YOUR COMPANY IS LOOKING FOR FACTORING OF ACCOUNTS RECEIVABLES!
ACCOUNTS RECEIVABLE FINANCING IN CANADA
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Financing & Cash flow are the biggest issues facing business today
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Accounts receivable factoring provides businesses with a powerful financial solution to optimize cash flow and accelerate growth."
"Unlock immediate cash flow without taking on additional debt - revolutionize your business financing via factoring receivables "
Factoring for Success: Unraveling the Benefits of Accounts Receivable Financing
INTRODUCTION
Shocking Statistic: According to a recent study, nearly 82% of businesses fail due to cash flow problems, highlighting the critical importance of solutions like accounts receivable invoice factoring in sustaining business viability for businesses that can't obtain traditional loans for trade finance requirements and the need to stay liquid and cover business overhead costs.
AR Finance is a very valuable method of financing a company in Canada. The process goes under various names, and there are some subtle and not-so-subtle differences in the terminology - aka the 'factoring of accounts receivables'.
Other terms are receivable finance, invoice discounting, etc. Whether your firm is a small business or a major corporation this method of financing is used by firms in every industry in the Canadian economy for better cash flow management.
WHAT IS RECEIVABLES FACTORING? FINANCING ACCOUNTS RECEIVABLE EXPLAINED!
Factoring transactions in a business revolve around a company's ability to ' sell ', not finance their accounts receivable on an ongoing basis.
They are sold for a ' factoring fee ' which is known as the factoring fee to a 3rd party commercial factoring company. Firms that utilize this method of Canadian business financing/invoice factoring typically can't access any or enough traditional bank financing. This method of accounts receivable financing allows a company to receive cash flow immediately on the sale of its products and services.
A FACTORING EXAMPLE:
The factoring accounts receivable formula is very easy to understand
Typical advances on the invoices are in the 90% range - and when the customer pays the invoice your firm receives the additional ' hold back ' amount of 10%, less a fee of approximately 1-2%. This method of AR Finance requires that a company can absorb at least a 1-2% reduction in its gross margins for the financing to be effective.
KEY POINT - Many firms can eliminate this cost of financing by simply taking advantage of supplier payment discounts with their vendors.
Although the actual ' cost ' of AR Accounts Receivable financing seems to be subject # 1 when it comes to discussing factoring. This cost is balanced against some pretty major benefits - your firm now has pretty well all the cash it needs, supplier discounts can be taken to reduce up to half of your financing costs, and your competitors who seemed to be taking business away from you ( perhaps they are using invoice factoring also ?!) are now in your firm's rearview mirror.
The arrangement is pretty basic, and in fact, has been around for hundreds of years. In Canada, we appear to be 'catching up'! The arrangement is as follows - the finance firm agrees to purchase accounts receivable from your firm. That right there is an immediate well-publicized benefit - even if your firm can’t access bank financing, or is a start-up, etc. you immediately have found the ability to finance your firm, based solely on your sales.
Companies also can choose a non-recourse factoring facility - allowing them to transfer all collection risks to the finance company. Recourse factoring, the opposite, has your firm assuming normal collection and bad debt risk, as you always have! Confidential receivable funding allows a business to bill and collect its own invoices while receiving immediate cash when invoices are generated.
NO MORE LENDING COVENANTS AND FINANCIAL STATEMENT RATIOS
Oh, and by the way, all the lending covenants and restrictions that come with Canadian chartered banks simply don't exist in accounts receivable AR finance. Time is also critical to clients we talk to, and solid a/r financing transactions can be completed in one or two weeks - if you're dealing with the right parties or advisor, and of course the right factoring company.
At 7 Park Avenue Financial, new clients ask us what the difference is between bank financing of receivables versus factoring. The simple explanation is, as we noted, that factoring paperwork specifies the ' sale of your receivables ' while bank business credit lines simply hold your a/r as security, with banks charging an ' interest rate ' versus the factoring ' fee'.
Both types of financing, a bank loan, or factor finance, deliver working capital solutions - it's just that many firms in the SME sector cannot access traditional bank finance.
THE THREE BUSINESS DRIVERS THAT MAKE FACTORING SUCCESSFUL FOR YOUR FIRM
There are three drivers that pretty well secure the fact that your firm could significantly benefit from a/r finance - they are
1. Your ability to demonstrate good gross margins,
2.Reasonable overheads and helps remove some manual accounts receivable processes in a business
3. The ability to potentially increase your prices a bit or take supplier discounts at the other end of the spectrum.
FACTORING CAN BE A FORM OF TURNAROUND FINANCING
Perhaps your firm is having some serious financial challenges; and at the same time, you just might be experiencing a solid growth period in revenues. Even more so you might be coming out of a turnaround phase in your firm and you're not quite ready for the bank yet. In those cases, the cost of factoring in accounts receivable can easily be justified around the speed, flexibility, access to capital, etc.
KEY TAKEAWAYS
The benefits of accounts receivable finance :
Enhanced cash flow
Facilitating improved working capital management by converting invoices into immediate funds
Risk mitigation, as factoring companies often assume responsibility for credit and collection functions, reducing the risk of bad debt; flexibility
Allows businesses to access financing without increasing debt or sacrificing equity
Growth acceleration, enabling companies to pursue expansion opportunities by unlocking capital tied up in receivables
Operational efficiency, streamlining the invoicing and collection process, freeing up resources for core business activities
CONCLUSION - YOUR CASH FLOW SOLUTION
AR FINANCE factoring makes sense to consider for several reasons - the most obvious of which is a slow-paying customer base. But simply having immediate access to cash allows your firm to not be hampered by growth concerns, allowing it to grow at a pace that might not normally be achieved based on investments in receivables and inventories.
A/R and inventory can be combined into an ASSET BASED LINE OF CREDIT which doubles that cash flow power. Balance sheet financing allows your firm to monetize assets and not take on any debt to the company. AR financing is in fact a subset of asset based lending
CONCLUSION
In today's competitive landscape, accounts receivable factoring not only bolsters cash flow but also acts as a strategic lever for market dominance.
Contrary to conventional wisdom, receivables factoring services are no just a stop-gap measure but a transformative tool for businesses to reinvent their financial trajectory.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor on how your firm can benefit from this accepted business non-bank financing strategy.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK /MORE INFORMATION
How does receivables factoring improve cash flow?
Accounts receivable factoring accelerates cash flow by converting unpaid invoices into immediate working capital. The factoring company pays the company when invoices are generated for products and services sold.
What risks does invoice funding help mitigate?
By outsourcing credit and collection functions to financing companies in a traditional factoring arrangement, accounts receivable factoring helps mitigate the risk of bad debt for customer payments and helps create a positive working capital financing solution.
Can accounts receivable factoring support business growth?
Yes, by business owners unlocking capital tied up in receivables, accounts receivable factoring provides the resources needed for growth initiatives.
Is accounts receivable factoring a flexible financing solution?
Invoice financing offers flexibility without increasing debt or sacrificing equity which is a key benefit of this type of financing.
How does accounts receivable factoring enhance operational efficiency?
Accounts receivable factoring streamlines the invoicing and collection process, allowing businesses to focus on core activities.
How does receivables factoring differ from traditional bank loans?
Invoice funding is a form of asset-based financing where businesses sell their invoices to a factoring company at a discount in exchange for immediate cash. Unlike traditional bank loans, factoring does not create debt on the balance sheet. The costs of factoring are expressed as a fee versus an interest rate. Alternatives to this type of financing include merchant cash advances which are short-term working capital loans paid back on an installment basis.
What types of businesses benefit most from accounts receivable factoring?
Accounts receivable factoring is beneficial for businesses that have high accounts receivable balances and need immediate cash flow to support operations or growth initiatives. Industries such as manufacturing, distribution, staffing, and transportation commonly utilize factoring services for supply chain finance.
How does recourse and non-recourse factoring differ, and what are the implications for businesses?
Recourse factoring requires the seller to repurchase any invoices that the factor cannot collect payment on, while non-recourse factoring relieves the seller of this obligation. Non-recourse factoring typically involves higher fees due to the increased risk assumed by the factoring company.
What is the difference between accounts receivable finance and invoice financing?
Accounts receivable factoring involves selling invoices to a third-party company at a discount in exchange for immediate cash. Invoice financing, on the other hand, allows businesses to borrow money against unpaid invoices for improving cash flow , using them as collateral for a business line of credit
How do businesses qualify for accounts receivable factoring services?
Businesses typically qualify for invoice funding based on the creditworthiness of their customers rather than their credit history. Factors consider factors such as the quality of the invoices, the customer creditworthiness of the debtors, and the business's industry when it comes to small business financing / SME solutions. Businesses can also choose spot factoring, which is the financing of only certain specific invoices.
What happens if a debtor fails to pay the invoice after factoring?
If a debtor fails to pay the invoice on agreed-upon payment terms after factoring, the responsibility for collecting the debt depends on the type of factoring arrangement. In recourse factoring, if the customer defaults on an invoice, the business may be required to buy back the unpaid invoice from the factoring company. In non-recourse factoring, the factoring company assumes the risk of non-payment and as well the factoring company takes responsibility for the ultimate collection.
What are the typical fees associated with accounts receivable factoring?
The typical fees associated with monetizing your invoices include a discount fee, which is a percentage of the invoice amount deducted by the factoring company, and other administrative fees such as processing fees or due diligence fees. To calculate ar factoring you need to know the advance rate and the factoring fee as agreed upon in the factoring agreement.
How long does the accounts receivable factoring process usually take?
The invoice finance process from a factor finance companies can vary depending on factors such as the complexity of the invoices and the efficiency of the factoring company. Generally, it can take anywhere from a few days to a few weeks for the entire process, including application, approval, and funding, to be completed.
