FINANCING BOOKLET SERIES ON FINANCIAL LITERACY

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1 FINANCING BOOKLET SERIES ON FINANCIAL LITERACY

2 CONTENTS FINANCIAL CHECK LIST Definition of Financing Why Does Public Need Financing Services? When Does Public Need Financing Services? Who are the Users of Financing Services? How to Become a Financing Service Customer? Financing Quiz

3 FINANCIAL CHECK LIST 1. I know that the commonplace auto financing is a form of service provided by financing companies. 2. I know that by doing financing on my vehicle, I am insuring it as well. 3. Operational vehicles owned by companies are objects that can be leased. 4. For assets financed by leasing scheme, company has the option to purchase the asset at the end of its time to maturity. 5. I know that companies can sell its invoices to a financing company to acquire hard cash. 6. Financing is not limited to vehicles. Electronic goods can be financed as well, such as laptops, refrigerators, et cetera. 7. There is a type of Sharia leasing scheme called Murabahah principle. 8. When applying for car financing, the ideal amount of down payment would be around 20%-30% of the car price. 9. I know that the period of car insurance is equal to the financing period. 10. I know that financing interest rate does not change during instalment period. 2

4 o o Yes No Your Score Calculate all the Yes and No answers. Yes: No: Score: Yes 8 10 Good 6 7 Room for Improvements 4 5 Lacking <3 Minimum 3

5 01 Definition of Financing Financing is probably not a publicly well-known term, but when we talk about leasing, the public will immediately have an idea about what kind of service is being offered. Generally, the public sees leasing as a company that provides loan services for car or motorcycle besides banks. Upon contacting a financing company, the sales representative will provide you with a calculation of installment amount that should be paid monthly, including insurance fee, administrative fee, and loan interest. It differs slightly from home loans (KPR) which has longer period and instalments that are subject to change, auto financing is usually conducted in medium term (a maximum of 4 years) with fixed installment amount up to the end of its time to maturity. However, auto financing or consumer financing given to end user, is only one of 4 business activities run by a financing company. Financing Company is a non-bank business entity and non-bank financial institution specifically established to run all the activities that are included in the business fields of Financing Institutions. Some of the fields in financing business are: 1. Leasing 2. Factoring 3. Credit Card 4. Consumer Financing Referring to the fields of business above, actually we can see that people have been mixing up leasing and consumer financing. All this time, automotive financing has been associated with leasing because companies use the word leasing in their naming and because of its incorrect use by companies sales agents. In fact, Leasing points more to financing aimed at assets owned by companies such as operational vehicles, machineries, and heavy equipment. Meanwhile, the type of financing aimed at common vehicles is actually part of consumer financing category. However, because of its commonplace use, the term leasing is now closely associated to financing 4

6 company. And taking into account the great variety of finances being offered, leasing company is generally known as multi finance company. Financing company has an important role and function in supporting the national economy, which is an alternative financing sources for the public in terms of meeting their capital needs and/or purchasing assets/goods. The Role of Financing in National Economy Purchasing Heavy Equipment Purchasing Production Machines Consumer Financing Purchasing Vehicles 5

7 02 Why Does the Public Need Financing Services? Financing, as per its function, facilitates people who want to acquire assets by which they can get additional value through loan schemes. Therefore, people who need assets but are financially limited can utilize financing as one of the alternative means of getting the assets. What should be taken into consideration while using financing services is the function of the assets acquired through said facilities. Before you decide to turn to financing facility which means using loan to obtain a certain asset, you should calculate the additional value that you will get by procuring that asset. For example, if you want to use financing service to help purchase a motorcycle or car, then make sure that the vehicle will aid us in daily activities and make us more productive, for example by allowing us to cut time to travel to and from work. There is also a type of financing that directly supports productivity, such as factoring, through which we can sell accounts receivable or invoice of a company that hasn t reached maturity date to gain some fund in order to support company s business. Considering the variety of facilities offered by financing companies, the public needs to understand the characteristics of each financing service before deciding to use one. 6

8 LEASING Leasing is the act of financing in the form of capital goods provision, either in the form of Finance Lease or Operating Lease, to be utilized by the Lessee during a certain time period based on payment in instalments. The benefits of Leasing are as follows: 1. As an alternative source of financing. 2. Easy and fast procurement of needed capital goods. 3. More flexible payment agreement. 4. Protection from technological advancement. 5. Capitalization of costs. 6. Convenient budgeting process. 7. Large scale projects financing. CAPITAL GOODS SUPPLIER Delivery of goods LESSEE Order LESSOR COMPANY Direct delivery of goods 7

9 FACTORING Factoring is the act of financing in through purchasing a company s short-term accounts deliverable or invoice, along with the management upon said accounts deliverable or invoice. Factoring can also be defined as the transferring of company s accounts deliverable or invoice to financing company. Benefits of factoring include: 1. Helping the increase of sales. 2. Helping to ensure liquidity of working capital. 3. Reducing the risks of uncollected invoice. 4. Improving business efficiency. 5. Improving the quality of accounts deliverable. 6. Easier cash flow planning. FINANCING COMPANY (FACTORING) FACTORING TRANSACTION (TRANSFER OF ACCOUNTS RECEIVABLE) CLIENT (DEBTOR) SUPPLIER (SELLER) 8

10 CREDIT CARD This is the act of financing the purchase of goods and/or services using a credit card. Even though credit card is associated closely with banking, actually credit card service can also be provided by financing companies. The benefits of credit card are, among others: 1. Convenient and safe shopping. 2. Replacing the use of cash. 3. Used and accepted worldwide. 4. Additional benefits. 5. Easier budget planning. 6. Simple transaction recording. 7. Transaction can be done via mail, phone, and online. CARD ISSUER 1 4 CREDIT SCHEME 3 6 ACQUIRER DEBIT ACCOUNT 2 7 CARD HOLDER TRANSACTION APPEARS ON MONTHLY STATEMENT 8 1 MERCHANT / RETAILER ACQUIRER CREDITS FUNDS TO MERCHANT S NOMINATED BANK ACCOUNT 1. Card presented for payment 2. Data transaction pin authorized 3. Data transaction 4. Data transaction 5. Authorization 6. Authorization 7. Authorization 8. Terminal receipt 9

11 CONSUMER FINANCING Consumer financing is the act of financing a purchase of consumer (non-productive) goods such as electronic goods, private vehicles, household appliances, etc. Some benefits of consumer financing are: 1. Enabling purchase of needed goods regardless of insufficient amount of funds. 2. Simpler payment procedure. 3. Faster financing approval process. 4. Additional collateral is unnecessary. 5. Affordable interest and flexible payment period. 6. Buyers can get what they need immediately and use it to improve their life quality. FINANCING COMPANY CONSUMER SUPPLIER / SELLER Products sold 10

12 03 When Do You Need Financing Services? For the public in general, financing services are part of everyday life. Starting from early adulthood, when someone purchases a motor vehicle using loans, when he starts working and uses financing service such as credit card or auto financing to support his activities. As part of the company, the procurement of operational vehicle, heavy equipment, and machineries, as well as supporting the needs of cash flow, can be assisted by Leasing and Factoring. Therefore, the use of financing services depends very much on the needs of public or company in productivity area. However, in using financing service, we also have to pay attention to our ability in repaying the loan so that it does not cause problems in the future. Therefore, the question of when someone needs financing service, can be answered as follows: 1. When you need an asset in order to improve productivity (vehicle, machinery, heavy equipment, cash flow needs). 2. If you have the ability to pay off the responsibility resulting from said financing service. 3. When you have completed all administrative documents as required by the financing company. 11

13 04 Who are the Users of Financing Services? Both individual and company can become can become customers of financing services. Individual customer is usually classified into three subcategories: Employee, Professional, and Entrepreneur. EMPLOYEE PROFESSIONAL ENTREPRENEUR COMPANY Customers of Financing Services The documents and criteria required to apply for financing service are: o o Employee 1. Aged years old during loan period 2. A copy of applicant s ID card and wife s/husband s/guarantor s ID card 3. A copy of Family Registers 4. Salary slip 5. A copy of Land and Building Tax bill / electricity bill / telephone bill of the last three months 6. A copy of Bank Statement of the last three months Professional 1. Aged years old during loan period 2. A copy of applicant s ID card and wife s/husband s/guarantor s ID card 3. A copy of Family Registers 4. Salary slip 5. A copy of Land and Building Tax bill / electricity bill / telephone bill of the last three months 6. A copy of business permit 7. A copy of Bank Statement of the last three months 8. A copy of Taxpayer Identification Number card 12

14 o o Entrepreneur 1. A copy of applicant s ID card and wife s/husband s/guarantor s ID card 2. A copy of Family Registers 3. A copy of Bank Statement of the last three months 4. A copy of Business License 5. A copy of Company Registration Certificate 6. A copy of Taxpayer Identification Number card 7. A copy of Financial Statement (Balance Sheet and Profit-and-Loss Statement) of the last 3 years, or a minimum of 1 year (if business is newly established) Company 1. A copy of Director s/commissioner s/endorsee s ID card 2. A copy of Bank Statement of the last 3 months 3. A copy of Business License 4. A copy of Notary Deed of Establishment and Modification 5. A copy of Company Registration Certificate 6. A copy of Taxpayer Identification Number card 7. A copy of Financial Statement (Balance Sheet and Profit-and-Loss Statement) of the last 3 years, or a minimum of 1 year (if business is newly established) 13

15 05 How to Become a Financing Service Customer? To become a financing customer, the preparation steps are below: 1. Think of goods that you want to purchase through financing. Usually goods that can be purchased via financing service already have the option of payment by financing, for example in the purchase of motor vehicles and heavy equipment. 2. Do a simulated calculation to determine payment capability based on the period of instalment. Many financing companies provide a website to see this simulated calculation, for example Below is an example of the simulation. (picture) Vehicle Loans Simulation 3. Prepare all the required documents. 4. Wait for the process between financing company and seller to be done. 5. Do the first payment as instructed. 6. Receive the goods or wait for it to be delivered. 7. Prepare the funds for monthly instalments. In terms of payment, generally financing companies provide various facilities to make it easier, such as: a. Payment via Virtual Account at ATM b. Payment via post office c. Payment via autocollection by debiting the amount of instalment to customer s bank account every month 8. In the case of motor vehicle or car financing, at the end of instalment period, customer should also receive the Certificate of Ownership of Motor Vehicle. 14

16 Financing Quiz 1. Below is not the service offered by financing companies: a. Motor vehicle financing b. Credit card financing c. Gold financing d. Heavy equipment financing for a mining company 2. When purchasing a vehicle with financing facility, generally customer still have to pay about 20% of the vehicle s price and then finance the rest. That 20% amount of payment is called: a. First instalment b. Instalment c. Administration fee d. Down payment 3. Below are three things that people have to own before they can become customers of financing company: a. Have completed required documents b. Have the capability to pay the instalments c. Owns savings in bank d. Have the need of an asset that would improve productivity 4. One of the fields financing business that can help a company divert its accounts receivable is called: a. Leasing b. Consumer Finance c. Credit Card d. Factoring 5. The period of car loans is usually: a. 4 years b. 5 years c. 6 years d. 7 years 15

17 Answers 1. C 2. A 3. D 4. D 5. A 16

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