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Factoring and Receivable Financing in Canada - By Stan Prokop -7 Park Avenue Financial
Factoring and receivable financing in Canada is growing in popularity - we feel this is for several reasons. One key reason is the current economic and financing environment in Canada - any financing strategy that is an alternative financing strategy to traditional bank financing is being assessed as an alternative by many Canadian firms.
As bank financing and traditional working capital facilities become more difficult to obtain firms look to alternative methods such as receivable financing facilities.
Only two key issues remain unknown to the Canadian business owner - how does factoring (receivable financing) work, and is it the appropriate type of financing for my firm.
Factoring is the immediate sale of your receivables. You get the cash as soon as you invoice - sounds great so far, right? The receivables you sell must be current; current is usually defined in the Canadian marketplace as any receivable less than 90 days. As your receivables approach 90 days you can be forgiven for thinking they might be uncollectible, so you might not want to sell them and be responsible to the lender for re payment of the cash advanced against that receivable.
While pricing, customer perception and some other misc issue might seem a deterrent to your consideration of a factor type facility we would quickly point out some of the benefits. The bottom line is that under a pure factor facility (more about that later) you are out of the collection business. The factor collects the receivable and notifies you accordingly.
Companies usually define working capital around their receivable and inventory investments. The freeing up of receivables for cash allows the business owner to free up capital tied up in inventories.
Many firms find it both times consuming and tedious to report to banks and other lenders on their receivable levels and margining capability. Factoring, or receivable financing is as close to instantaneous as you can get. If you need cash factoring provides you with almost same day cash.
Previously we spoke of a pure factoring facility. The type of factoring that is prevalent in Canada is based on the traditional model of U.S. and European factoring - that process is quickly summed up as follows:
You bill your customer
The Factor buys your invoice immediately
The factor collects your invoice
Your firm absorbs the financing fee on the transaction
Not all Canadian firms know that some factor facilities allow you to bill and collect your own receivables. This eliminates the intrusion of third party fiancé firms - "the factor 'calling your customer, who has never heard of them by the way, for money.
Canadian firms have been much slower to catch on to factoring primarily because of the customer intrusion level which they equate with their own customers perception of their viability.
In summary, we have highlighted some of the benefits, as well as some of the perceived negative aspects of factoring or receivable financing in Canada. As in all aspects of business, Caveat Emptor (buyer beware!). Choosing a reliable and experienced factor partner will allow the business owner to maximize the benefits, and minimize the negative aspects of this solid alternative financing scenario. Factoring - it works if you make it work.
