Why is Factoring the Hottest Form of Business Financing and Cash Flow Financing in Canada Today? - By Stan Prokop - 7 Park Avenue Financial
Business owners and financial managers today are totally focused on 'cash flow '. Never has the term 'cash is king' (cash flow is king?!) been more relevant.
The 2008-2009 world economic crisis drastically affected business liquidity. Every financial institution in Canada, i.e. Banks, trust companies, life insurance companies, third party independent finance companies, etc all had liquidity issues and concerns.
Larger corporations scrambled to re adjust their capital, long term loans, issue new equity, etc. This of course left the small and medium sized business in Canada scrambling - typically this part of the market is, in our opinion, the great 'void 'in business financing, the area providing the most challenges to business financing.
So why factoring as a cash flow financing vehicle. It's more expensive, quite a bit more expensive, but it works. Often times it's an interim solution, even a short term solution to a company's liquidity problems.
The challenge in Factoring in Canada for the Canadian business owner is a multiple challenge - this new alternative financing method is fairly misunderstood, there are numerous players in the market, (many firms aren't Canadian) and, probably most importantly methodologies to deliver the service vary very significantly. And we mean really significantly.
The main advantage to Factorings current popularity is its ability to turn a receivable into cash immediately. Receivables are sold, or assigned to the factor firm, and cash is deposited immediately into the company bank account.
We spoke of methodologies varying differently from firm to firm. In certain cases the company will be required to finance all of its receivables, in some cases the facility is set up, potentially, as a ' bulge' with a current lender, most often a Canadian bank. This is probably the best strategy of all, but frankly it is the most challenging to set up as the Canadian chartered banks are reluctant, because of size and security, to be a partner to this type of arrangement. We spoke of factoring being more expensive. The factor lending firm views the cost of the service and financing as a discount rate, or fee. (We also thing that's the best way to look at it). Canadian firms don't look at it that way; they view it as an interest rate that comes with a much higher cost of borrowing. Therefore a facility that has a combination of bank and factor lending has an overall lower cost of borrowing and maximum borrowing power.
Factor firms have very levels of involvement in your business when you have such a facility. The factor financing can have a strong level of daily ' intrusion' into the Canadian firms business - the factor might insist on delivering invoices to your customer, notifying them of the financing arrangement, and yes, you guessed it, even calling the customer and collecting the receivable. Naturally in a perfect worked most firms would rather perform these functions themselves as part of the overall 'customer relationship '.
Yes, factoring is cash flow financing at its finest and quickest, but Canadian firms are encouraged to ensure they are working with a firm who truly understands their needs and can maximize the total cash flow process with minimum intrusion and maximum financing cost savings.
Accounts Receivable Financing and Factoring Facilities Help Canadian Businesses Grow! - By Stan Prokop- 7 Park Avenue Financial
Recent Studies in the U.S. , ( and we believe the Canadian business landscape is very similar ) suggest that one of the most viable ways for businesses to grow and continue growing in the current economic and somewhat difficult credit environment is to consider a factoring working capital facility for their business . This type of financing facility is also known as an accounts receivable financing facility.
When business credit and access to business credit gets difficult Canadian business owners should of course investigate every ‘tactic ‘to get their company financing properly.
If your company is doing reasonable well, and the general economic and business and credit environment is quite positive naturally more traditional financing is considered – as a Canadian business owner you know the drill - prepare an executive summary or business plan, produce several years of financial statements, and meet with your Canadian chartered bank to discuss receivable or term financing . The reality of today’s economic environment is that many businesses aren’t in a position to pursue this traditional financing and therefore must consider what the alternatives are.\
One of the appeals of factoring / accounts receivable financing is that your business is generating positive cash flow right out of the gate.
One of the other main benefits of such a facility is that business owners and financial managers can focus on running their business, and not spending all their time on cash flow problems and working capital challenges. We would point out that the time save on collections of course refers to the factor that the finance or factor firm is the one collecting your accounts receivable. Many business owners do not like this direct contact with the customer, and that is one of the reasons that the Canadian business environment has, relatively speaking, been ‘ slow ‘ to catch on to factoring .
This necessitates a brief discussion around the concept of notification and how factoring has traditionally been done in the U.S. and elsewhere in the world. Factoring started hundreds, some say thousands of years ago in Europe and Asian. Traditionally it involved the total ‘sale ‘of your receivables, your firm got the cash but you didn’t own or collect the receivable at that point. In recent years , due to the creativity of the North American financing markets there are numerous other product offerings related to factoring , one of which is ‘ non – notification ‘.
We believe non-notification factoring is the absolute best solution for Canadian business owners who are considering alternative financing. Under non notification type facilities you bill and collect your own receivables, while at the same time receiving cash for them as soon as you generate your invoices. This provides a double whammy, so to speak!
1. You bill and collect your own receivables and get cash ASAP
2. You maintain the relationship with your customer, which is key to most Canadian business owners
As we have noted in the past factoring is more expensive than traditional financing, but that premium that is paid provides you with literally all the cash you need to grow your business. Savvy Canadian business owners are able to use that cash to improve supplier relationships, take prompt payment discounts, and purchase more inventories for sale to their customers. In certain cases, all, yes we repeat, ALL! Of the costs of a factoring facility can be offset by good gross margins and strong operating efficiencies.
Is it any wonder by factoring, accounts receivable financing and non traditional working capital facilities are becoming more popular in Canada? We don’t think so!
Searching for reliable expertise on working capital financing?
If you’re looking for advice from the experts on working capital financing, 7 Park Avenue Financial is what you’ve been searching for. We’re here to help you move forward with your business and into the future. Our track record proves our expertise – we originated over a million dollars in financing for our clients in March-April of 2008 alone.
The Operating Cycle and Cash Flow Financing - By Stan Prokop - 7 Park Avenue Financial
The 'operating cycle is a distinct part of any business. Frankly we believe that most business owners intuitively know it exists - they just didn't know it had a name.
The operating cycle is the repetitive pattern of a turnover of a businesses current assets and liabilities. Let's examine that in a bit more detail. In essence each business established within their company, and probably within their industry, a repetitive pattern of turnover.
In the first phase of the operating cycle a business, unless it is a service business, buys inventory and materials which they will resell to customers. Normally these goods are obtained on credit. The company buys product, and obviously has an account payable to that supplier. So we find that company paying their supplier, cash goes down and inventory goes up. So far so good.
In phase two of the operating cycle the company sells product to a customer. More often than not it sells on credit - this generates accounts receivable - the good news is that the company can finally record sales, or revenue.
In phase three, the final phase of our operating cycle, the company collects the receivable and converts the entire process we have gone through back into cash.
Yes, our analysis is over simplified, and of course behind all these processes the company has administrative and sales costs that back up the entire operating cycle. All of these costs are in some manner related to the final sale and have some sort of contribution in that regard.
We also need to remember that through the entire process bank loans or working capital facilities regularly turn over.
Each company and industry has a different operating cycle - within each industry some companies are clearly doing better than others.
One of the best know ways to measure a firms operating cycle is a formula created by the DUPONT COMPANY many years ago - not surprisingly the formula is called the DUPONT FORMULA!
The formula looks at relationships, or ratios, in the balance sheet and income statement and provides solid ways of measuring the operating cycle and how it affects a company's profit, and operations. It provides a lot of insight into how a company can improve profitability by emphasizing asset turn over and showing how it's important as sales. Even a non- financial person should be able to understand this - we are simply saying that if a company get buy something, sell it, and collect the money fast and start all over that will increase profits over a company who takes twice as long to repeat that entire process. Sales are not always the be all and end all! A company, using DUPONT, can show that even if they make a little less on each sale, but turn over inventory and receivables faster, can do as well or better than the competitor.
In summary, a true understanding of the operating cycle allows a business owner or financial manager to focus on expenses, asset turn over, and margins, and see the inter - relationship of all these three components of a business. Understanding and improving your operating cycle will make your firm a leader, not a laggard, in your industry.
We’ve staked our reputation on our expertise and customer-service oriented approach, and we know what it takes to get your business the Brampton Ontario working capital financing it needs to move forward in the business world. Not only do we know what it takes, but we actually want to get you there with the best possible financing option available for your business goals.
Sound unbelievable? That’s because 7 Park Avenue Financial doesn’t work the way others do. We believe that our customers and their business come first, and we want to do whatever it takes to foster a relationship of trust that will last well into the future. That means that we’re willing to listen to your unique financial challenges and projected goals, and then form a solution just as unique and personalized as your business.
First we listen, then we find the solution. We want to match your business with the perfect lender, because we know what can happen when the wrong lender is chosen – and we’re not willing to let it happen to you. We’ll work with your ideas, provide flexible financing options, and ensure that a specialized solution is developed in a workable timeframe.
Our customer-oriented approach to Brampton Ontario working capital financing and our reliable expertise is what we believe sets us apart – and we want to do everything possible to set your business apart from the crowd too.
Want to find out how we can help your business thrive in today’s corporate marketplace? Why not give us a call today? Let’s grow your business together.
