YOUR COMPANY IS LOOKING FOR RECEIVABLE FINANCE!
UNDERSTANDING ACCOUNTS RECEIVABLE FINANCING & INVOICE FACTORING
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Financing & Cash flow are the biggest issues facing business today
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EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
AR financing in Canada. When clients we speak to think about receivable factoring solutions they tend to have more questions on this solution than some other types of financings as a financing arrangement. Why is that we thought? We're not 100% sure but we know those questions need to be answered. So our solution, a mini ' Operations Manual ' on A/R finance in Canada for the business owner and financial manager.
WHAT IS ACCOUNTS RECEIVABLE FACTORING FINANCING?
Financing receivables is a finance process allowing a company to ' sell ' receivables as they generate sales revenues. The sale is typically made to a commercial receivables factoring firm - where advances are made against the invoice. This method of financing is commonly known as a subset of the broad term ' asset-based lending ' and allows a company to manage its debt to equity ratio by not taking on term debt of any type through this process.
AN AR FINANCE OPERATIONS MANUAL !?
It's those operations manuals that provide us with ' how-to ‘, dangers, warnings, recommendations, so it seemed quite appropriate to adopt that type of information delivery when considering financing accounts receivable! Let's dig in.
WHY DO COMPANIES CONSIDER ACCOUNTS RECEIVABLE FACTORING?
Canadian business owners and financial managers utilize Receivable factoring for a variety of reasons - one main one being it provides your firm with working capital and cash flow without dilution of your ownership equity in the company. It is often viewed as a short term or intermediate finance solution, avoiding long term commitments and long term debt.
WHAT IS THE DIFFERENCE BETWEEN BANK FINANCING AND COMMERCIAL A/R FINANCE
It differs from bank financing from a number of perspectives. When you finance your accounts receivable with a bank you provide an assignment of those receivables that you're financing. When you utilizing an A/R finance scenario you simply bulk up on ' Cash On Hand ' as you are in a position to constantly ' sell' your A/R on an ongoing or bulge type basis to your finance company - that's the difference in factoring compared to traditional bank lines of credit, wherein you ' assign' your receivables.
HOW MUCH ARE YOU ADVANCED ON YOUR ACCOUNTS RECEIVABLE PORTFOLIO
Both factoring and bank receivable finance advance you a percentage of the value of your sales. In the case of Canadian chartered banks, it's a 75% advance rate ; Receivable factoring typically provides you with a 90% advance on the invoice amount, so you have more liquidity!
WHAT IS THE BEST TYPE OF A/R FINANCING / FACTORING ?
Does our ' Operations Manual ' of advice recommend any one type of AR financing over another? Ours does! At 7 Park Avenue FInancial we recommend that you consider Confidential A/R finance, which allows you to bill and collect your own accounts - there are no notices toa third party, i.e your customers, and you are completely independent of your finance partner, and at the same time, you have the same or better pricing with respect to limits and credit lines. We feel its the best solution available for clients looking to work with factoring companies.
WITH CONFIDENTIAL ACCOUNTS RECEIVABLE FINANCE YOU ARE IN CONTROL - NOT THE FACTOR COMPANY
In effect, you're in control. That ability of Canadian firms to run their own businesses without any ' negative ' client reaction from their customer base. That's a good thing! when it comes to the somewhat more conservative Canadian landscape of business ' perceptions '.
ASSET BASED LENDING HAS A NUMBER OF BUSINESS FINANCE SOLUTIONS
Receivable financing in Canada is a subset, we can say, of asset-based financing... So in many cases, your cash flow financing for your receivables can be combined with inventory of fixed asset financing, allowing you to truly ' bulk up ' on capital needs.
HOW ARE RECEIVABLES SECURED BY LENDERS
The security for your A/R financing is pretty well the same as that of any Canadian chartered bank and the bank business loan process. Typically it's most easily accomplished with the same type of General Security Agreement that collateralizes the financing. Clients also have the option when factoring accounts to enter into non-recourse financing, allowing them to transfer bad debt and credit risk to the lender- at a cost of course, via the initial factoring agreement.
Recourse factoring has the credit risk staying with your business. There is a factoring fee in AR finance, which typically is 1.5-2% - it is a ' financing fee' and not an interest rate, which is often confusing to many new clients. The approval process in a/r financing is typically very quick compared to traditional bank financing applications. It's in effect a way to monetize assets via the balance sheet.
CONCLUSION
So does the concept of an ' Op's Manual ' when it comes to receivable factoring as an option make sense? If you're concerned about ' how things work '. ‘dangers’, 'recommendations', etc. consider a LIVE operations manual by seeking out and speaking to a trusted, credible and experienced Canadian business financing advisor who can assist you with your cash flow needs.
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Stan Prokop
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