Factoring and Invoice Discounting As an Alternative Financing Method For Canadian Firms - By Stan Prokop - 7 Park Avenue Financial
Canadian small and medium sized firms do not have the financing alternatives enjoyed by their larger, often public company counterparts. As an example many larger corporations use the concept of securitization as a method of financing working capital and enhancing balance sheets. This type of sophisticated financing allows firms to improve liquidity and satisfy lender loan covenants.
Smaller firms, usually do to cost, lack of financial sophistication, and size are unable to utilize such alternative financing. Additionally, in the current 2009/2010 financial environment many firms are struggling with their ability to maintain bank credit facilities, let alone increase them!
Therefore factoring continues to grow and become more widely used in small and middle sized firms in the Canadian business environment.
The factoring or 'discounting' of receivables allows firms to convert working capital into immediate cash. This comes with a cost which we will also discuss. Unbeknownst to many Canadian firms they have the option of selling some of their receivables, at once or on an ongoing basis, or all of their receivables - again, on a one time basis or ongoing.
It is critical to note that when a firm sells, or factors, or discounts (they all mean the same thing) they retain no ownership or interest in the receivable. Depending on how the factoring or working capital facility is structured they may or may not have responsibility for the ultimate non- collectibility of the account. Lenders address that issue in a variety of manners.
As we talked about previously, larger corporations utilize this process in a very large and serious way. Millions, rather Billions of dollars are packaged up, put into special investment vehicles called ABCP or SPV ( asset backed paper ) ( special purpose vehicle ) and then sold to corporate and institutional buyers based upon the over all quality of the total assets.
Smaller and medium sized companies in Canada aren't able to enter to large multi year arrangements, with lower costs, that would allow them to achieve the benefits of a true securitization.
Smaller and medium size firms have the ability to, either with their banks (possible, but doubtful) or independent finance firms, sell receivables under a factoring or discounting agreement. This means they don't have to spend time and costs on setting p those asset backed commercial paper trusts, deals can be structured uniquely to the customers situation, and their is a lower cost and no reliance or need for rating agencies, lawyers, etc.
If used on a regular basis the factoring or invoice discounting process continually generates new working capital, allows the customer to generate better rates as time goes on, and, most importantly, relieves the financial stress of managing working capital.
It is very important to note that smaller companies have some distinct choices that on occasion the larger firms don't have. They can on a one time basis, or periodically choose to utilize this alternate financing method.
We discussed previously the company's responsibility around the invoice not being ultimately collected. If that is the case, 99% of this type of financing in Canada is done on a ' recourse ' basis. This means the customers has to pay back the lender, or replace the invoice with another one of equal value.
Typically the costs in Canadian receivable financing and factoring vary greatly. Rates range from 1 - 3% on a monthly basis. Most customers view this as an ' interest rate ', while the lender tends to view it as discount rate.
Generally the factoring (receivable discounting) facility can be set up in a couple of weeks. As we can imagine it takes the larger corporations many months (and many thousands of dollars) to set up their large dollar securitization facilities.
The factoring facilities are set up efficiently for the smaller and medium sized Canadian firm, and allow a company to grow with unlimited working capital access.
In summary, more and more firms are turning towards factoring (receivable discounting) to manage their working capital and liquidity challenges. Firms are strongly advised to search out experts in this area who know the Canadian marketplace, as it differs substantially from the U.S. environment in this unique method of alternative financing.
London Ontario Working Capital Financing
What Does Accounts Receivable Financing Mean? How Does it Work in Canada? - By Stan Prokop - 7 Park Avenue Financial
Accounts receivable financing is becoming more and more popular as an alternative financing and working capital solution for Canadian business owners and financial managers.
What is it? At its most basic it is a true form of an asset financing arrangement. Your company uses its receivables as collateral in a financing arrangement. The financing can be on one receivable, all your receivables, and, more commonly, some or all of your receivables on an ongoing basis.
The industry tends to refer to the term 'factoring' as the day to day description of accounts receivable financing.
Factoring or receivable financing allows Canadian business owners to receive immediately, on billing, cash for the receivable. A portion of the invoice is always held back, representing a traditional 'holdback 'plus some of the lenders financing fee. We would point out that the holdback is always paid back to your firm as soon as your customer pays the invoice
The company receives an amount that is equal to a reduced value of the receivables pledged. The age of the receivables have a large effect on the amount a company will receive. The older the receivables, the less the company can expect - Generally speaking, invoices over 90 days can not be sold - therefore no cash flow will result on those items.
Factoring, or accounts receivable financing helps companies unlock capital that is invested in accounts receivables. Accounts receivable financing on some occasions transfer the default risk associated with the accounts receivables to the financing company; this type of facility is set up as a non-recourse facility, meaning the lender or finance firm that is doing your factoring in fact accepts the credit risk associated with the ultimate collection of your accounts receivable. How does the lender do that - quite frankly the receivable portfolio originated on your customers in effect is 'insured 'by the lender. We will let you guess who pays for that and if it is included in your cost of financing. Yes, you are right, you pay. Typically the cost of such insurance as at least a per cent age or two to your cost of financing.
The Canadian market place is dominated by a variety of firms that will factor your accounts receivable. These firms are either divisions or subsidiaries of large U.S or other foreign countries, or they are smaller Canadian owned, operated and funded firms. Typically the latter type of firm, the Canadian single entity has a difficulty in accessing all the funding it typically might need for a large number of transactions. The factoring business requires a significant amount of capital.
When a Canadian business originates an account receivable financing it is prudent for the company to ensure they understand the over all profile, reputation, and capabilities of the firm that will be financing your accounts receivable. Unless the business owner negotiates a very special type of facility the accounts receivable financing firm generally has a good amount of customer contact with your customer base; they will want to validate your invoices, confirm customer acceptance of your invoice and products and services, and in most cases follow up directly with your customer for payment.
In summary, Canadian firms can increase cash flow by the use of the alternative financing method known as 'accounts receivable financing ', commonly called factoring. Cash is secured for your receivables soon that your customer actually paying for it - As we have pointed out that comes at a cost in both financing cost as well as some level of customer intrusion. Canadian business owners should dutifully look into who they are dealing with, their capabilities and procedures, and possibly utilize the services of a trusted and credible expert in the area to determine their best receivable partner.
Wondering where to turn for reliable advice on working capital financing?
Look no further than 7 Park Avenue Financial! We have the expertise and the experience to help your business navigate the murky waters of working capital financing in London Ontario. We know what to do and how to do it, and have a proven track record to show it!
Take a look at it here. We approach every transaction with integrity and reliability, because we’re dedicated to helping your business grow.
What Does Accounts Receivable Financing Mean? How does it work in Canada? - By Stan Prokop - 7 Park Avenue Financial
Accounts receivable financing is becoming more and more popular as an alternative financing and working capital solution for Canadian business owners and financial managers.
What is it? At its most basic it is a true form of an asset financing arrangement. Your company uses its receivables as collateral in a financing arrangement. The financing can be on one receivable, all your receivables, and, more commonly, some or all of your receivables on an ongoing basis.
The industry tends to refer to the term ‘factoring’ as the day to day description of accounts receivable financing.
Factoring or receivable financing allows Canadian business owners to receive immediately, on billing, cash for the receivable. A portion of the invoice is always held back, representing a traditional ‘holdback ‘plus some of the lenders financing fee. We would point out that the holdback is always paid back to your firm as soon as your customer pays the invoice
The company receives an amount that is equal to a reduced value of the receivables pledged. The age of the receivables have a large effect on the amount a company will receive. The older the receivables, the less the company can expect – Generally speaking, invoices over 90 days can not be sold – therefore no cash flow will result on those items.
Factoring, or accounts receivable financing helps companies unlock capital that is invested in accounts receivables. Accounts receivable financing on some occasions transfer the default risk associated with the accounts receivables to the financing company; this type of facility is set up as a non-recourse facility, meaning the lender or finance firm that is doing your factoring in fact accepts the credit risk associated with the ultimate collection of your accounts receivable . How does the lender do that – quite frankly the receivable portfolio originated on your customers in effect is ‘insured ‘by the lender. We will let you guess who pays for that and if it is included in your cost of financing. Yes, you are right, you pay. Typically the cost of such insurance as at least a per cent age or two to your cost of financing.
The Canadian market place is dominated by a variety of firms that will factor your accounts receivable. These firms are either divisions or subsidiaries of large U.S or other foreign countries, or they are smaller Canadian owned, operated and funded firms. Typically the latter type of firm, the Canadian single entity has a difficulty in accessing all the funding it typically might need for a large number of transactions. The factoring business requires a significant amount of capital.
When a Canadian business originates an account receivable financing it is prudent for the company to ensure they understand the over all profile, reputation, and capabilities of the firm that will be financing your accounts receivable. Unless the business owner negotiates a very special type of facility the accounts receivable financing firm generally has a good amount of customer contact with your customer base; they will want to validate your invoices, confirm customer acceptance of your invoice and products and services, and in most cases follow up directly with your customer for payment.
In summary, Canadian firms can increase cash flow by the use of the alternative financing method known as ‘accounts receivable financing ‘, commonly called factoring. Cash is secured for your receivables soon that your customer actually paying for it – As we have pointed out that comes at a cost in both financing cost as well as some level of customer intrusion. Canadian business owners should dutifully look into who they are dealing with, their capabilities and procedures, and possibly utilize the services of a trusted and credible expert in the area to determine their best receivable partner.
Our reputation is based on a customer service oriented approach to financing, along with our experience in the industry. We know that getting the right working capital financing for your business is crucial – settling for the wrong financing option can be devastating in terms of lost time and money, so we refuse to offer ‘volume-based’ solutions. We’re here to listen to the needs and goals of your business first, and then work with you to create a financing plan that is as unique as your business.
How are we able to do this? At 7 Park Avenue Financial, we take a ‘one deal at a time’ approach. Keeping this focus allows us to work with our customers to overcome all obstacles to financing success, developing that specialized solution within a workable timeframe.
Listening comes first. Solutions come second. It is our hope that our personalized approach will foster a relationship of trust that will last into the future – we want to be the people you call for your financing needs!
Let’s work together to obtain the best working capital financing for your business in London Ontario. Moving forward in the business world can be a tough slog, but that’s where we come in! Want to learn more about 7 Park Avenue and how we can make financing work for you? Simply give us a call today.
