Most Canadian business owners and financing managers often seek out factoring accounts receivable financing/invoice factoring from a factoring company as a quick way to get out of a cash flow crunch when other more traditional methods of financing have been exhausted.
GENERATING SALES ISN'T THE PROBLEM - COLLECTING RECEIVABLES PROMPTLY IS
Typically clients tell us that sales or revenue generation is not the problem, with the bigger challenge simply converting those sales into cash flow and working capital. Factoring financing comes at a higher price than traditional bank financing/bank loans, but most Canadian business owners recognize that other options are limited. Their situation is one of access to capital versus the cost of capital.
RECOGNIZING CASH SHORTAGES AND ADDRESSING THE PROBLEM - UNDERSTANDING ACCOUNTS RECEIVABLE FINANCING VS FACTORING NEEDS
When you recognize that a cash crunch often comes from your success, it is often much easier to rationalize factoring as a solution.
THE RISE IN POPULARITY OF FACTOR FINANCE IN CANADA
Factoring and receivable financing funding solutions via factoring companies in Canada are slowly catching on as a true financing option – many parts of the economy now view this financing method as a traditional method of financing the business – and the reality is that the big boys use it also, which many are not aware of.
HOW DOES FACTORING WORK? WHY DO COMPANIES FACTOR RECEIVABLES
Factoring your accounts receivable is also known as ' debtor finance,' whereby your business, via a factor agreement, sells accounts receivable to receive immediate cash. It's a simple, effective way to monetize sales.
New clients at 7 Park Avenue Financial ask us to explain the difference in factoring versus receivable financing. It's simply the paperwork essentially - in a bank arrangement, your paperwork specifies ' assigning' all your receivables, whereas a factor company's paperwork specifies selling the a/r.
When you utilize factoring, you are in effect selling your receivables as you generate them (at your option, of course) and receive immediate cash for those funds. Don’t let the literature fool you, though – you actually receive funding for 75-90% of your invoices (depending on who you deal with) and the balance is held back and then remitted to you when your customer pays.
WHAT DOES FACTORING COST?
Naturally, from this final holdback amount, there is a financing fee or a discount fee. Many business owners view this financing or discount fee as an interest rate, when in fact, the factor finance firms always refer to this as a discount fee.
IS FACTORING CONSIDERED AS DEBT?
Factoring is not debt as neither your company nor the factoring company takes on debt to their respective balance sheets. You are simply monetizing a current asset - ' Receivables.'
WHAT ARE THE REQUIREMENTS FOR FACTORING FACILITIES
The prerequisites for factoring your receivables often revolve simply around the nature of your receivables and customers. Your final pricing or discount fee depends on several key factors. They are:
- The overall risk profile of your firm – i.e. how you are doing!
- The quality of your customer base regarding accounts receivables
- The size of your receivables portfolio
- The geographical scope of your invoices - foreign, i.e. U.S. receivables can also be financed.
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You can also choose a non-recourse facility that allows you to transfer your current credit risk/bad debt risk to a factoring company.
TWO TYPES OF FACTORING - OLD SCHOOL AND NEW SCHOOL
What do you need to know about small business invoice factoring finance in Canada related to the U.S. and U.K. approaches to this type of financing? Well, in Canada, there are two types of invoice discounting/factoring. Under the most commonly used method, the factoring firm you engage with works with you to invoice the customer, collect the payment, and monitor your overall credit quality.
THE BEST ACCOUNTS RECEIVABLE FINANCING COMPANY SOLUTION?
If you view this overall business model and way of financing as somewhat intrusive and undesirable, then seek out the services of 7 Park Avenue Financial, a trusted, credible and experienced advisor who can provide you with a Confidential Accounts Receivable factoring facility that allows you to bill and collect your own outstanding invoices.
Many business owners we meet are concerned with suppliers' and customers' perceptions when they find out you are factoring. That comes out of the issue that in the past, many firms that factoring generally was viewed as companies with financial problems. However, the new reality of financing a business in Canada in the year 2021, pandemics included !.., is that factoring is, in fact, a great way for healthy businesses to generate much-needed cash flow and working capital.
CONCLUSION - FACTORING ACCOUNTS RECEIVABLES
In summary, consider the cash flow benefits of factoring and accounts receivable financing of your receivables and payment to you within 24 hours when you cannot obtain the total amount of financing you need. Determine if you are eligible (most firms are) and seek out a facility that meets your business financing needs.
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Stan Prokop
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