better interest rate.
See also
- Capital formation
- Invoice removal
References
Source of the article : Wikipedia
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