Is accounts receivable source of financing?

Accounts Receivable financing is based on the ability of a company to address receivable financing problems and solutions. Whether comapanies 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 simply accounting treament. Accounts receivable loanss are a source of short term funding for a business which allows the day to day operations 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.

Is accounts receivable financing a loan?

A/R financing leverages the cash flow of a company's investment in accounts receivable - It is a monetizatin of a valuable current asset ( a/r ) and puts no debt n the balance sheet . Invoice financing can be in the form of a bank line of credit or a factoring service.

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.

Do banks do factoring?

As a general rule regulated banks do not offer factoring services in Canada , versus similar services offerd by non bank comercial financing companies. There are numerous differrences 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.

What percentage do factoring companies take?

Factoring companies profit by charge a factor fee on an invoice - this fee is also known as a discount rate . Factoring fees are competitive and are based on customer credit worthiness, size of the a/r porflio, typical invoice value, etc. Fees should not be confused with interest rates charged by banks .

Guide To The Best Accounts Receivable FInancing Options In Canada

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RECEIVABLES FINANCING IN CANADA

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

There probably isn't a time these days 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.

One of those is 'Confidential Receivable Financing' via accounts receivable financing companies and not all businesses understand the power, value, and real availability of this method of cash advance financing your valuable current asset on your company's balance sheet - A/R!

What information does your company need to know in order to assess if the Invoice Discounting A/R finance factoring services solution is viable for your business? More importantly, are there mistakes and pitfalls you can make when considering this type of working capital solution?

THE DIFFERENCE BETWEEN FINANCING ACCOUNTS RECEIVABLE AND FACTORING

Clients at 7 Park Avenue Financial don't always understand the difference between receivables financing 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 an 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, where the key benefit is a low-interest rate. So when understanding the difference between invoice financing and factoring its a question of how a company sells its ownership in the invoices in many cases 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 simpler than you might think - simply that Canadian chartered banks are finding it increasingly more difficult to fund A/R, and of course inventory for many companies in the SME COMMERCIAL FINANCE sector.

Many firms cannot meet the regulated criteria that banks mandate for financial stability, external collateral, personal guarantees, and covenants even though they have credit-worthy customers.

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 you have a situation where 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 that have chosen the wrong type of funding or factoring, and, even worse, find them 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 own limitations are, and, even to a certain extent, do they in fact themselves have the funding to survive, let alone finance your firm?

For that reason 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 talk about some of the nuances, we can call them potential ‘pitfalls' also, 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 business has never had to think that the Canadian chartered banks could be ‘out of money but the Canadian landscape is somewhat littered with small and medium-sized factor firms that do not have the financial wherewithal to support their funding commitments in all places. That just reinforces our idea that a trusted industry expert will guide you to the best partner for your firm.

Other issues, again, we can call pitfalls, to look for include:

- 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

If we had in our experience to name one pitfall of A/R financing that many firms encounter it's the excessive notification and intrusion with your customers - which is very prevalent in the U.S. model of factoring.

Key Point - Many Canadian A/R Financing firms are branches of U.S. firms

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 collects your own 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. It’s simply that receivable financing and A/R invoice factoring is growing in popularity for many businesses in Canada It works because it is providing 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.

CONCLUSION - ACCOUNTS RECEIVABLE FINANCING CANADA

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' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Factoring Accounts Receivable Financing Expert Tip| 7 Park Avenue Financial