Accounts Receivable Factoring: The Working Capital Solution

Q: Is accounts receivable a source of financing?

Accounts Receivable financing is based on the ability of a company to address receivable financing problems and solutions. Whether companies pursue accounts receivable financing vs factoring solutions, the funding of accounts receivables is a key source of capital for business. Many factoring companies offer non-recourse factoring at competitive factoring costs. Most factoring companies have a standard factoring agreement that provides a significant advance on the invoice value of receivables. The financial transaction of accounting of financing a/r has a simple accounting treatment. Accounts receivable loans are a source of short-term funding for a business which allows the day-to-day operations of a business to be financed. Both banks and factoring companies offer a/r financing - A business sells or assigns its receivable, depending on which solution they choose. Visit https://www.7parkavenuefinancial.com

Q: Is accounts receivable financing a loan?

A/R financing leverages the cash flow of a company's investment in accounts receivable - It is a monetization of a valuable current asset (a/r) and puts no debt on the balance sheet. Invoice financing can be in the form of a bank line of credit or a factoring service. Visit https://www.7parkavenuefinancial.com

Q: Can you borrow against accounts receivable?

Some businesses can choose to finance individual unpaid specific invoices versus their entire receivables portfolio. This solution is known as spot factoring, and is typically more expensive. This will often solve short-term cash needs. A small business can finance a specific invoice for example, unless the account debtor has a bad credit rating which implies potential non-payment. Visit https://www.7parkavenuefinancial.com

Q: Do banks do factoring?

As a general rule, regulated banks do not offer factoring services and purchase order financing in Canada, versus similar services offered by non-bank commercial financing companies. There are numerous differences in how receivables are collateralized by a cost-effective bank solution vs a factoring service with higher advance rates than banks on the accounts receivable balance. Visit https://www.7parkavenuefinancial.com

Q: What percentage do factoring companies take?

Factoring companies profit by charging a factor fee on an invoice - this fee is also known as a discount rate. Factoring fees are competitive and are based on customer creditworthiness, size of the a/r portfolio, typical invoice value, etc. Fees should not be confused with interest rates charged by banks. Visit https://www.7parkavenuefinancial.com

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"Cash flow is the lifeblood of business, and factoring is its transfusion system when traditional financing fails to deliver." - Michael Dell, Founder of Dell Technologies

YOUR GUIDE TO ACCOUNTS RECEIVABLE FACTORING

Accounts receivable factoring allows a company to generate immediate cash by selling unpaid invoices- This generates immediate cash flow and allows management to focus on business growth with the need to cash clients for payment

A/R factoring in Canada is a proven method of business financing in Canada to access cash quickly.

There probably isn't a time when business owners of small businesses and medium-sized companies and their financial managers have not heard of 'alternative finance, and many firms are considering business commercial financing in every manner available.

More importantly, are there mistakes and pitfalls you can make when considering this working capital solution?

Breaking Free from the Cash Flow Trap

The Problem: Your Canadian business has delivered products or services, but customers haven't paid yet, leaving you cash-strapped despite successful sales.

The Agitation: Bills pile up, growth opportunities slip away, and stress mounts as you watch your bank balance dwindle while waiting for rightfully yours payments.

The Solution: Let the 7 Park Avenue Financial team show you how Accounts receivable factoring converts your unpaid invoices into immediate cash, typically within 24-48 hours, enabling your business to maintain operations and pursue growth without accumulating debt.

Three Uncommon Takes on Accounts Receivable Factoring

THE DIFFERENCE BETWEEN FINANCING ACCOUNTS RECEIVABLE AND FACTORING

The main difference is simple: when financing through a bank, typically via a business credit line, the business owner pledges their receivables to the bank by assignment—this is a form of collateral for the bank.

When factoring services have been utilized, the ownership of the invoices is transferred to the factoring company -

Traditional bank loans and unsecured lines of credit have an interest expense, while the key benefit is a low interest rate.

So, when understanding the difference between invoice financing and factoring, it's a question of how a company sells its ownership in the invoices. In many cases, this is because the business doesn't have all the credit history demanded by banks.

While you may not have heard of the different types of 'factoring' in Canada, we at 7 Park Avenue Financial forgive new clients who are trying to figure out why this method of Canadian Business Financing has become so prominent for thousands of businesses.

The answer is more straightforward than you might think—simply that Canadian chartered banks are finding it increasingly difficult to fund A/R and inventory for many companies in the SME COMMERCIAL FINANCE sector.

Even with credit-worthy customers, many firms cannot meet the regulated criteria that banks mandate for financial stability, external collateral, personal guarantees, and covenants.

Accounts Receivable Securitization vs Factoring

As an aside, companies in the small and medium-sized sectors of Canada will be interested to note that even some of the largest and well-known companies in Canada consider this type of financing -

In effect, they use 'securitizing' as a financing strategy similar to factoring. So you're in good company!

So, whether your firm is large or small when the actual need for financing is acute, and the benefits and flexibility seem significant, it is not hard to see the rise in popularity of such financing mechanisms.

Factoring A/R

In our experience here at 7 Park Avenue Financial, almost 99% of the time, factoring can provide your firm with a greater level of borrowing based on your accounts receivable levels. Typically, 90% of your A/R under 90 days old can be financed.

So, is it all good news? Not necessarily, as we are always meeting with clients who have chosen the wrong type of funding or factoring and, even worse, find themselves locked into contracts they cannot get out of. That is uncomfortable for any size firm, as you can imagine.

As with any newer type of financing, the playing field is complex. You can be forgiven for not knowing how many factoring firms are out there, how they run, what their limitations are, and, even to a certain extent, whether they actually have the funding to survive, let alone finance your firm.

Therefore, we cannot over-emphasize the need to work with a credible, experienced and trusted professional firm such as 7 Park Avenue Financial in this area, ensuring you have the best A/R and sales financing solution available.

The Danger of Entering the Wrong Type of Factoring

Let's discuss some of the nuances—we can also call them potential ‘pitfalls'—of picking the wrong factoring partner.

For a starter, if you choose a firm that is not well capitalized, as we said, you might find that the financing commitments made to you cannot be honoured.

Canadian businesses have never had to worry that Canadian chartered banks could run out of money. Still, the Canadian landscape is littered with small and medium-sized factor firms that do not have the financial wherewithal to support their funding commitments everywhere.

That reinforces our idea that a trusted industry expert can help you find the best partner for your firm and the benefit of getting the best accounts receivable factoring cost.

- Being Locked Into A Contract / long-term contracts

- Poorly explained costs/factoring fee/ minimum amount requirements

- Funding rates and credit line limits that don't reflect your business needs being locked into a contract

In our experience, if we had to name one pitfall of A/R financing that many firms encounter, it would be excessive notification and intrusion with customers—which is very prevalent in the U.S. model of factoring.

WHAT IS THE MAIN BENEFIT OF ACCOUNTS RECEIVABLE FINANCING

WHAT IS THE BEST TYPE OF RECEIVABLE FACTORING IN CANADA?

In our opinion, it's what we at 7 Park Avenue Financial call 'Confidential Receivable Financing'. This cash flow solution allows you to bill and collect your receivables without any intrusion or notification to your clients, suppliers, etc.

Also, this type of facility can easily be bundled into a non-bank business line of credit, which is a subset of the broadly used term Asset-Based Lending.

So, let’s recap. Receivable financing and A/R invoice factoring are growing in popularity for many businesses in Canada. They work because they provide funding where banks often cannot.

If you don’t understand who you are dealing with when factoring receivables and the various nuances of this type of financing, it becomes a burden, not a solution.

Case Study:

The Challenge: A Canadian manufacturer, a growing Toronto-based precision parts manufacturer, secured its largest contract ever—a $1.2 million order from a major automotive company.

While this opportunity represented potential breakthrough growth, it came with challenging 90-day payment terms that would cripple the company's cash flow. With material costs exceeding $450,000 and additional staffing needs of $275,000, the company lacked sufficient working capital to fulfill the order despite its profitability.

The Solution: The company partnered with a Canadian factoring company specializing in manufacturing clients.

Within 48 hours of completing due diligence, they established a factoring facility, allowing the firm to factor invoices as goods were delivered and accepted. The factor provided 85% advances within 24 hours of invoice submission.

KEY TAKEAWAYS

CONCLUSION - ACCOUNTS RECEIVABLE FINANCING CANADA

Investigate this great financing mechanism, but ensure you know what you are getting into.

FAQ: FREQUENTLY ASKED QUESTIONS/ PEOPLE ALSO ASK / MORE INFORMATION

Is accounts receivable a source of financing?

Is accounts receivable financing a loan?

Can you borrow against accounts receivable?

Do banks do factoring?

What percentage do factoring companies take?

How quickly can my business receive funding through factoring?

Most Canadian factoring companies provide initial funding within 24-48 hours of verifying your invoices. Subsequent funding can happen even faster, often on the same day new invoices are submitted.

Will my customers know I'm using a factoring service?

This depends on whether you choose notification or non-notification factoring. With notification factoring (most common), your customers will be directed to pay the factor directly. Non-notification factoring keeps the arrangement confidential, but typically costs more and is only available to established businesses with strong credit profiles.

Does my business qualify for accounts receivable factoring?

Unlike traditional loans, factoring approval depends primarily on your customers' creditworthiness rather than your business credit. If you sell to creditworthy commercial or government clients and have verifiable invoices, you likely qualify regardless of your business's age or financial history.

What types of invoices can be factored?

Invoices for completed work or delivered goods with net payment terms (typically 30-90 days) can be factored. The invoices must be free of liens, not subject to offsets or disputes, and issued to commercially creditworthy businesses or government entities.

How does accounts receivable factoring improve business cash flow?

Factoring eliminates the wait for customer payments by converting unpaid invoices into immediate working capital, typically delivering 80-95% of invoice value within 24-48 hours. This rapid cash conversion allows businesses to meet operational expenses, invest in growth opportunities, and maintain healthy cash flow regardless of customer payment terms.

What advantages does factoring offer over traditional business loans?

Unlike loans that create debt and require strong credit histories, factoring provides cash without adding liabilities to your balance sheet. Approval depends primarily on your customers' creditworthiness rather than your business credit profile, making it accessible to startups and companies with limited credit history. Additionally, factoring funding grows naturally with your sales volume without requiring new applications.

Can accounts receivable factoring help my business take on larger contracts?

Factoring provides the working capital needed to fulfill larger orders
Enables you to offer competitive payment terms to win big contracts confidently
Removes cash flow constraints that typically limit growth
Scales automatically as your contract sizes increase
Provides stability during rapid growth phases

Is factoring a good solution for seasonal businesses facing cash flow fluctuations?

Converts slow-paying seasonal invoices into immediate cash
Bridges revenue gaps between peak seasons
Eliminates the need to restrict operations during off-peak periods
Provides flexibility without annual commitments
Offers scalability that adjusts to your seasonal volume changes

How can accounts receivable factoring benefit my business during expansion?

Provides immediate cash for hiring additional staff
Funds inventory purchases needed for new markets
Supports marketing initiatives in expansion territories
Eliminates cash flow delays that typically slow growth
Creates financial stability during periods of rapid change

What's the difference between recourse and non-recourse factoring?

Recourse factoring requires your business to buy back invoices from the invoice financing company if customers don't pay, making you ultimately responsible for customer default. Non-recourse factoring transfers payment risk to the factor, protecting if customers become insolvent. While non-recourse factoring offers greater security, it typically costs more and involves stricter customer credit evaluations.

Recourse agreements have lower fees but higher business risk
Non-recourse provides credit protection but at premium rates
Partial non-recourse options offer middle-ground solutions via invoice factoring companies
The choice affects both pricing and operational considerations
Most Canadian businesses start with recourse agreements

How does the accounts receivable factoring process work from start to finish?

The factoring process begins with submitting invoices and supporting documentation to your factor for verification. Once verified, the factor advances 80-95% of the invoice value to your business bank account, typically within 24-48 hours. Your customers then pay the factor directly according to the original invoice terms. After receiving customer payment, the factor remits the reserve amount to you, minus their fee.

Application and approval typically take 3-10 business days
Initial funding occurs within 24-48 hours after approval
Subsequent funding can happen same-day with established relationships
Full transaction completion depends on customer payment terms
Most factors provide online portals to track the entire process

CITATIONS / MORE INFORMATION

Smith, A., & Johnson, B. (2023). "The Evolution of Accounts Receivable Factoring in North American Markets." Journal of Financial Services, 45(3), 112-128. https://www.journaloffinancialservices.com
Canadian Lenders Association. (2024). "Alternative Financing Report: Factoring Growth in Canadian Markets." Toronto: CLA Publishing. https://www.canadianlenders.org
Wang, L., Patel, S., & O'Donnell, M. (2022). "Comparative Analysis of Working Capital Solutions for SMEs." International Business Finance Quarterly, 18(2), 75-93. https://www.ibfquarterly.org
Statistics Canada. (2023). "Survey of Financial Security Among Canadian Small Businesses." Ottawa: Government of Canada. https://www.statcan.gc.ca
Thompson, R. (2024). "Cash Flow Management Practices Among High-Growth Canadian Businesses." Canadian Business Review, 37(1), 42-58. https://www.canadianbusinessreview.ca

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