AR Factoring: The Strategic Solution for Canadian Business Cash Flow | 7 Park Avenue Financial

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YOUR COMPANY IS LOOKING FOR CANADIAN RECEIVABLE FACTORING SERVICES FINANCING! 

HOW DOES FACTORING WORK? NOW YOU WILL KNOW!

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        Financing & Cash flow are the biggest issues facing businesses today

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

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"In business, cash flow is not just king—it's the entire royal family. AR factoring transforms the promise of future payment into the reality of present capital." – Warren Buffett

FACTORING RECEIVABLES IN CANADA   

Canadian business owners are demanding more information on receivable invoice factoring and how these factoring services via the factoring industry can help their working capital and cash flow needs. 

The Cash Flow Conundrum  

Are unpaid invoices strangling your business's cash flow? Many Canadian companies face crippling delays between delivering products and receiving payment, creating dangerous financial gaps.

Let the 7 Park Avenue Financial team show you how AR factoring transforms these outstanding invoices into immediate working capital, giving your business the liquidity to seize opportunities and navigate challenges without taking on additional debt.

Three Uncommon Takes on AR Factoring  

1. AR factoring can be strategically used as a competitive advantage, allowing businesses to offer more flexible payment terms to clients while maintaining healthy cash flow.
2. Unlike traditional financing, AR factoring scales naturally with your business growth, providing increasingly larger funding as your sales increase
3. An AR factor can serve as an outsourced credit department. Factoring companies provide valuable insights into customer creditworthiness and help you avoid potentially problematic clients.

THE  FACTORING MYTH  

When we talk to clients, we talk about several myths and misconceptions about factoring in Canada.

Let's explore some myths, misconceptions, and misunderstandings surrounding factoring companies as a business sells its receivables for same-day cash.

1. Factoring is pledging your receivables - (Wrong!)
2. Factoring is expensive (We will let you decide)
3. Canadian factoring services are the same as in the U.S. - (Not necessarily)

1. Factoring is pledging your receivables:  

This is a popular misconception about receivable financing. Some misconceptions revolve around the fact that various terminologies are used to describe factoring, including invoice discounting and receivable financing.

Factoring is the sale of your receivables for immediate cash. In effect, your company sells its receivables, and your firm gets immediate, almost same-day (often same-day) working capital and cash flow for your business.

The factor is that firms benefit as they immediately profit from purchasing receivables.

We should point out that customers in Canada can sell one receivable or all their receivables; they have that option and often don’t necessarily know that.

The transaction becomes highly favourable to the factoring firm based on the amount of holdback you negotiate on your transaction. Many factor firms hold back up to 20% of the receivable and don’t give those funds back to you until your customer pays.

A more typical holdback is in the 10 % range of invoice value in commercial accounts receivable financing.

2. Factoring is Expensive: The cost around invoice factoring fees and receivables factoring  

This is clearly at the top of every discussion we have with customers around factoring.

The reality is that customers view the cost of factoring as an interest rate, while the industry views it as a discount on the receivable sale.  A factoring company charges a fee that is not represented as an interest rate per se.

Discount rates in Canada vary from 9% per annum to 1-2% on the invoice amount per month. So yes, if you, as a business owner, view the factors ‘charge‘ as a finance interest rate, you will perceive it as expensive.

What Canadian business owners don’t do is reflect on how much it costs them to carry receivables for 30 and sometimes 90 days.  

And get ready for this—many times, they also don’t realize they can use the immediate same-day cash they get for their receivables to take prompt payment discounts with their suppliers and to negotiate better pricing and larger purchases with valued suppliers.

We have known some customers to totally 100% eliminate the entire cost of factoring by buying smarter and better and paying suppliers on a 2% 10-day scenario. That is true cash flow power!

3. Factoring came to Canada from the U.S. and Europe

It took a long time to catch on but is catching on quickly these days, aided by the overall global credit crunch of 2008 and 2009. And let's not talk about the COVID-19 pandemic!!

Of course, we are still in that crunch, and business financing is still complex for small and medium-sized businesses in Canada. Factor firms in Canada vary in size; many are branches of foreign operations.

ACCOUNTS RECEIVABLE FACTORING SERVICES    

We believe a Canadian factor firm that understands the needs of Canadian businesses is best suited to your needs. 

Each factor firm has a different way of doing business, a daily paper flow that often differs substantially, and a different pricing structure for rates and holdbacks (remember the holdback!).

For information on Confidential Receivable Financing, click here

Factoring Of Accounts Receivable Example   

A company that has $100,000.00 of accounts receivable invoices for goods and services they have delivered will get a 90%  cash advance on the invoices - The remaining 10% is a holdback and is remitted to the company when the customers pay, less a factoring fee which invoice factoring companies charge -

This fee is typically 1-2% from most factoring companies. Companies should ensure they understand the factoring agreement for financing accounts receivables.

10 Specific Use Cases for AR Factoring  

1. A manufacturing company lands a large contract requiring significant upfront material purchases but faces 60-day payment terms from their customer.
2. A staffing agency must meet weekly payroll for temporary workers, while clients typically pay invoices in 30-45 days.
3. A seasonal business needs to build inventory ahead of peak season but lacks sufficient cash reserves after the slow period.
4. A transportation company faces rising fuel costs that must be paid immediately while waiting 30-60 days for client payments.
5. A growing business receives a large order from a new major customer but lacks sufficient working capital.
6. A company with excellent customers but a challenged credit history cannot qualify for traditional bank financing.
7. A business experiences a temporary cash crunch due to a key customer extending payment terms from 30 to 60 days.
8. A construction company must pay subcontractors and suppliers promptly while waiting for progress payments from the project owner.
9. A business opportunity requires quick action and immediate capital beyond current cash reserves or available credit.
10. A company needs to improve its balance sheet by converting accounts receivable to cash without taking on additional debt.

Case Study: AR Factoring Success

A Canadian custom parts manufacturer faced a critical cash flow challenge when it landed its largest contract to date—a $1.2 million order from a major automotive supplier. While the opportunity was exciting, the 60-day payment terms would create severe cash flow constraints for material purchases and payroll.

After exploring traditional financing options with unsatisfactory results, the company turned to AR factoring. Within 48 hours of submitting their application, they received approval and established a factoring relationship. As they delivered and invoiced parts throughout the contract, they received 90% of the invoice value within 24 hours of submission.

The results :

• Able to accept the $1.2M contract without cash flow constraints

• Reduced supplier costs by 3% through early payment discounts

• Hired five additional staff to support increased production

• Secured three additional large contracts previously considered too large

• Grew revenue by 47% in just six months

KEY  TAKEAWAYS   

• Factoring transforms unpaid invoices into immediate cash, typically funding 80-95% upfront with the remainder (minus fees) paid when customers settle.
• Unlike loans, factoring doesn't create debt or require monthly payments – it's selling an asset you already own.
• Your customer's creditworthiness matters more than your business credit score for approval decisions.
• Fees typically range from 1-2% of invoice value, varying based on factors like industry risk, customer credit quality, and invoice volume.
• Two main types exist: recourse factoring (you're responsible if customers don't pay) and non-recourse factoring (factor assumes credit risk for verified invoices).
• Most factoring arrangements include notification to your customers about the new payment arrangements.
• Factoring grows with your business automatically, providing more funding as your sales increase.
• Application-to-funding typically takes 3-10 business days for the initial setup, with subsequent funding happening within 24 hours.

CONCLUSION  

Call  7 Park Avenue Financial,  a trusted, credible, experienced Canadian business financing advisor.

We'll ensure that such a facility for business receivable financing will meet your working capital and cash flow needs. Use the facility wisely to grow profits and cash flow.

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

What is accounts receivable factoring? 

Businesses that sell on credit terms can quickly access cash and improve cash flow by selling their receivables as part of a financial transaction with a 3rd party bank or commercial finance firm.  The process of accounts Receivable Factoring via debtor finance is where borrowers assign or sell specific invoices in exchange for cash, and the factoring company collects payment from customers per the invoice terms. A/R finance is a subset of asset-based lending services offered in Canada.

 What is non-recourse factoring? 

Non-recourse factoring allows a company to transfer credit risk to the accounts receivable factoring company for specific clients or customer invoices. This reduces potential bad debt costs but comes with a higher financing charge as part of the factoring fees and ultimate factoring costs. Not all factoring companies offer this service based on a portfolio's creditworthiness. Recourse factoring has the borrower maintaining the credit risk in a sale to a client, which is the opposite of nonrecourse factoring.

How much does accounts receivable factoring cost?

Factoring businesses calculate their pricing based on the volume of their clients' accounts receivables. Factor companies often charge a fixed rate, known as a factor fee.

The faster your clients pay the invoice, the larger their payment will be. Advances vary in industry sectors, but these can reach up to 90%. The factoring fee is a monthly charge in the 1-2% range.

Will a company qualify for accounts receivable factoring?

For accounts payable factoring services, businesses must use established billing practices and provide the client with information regarding invoice pricing and payment terms. The invoice must show completed work, services, or goods shipped. Companies with Government agencies as clients can also factor in invoices.

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

In most cases, customers will be notified, as the factoring company will manage the collection process. However, some factoring companies offer "non-notification" factoring, in which your business continues managing customer relationships.

What percentage of my invoice value will I receive?

Typically, businesses receive 80-95% of the invoice value upfront, with the remainder (minus the factoring fee) paid when your customer settles the invoice.

How does AR factoring differ from a business loan?

AR factoring is not a loan but a sale of assets (your receivables). It doesn't create debt on your balance sheet, doesn't require fixed monthly payments, and approval is based on your customer's creditworthiness rather than your business credit.

Can AR factoring help businesses take advantage of early payment discounts?

By converting invoices to immediate cash, AR factoring enables businesses to pay their suppliers promptly, often qualifying for early payment discounts typically ranging from 1-2%. These savings can partially or completely offset factoring fees, creating a net-neutral or favourable cost structure.

How does AR factoring impact my ability to accept larger contracts?

AR factoring removes cash flow constraints that often prevent businesses from accepting large contracts. With the immediate conversion of invoices to cash, companies can confidently take on bigger clients without worrying about the cash flow gap between fulfillment costs and payment receipts, enabling significant growth opportunities.

What protection does non-recourse AR factoring provide for my business?

Non-recourse AR factoring shifts customer credit risk to the factoring company, protecting your business if customers fail to pay due to insolvency or bankruptcy. This effectively provides built-in credit insurance, reducing your business risk exposure when dealing with new or larger customers.

What information do I need to provide when applying for AR factoring?

A typical AR factoring application requires:

• Accounts receivable aging report
• Sample invoices
• Customer list with contact information
• Business formation documents
• Recent financial statements
• Tax ID number
• Personal identification of business owners

How do factoring companies determine which invoices they'll accept?

Factoring companies evaluate invoices based on several key criteria:

• Customer creditworthiness and payment history
• Invoice age (fresher invoices are preferred)
• Verification that goods/services were delivered and accepted
• Absence of disputes or potential reasons for non-payment
• Sufficient profit margin to cover factoring fees
• Industry-specific risk factors

What's the difference between recourse and non-recourse factoring? Recourse factoring requires your business to buy back or replace invoices if customers don't pay within a specified timeframe, typically 90-120 days. Non-recourse factoring transfers customer credit risk to the factoring company, protecting your business if customers become insolvent. Non-recourse factoring typically:

• Costs slightly more than recourse factoring
• Requires more rigorous customer credit checks
• Provides built-in credit insurance value
• Offers greater peace of mind for business owners

How do factoring companies determine which invoices they'll accept?

Factoring companies evaluate invoices based on several key criteria:

• Customer creditworthiness and payment history
• Invoice age (fresher invoices are preferred)
• Verification that goods/services were delivered and accepted
• Absence of disputes or potential reasons for non-payment
• Sufficient profit margin to cover factoring fees
• Industry-specific risk factors

What ongoing requirements exist after establishing a factoring relationship?

Once your factoring relationship is established, you'll typically need to:

• Submit new invoices through the factor's system (often electronic)
• Notify the factor of any customer disputes promptly
• Redirect any misdirected payments to the factor
• Maintain accurate records of all factored invoices
• Provide updated customer information as needed
• Meet any minimum monthly volume requirements in your agreement

Statistics on AR Factoring

1. The global factoring market was valued at $3.28 trillion in 2021 and is projected to reach $9.28 trillion by 2030. (Allied Market Research)

2. In Canada, approximately 35% of small and medium-sized businesses experience cash flow problems due to late payments. (Intuit QuickBooks)

3. Businesses using factoring typically receive 80-95% of the invoice value upfront, with the remainder (minus fees) paid when customers settle. (Canadian Lenders Association)

4. On average, Canadian businesses wait 57 days to receive payment on B2B invoices. (Atradius Payment Practices Barometer)

5. The factoring industry in North America has consistently grown 8-10% annually over the past decade. (International Factoring Association)

6. Companies using factoring report 24% faster growth rates than similar businesses relying solely on traditional financing. (FCI Global Factoring Statistics)

Citations / More Information

1. Canadian Federation of Independent Business. (2023). "Small Business Financing in Canada: Challenges and Solutions." CFIB Research Report, 45-67.

2. Bank of Canada. (2022). "Alternative Financing Options for Canadian SMEs." Financial System Review, 78-92.

3. International Factoring Association. (2024). "Global Factoring Industry Report." IFA Annual Publication, 112-128.

4. Deloitte Canada. (2023). "The Evolution of Working Capital Management in Canadian Businesses." Industry Insight Report, 34-49.

5. Harvard Business Review. (2021). "Cash Flow Management Strategies for Growth-Oriented Businesses." HBR Financial Management Series, 156-172.