Include Factoring Receivables Financing Working Capital In Your Finance Toolbox!

YOUR COMPANY IS LOOKING FOR FACTORING & RECEIVABLES FINANCING!

Benefits of Receivables Financing As A Fast Track To Working Capital Needs In Canada

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factoring receivables in canada and how financing working capital works

UNDERSTANDING RECEIVABLES FACTORING CANADA

Could a receivables financing program actually help you manage and succeed when it comes to solving those working capital problems?

Top experts in business finance advise that the trend towards many companies adopting a factoring/accounts receivables finance strategy is in fact one solid solution to cash flow management... and survival in Canada. Let's explain!

It's no secret that many small and medium-sized firms n Canada are in ' waiting mode ' when it comes to having clients pay outstanding invoices - Financing receivables is a method in which a firm with cash flow challenges can receive immediate cash advances on outstanding payments owed to the business - A fee is charged by a finance firm to fund the transaction.

WHAT IS FACTORING & A/R FINANCING AS A NON-BANK SOLUTION FOR FUNDING YOUR BUSINESS

So, for a factoring definition at 7 Park Avenue Financial, we explain to new clients that it's simply a financial solution to generating cash flow without taking on any debt to the balance sheet. The ability to fund sales without waiting for your clients to pay is critical to the overall success and financial management of your business growth goals. Business lines of credit are not accessible for all firms - making this method of funding a business popular.

THE IMPORTANCE OF WORKING CAPITAL IN LARGE CORPORATIONS AND THE SME ECONOMY

At the core of our subject is the concept of ' working capital ' which is sometimes difficult to grasp for the Canadian business owner and manager in the SME sector. Those large corporations seem to have it down pat, don't they? When they do those conference calls on their quarterly results cash flow and growth seem to be all they are talking about... right!

RECEIVABLE FINANCING VERSUS RECEIVABLE FACTORING

Receivable financing is the financing solution that has a business using their accounts receivable as collateral - This is typically how banks finance accounts receivables - businesses receive payment and pay down the facility, which is essentially unsecured.

Receivable factoring in trade finance differs in that instead of collateralizing the receivables the paperwork in the receivable factoring process specifies these receivables are sold to the finance firm in exchange for receiving cash.

So does a receivables finance strategy solve the problem and how does accounts receivable factoring work? It's kind of good to understand the problem also, don't you think - and in our case, it's all about managing your current assets - receivables, inventory, etc. Can a factoring company help? At 7 Park Avenue Financial we are sure that's a solid potential solution.

In the case of receivables if you don't have a stated goal (by the way those large corporations do - they call it days sales outstanding) you definitely have an intuitive goal, which is to turn over those accounts receivables assets into cash.

THE FACTORING PROCESS - HOW RECEIVABLES FACTORING SOLVES THE WORKING CAPITAL PROCESS

As your business delivers its product and our services to clients invoices are generated - the factoring process allows you to immediately receive cash for the invoice - minus a financing fee and the transaction is closed when the client pays the invoice.

Invoice finance accelerates the turnover of receivables into cash at Warp Speed. And just what is that warp speed? Well, you should know by now, and if you don't you do now... that factoring generates cash as soon as you make a sale. So the current assets, in our case A/R that you permanently have on your balance sheet are turned into cash. That cash allows you to run the company and satisfy all other creditors.

MANAGING ACCOUNTS PAYABLE ALSO IMPROVES WORKING CAPITAL

Your payables, which comprise usually the majority of your short-term liabilities are a great way to manage debt, and the cash flow you receive from factoring helps keep the risk of insolvency at bay. Simple as that.

UNDERSTANDING THE ' CURRENT RATIO ' FORMULA

So while the Bay Street gang focuses and talks on the concept of working capital for your firm, an adopted factoring strategy helps you cut through the jargon without limitations to timing.

What we mean by that is that if you calculate your Current ratio, and let’s say for example it is 4:1 that really is somewhat meaningless if receivables are not collected and inventory isn’t turning. Factoring solves that receivable turning issue very quickly via immediate cash conversion of sales!

A/R FINANCING IS ONLY A SHORT-TERM SOLUTION - THE IMPORTANCE OF WORKING CAPITAL

It's important to remember that invoice factoring and receivables finance from a factoring company, as a solution to working capital challenges around your company's customers is a short-term financing strategy. Long term it's up to you the business owner and manager to manage long-term debt and grow your company.

THE BUSINESS CASH FLOW CYCLE AND THE BENEFITS OF RECEIVABLES FINANCING

Factoring is one key solution that helps you solve the cash flow cycle conundrum, which is the ability of 1$ to make it through your entire company, from product purchase for inventory to cash collected for your sales.

The bottom line today - Cash shortages reach a peak when your firm is carrying a high level of accounts receivable. Factoring solves that problem by converting your one major source of cash - receivables into immediate working capital.

THE COST OF FACTORING RECEIVABLES

Factoring receivable costs vary, but in general, they range in the .75% - 1.25% per month range - the longer that receivables are outstanding increases the cost, so its important to stay on top of collections and manage a/r turnover, aka your ' DSO ' receivable turnover ratio properly.

Factoring Receivables Example: Factoring Receivables Rates

Using a $20,000 receivable as an example with a financing fee of 1% a 30-day financing charge would be 200.00 - If the client took 2 months to pay the cost of financing that 20,000 is 400$ -ie the factoring fees.

Business owners should also understand that they can choose between factoring receivables with recourse and nonrecourse financing solutions - when choosing recourse factoring the company is responsible for any bad debts as it normally would - but choosing a non-recourse finance solution transfers bad debt and allowance for loan losses and credit risk to the finance firm.

KEY TAKEAWAYS - FACTORING RECEIVABLES & FINANCING WORKING CAPITAL

Businesses can receive immediate cash when they sell to clients on business credit terms - the investment that a company must make in carrying accounts receivable can hinder business growth as the business waits anywhere from 1-3 months these days to get paid

Any business selling to other businesses can qualify for invoice financing - it is a viable option to bank loan financing with fewer requirements around credit approval from traditional financing institutions such as banks

A/R Financing facilities grow as your business grows - credit limits are not necessarily defined unlike bank facilities

The majority of a/r finance solutions are short-term in nature and are often a runway back to traditional financing as the firm experienced potential cash flow challenge or growth that is unexpected

The collateral requirement for a factoring transaction is simple and basic - Your invoices are the collateral

CONCLUSION - THE BENEFITS OF FACTORING RECEIVABLES

So, is factoring receivables a good idea? Using factoring financing solutions is an established method of growing a business and generating positive cash flow. It is a viable alternative to solutions such as a merchant cash advance /short-term working capital loan which is a more expensive finance method.

There are different types of factoring and at 7 Park Avenue Financial, our recommended solution is Confidential Receivable Financing, allowing your company to bill and collect its own receivables.

For a custom-tailored factoring accounts receivable solution seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help you set up a proactive Factoring program to meet your business challenges.

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

What is Receivable Factoring

Factoring accounts receivable via receivable factoring companies allows the business to receive immediate cash for unpaid invoices. The factoring cost from the financing company is determined via an advance rate on the invoice and is known as the factoring cost. That is the simple meaning of factoring via selling receivables.

How to increase cash flows is a challenge in any business. Accounts receivable factoring works because it allows a small business, or a business of any size actually, to generate immediate cash flow from the invoice discounting process through the cash flowing of accounts receivable. Factored receivables are used by thousands of businesses in Canada and are funding provided by many factoring companies. The factoring company pays the business for the invoices the same day as the invoice is generated - A business is not required to finance all of its receivables.

A business can significantly improve its working capital and cash flow if it is experiencing a temporary cash-flow challenge, aka the ' cash flow crunch', given the time it takes for clients to pay invoices.

The ability to convert a/r into immediate cash improves the working capital position and allows the company to fund day-to-day operating expenses and invest in more growth in the business. Achieving predictable cash flow translates into more income opportunities,

Businesses who wish to transfer bad debt risk to a debt factoring company can choose non recourse factoring agreement. The factoring company assumes credit risk, and this can include non-domestic receivables - Recourse factoring assumes normal collection and credit risk - Ultimately the business is responsible to pay the factoring company for all invoices in a recourse facility.

Factoring Receivables Financing Working Capital | 7 Park Avenue Financial