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"Cash flow is the lifeblood of any business. Without it, even profitable companies can fail. The key is turning your receivables into working capital fast enough to meet your obligations and seize opportunities."
— Peter Drucker, Management Consultant and Author (paraphrased principle)
Financing Receivables in Canada
Table of Contents
Financing Cash Flows in Canada
Understanding Your Cash Flow Drivers
Why Cash Flow Fluctuates for Businesses
Days Sales Outstanding (DSO) and Cash Flow Management
Inventory Management and the Cash Flow Cycle
Factoring vs. Bank Credit: Key Differences
Gross Margin Requirements for Factoring
Is Factoring a Long-Term Solution?
Conclusion
Are there key ingredients to factoring accounts receivable that help firms achieve financial success?
Yes, there are.
Understanding these drivers can materially improve immediate cash flow and working capital performance.
Understanding Your Cash Flow Drivers
It is critical to understand what finance professionals call your cash flow drivers.
Factoring accounts receivable forces discipline around managing and maximizing working capital.
This focus often leads to stronger financial outcomes.
The Cash Flow Trap That's Strangling Your Business
Your customers owe you money—a lot of it—but your suppliers need payment now.
Every day you wait for unpaid invoices to clear, you're watching opportunities disappear while competitors with better cash flow move ahead.
Let the 7 Park Avenue Financial teamshow you how Factoring accounts receivable solves this timing mismatch by converting your outstanding invoices into immediate cash, typically within 24 to 48 hours, so you can operate your business on your terms instead of your customers' payment schedules.
Why Cash Flow Fluctuates for Businesses
Most business owners know that cash flow is rarely consistent.
It moves up and down based on customer payment behavior, expenses, and growth cycles.
This volatility is difficult to eliminate but can be managed.
Days Sales Outstanding (DSO) and Cash Flow Management
Days Sales Outstanding (DSO) is a critical cash flow metric.
It measures how long it takes to collect payment after a sale.
Lower DSO directly improves liquidity and working capital.
Receivables financing in Canada is not cheap, but it is often cost-effective.
Success requires daily attention to collections and receivables management.
DSO is so important that executives at global corporations are often compensated based on it.
Many Canadian SMEs struggle to collect from large, well-known customers.
These “blue-chip” clients often represent the majority of revenue.
They also create cash flow pressure due to slow payment cycles.
These same customers are ideal for factoring accounts receivable because they are:
Creditworthy
Large-dollar accounts
Predictable payers
Factoring companies solve this accounts receivable challenge by accelerating cash flow.
Inventory Management and the Cash Flow Cycle
Inventory plays a direct role in cash flow management.
Inventory converts into receivables, which are then financed through factoring.
Strong inventory management supports healthier working capital.
Effective current asset management is a key driver of small business financial success.
Inventory, receivables, and cash must be managed together.
Factoring fits directly into this cycle.
Factoring Versus Bank Credit - Key Differences
Many businesses debate whether Canada is in a credit crunch.
Regardless, every firm eventually faces financial uncertainty.
Factoring provides liquidity during these periods.
Factoring allows businesses to:
Pay suppliers on time
Fund growth
Meet daily operating obligations
Bank financing lends money directly to your business.
Factoring finances your sales by purchasing accounts receivable.
The receivable, not the borrower, is the primary asset.
Bank financing is usually cheaper.
However, factoring offers greater operating flexibility.
For many SMEs, it is more accessible than traditional bank credit.
While larger firms may raise equity or term debt, Canadian SMEs often choose factoring.
Importantly, financing cash flow is almost always cheaper than equity.
Dilution is avoided.
Gross Margin Requirements for Factoring
Strong gross margins are essential for factoring success.
Factoring works best when sales are well above breakeven.
Margins must absorb factoring costs while remaining profitable.
The basic formula must remain positive:
Sales
Minus cost of goods sold
Minus factoring fees
If margins are thin, factoring may not be sustainable.
This is a critical evaluation step before implementation.
Is Factoring a Long-Term Solution?
Factoring accounts receivable is rarely a permanent solution.
It can be long-term, but usually it is transitional.
Most businesses use factoring as a bridge to stronger financial health.
Over time, improved cash flow may support:
Bank financing
Asset-based lending
Internal cash generation
Case Study: Manufacturing Cash Flow Solution
From the 7 Park Avenue Financial client files
Company: ABC Manufacturing Ltd. (Ontario-based Industrial Equipment Manufacturer)
Challenge:
ABC Manufacturing faced a cash flow gap caused by 60–90 day payment terms from large construction and mining customers. A $250,000 order required $150,000 upfront, but the company’s bank declined a credit line increase due to rapid growth. Without funding, ABC risked losing a key customer and future contracts.
Solution:
7 Park Avenue Financial arranged a tailored factoring services receivables solution. ABC received an 80% cash advance on the total invoice value, providing $200,000 within 48 hours of invoicing. The factoring company approved a factoring agreement in five business days based on the customer’s strong credit profile.
Results:
ABC fulfilled the order, collected the remaining $42,500 reserve after payment, and improved liquidity. Over 12 months, revenue grew by 45%, and the company secured three additional large contracts. After 18 months, ABC qualified for asset-based lending and now uses invoice factoring selectively for oversized orders.
Key Takeaways
Factoring accounts receivable improves cash flow predictability
DSO is a critical metric for working capital management
Blue-chip customers are ideal factoring candidates
Inventory management directly impacts receivables financing
Factoring offers flexibility compared to bank credit
Strong gross margins are essential
Factoring is typically a bridge, not a permanent solution
Conclusion
Factoring accounts receivable provides Canadian businesses with immediate access to cash tied up in unpaid customer invoices, transforming slow-moving receivables into working capital within 24 to 48 hours without creating debt on your balance sheet.
Factoring accounts receivable can be a powerful cash flow tool.
Success depends on understanding your financial drivers.
Speak with a trusted and experienced Canadian business financing advisor to assess fit.
Get Your Free Factoring Assessment:
☎ Call us today to discuss your receivables and cash flow needs
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FAQ/FREQUENTLY ASKED QUESTIONS - FACTORING
What is factoring accounts receivable?
Factoring accounts receivable is a financing solution where a business sells its unpaid invoices to a factoring company for immediate cash. The factor company pays/advances a percentage of the invoice value and collects payment from the customer. This improves cash flow without adding traditional debt.
How does factoring work in Canada?
In Canada, a factoring company purchases approved invoices and advances funds, typically within 24–48 hours. The factor then collects payment directly from the customer. Once payment is received, the remaining balance is released minus fees.
Is factoring accounts receivable a loan?
No, factoring is not a loan. The factoring company purchases your accounts receivable rather than lending money against them. Because no debt is created, factoring does not increase liabilities on the balance sheet.
What types of businesses use factoring in Canada?
Factoring is commonly used by manufacturing, transportation, staffing, wholesale, and service businesses. Companies with B2B customers and invoice-based sales benefit most. SMEs experiencing growth or cash flow gaps frequently use factoring.
What are the benefits of factoring accounts receivable?
Factoring improves cash flow, shortens Days Sales Outstanding (DSO), and supports business growth. It provides predictable working capital and reduces reliance on bank credit. Approval is based on customer creditworthiness, not the business owner’s credit score.
What are the disadvantages of factoring?
Factoring costs more than traditional bank financing. It may also involve customer notification and ongoing reporting requirements. However, the flexibility and speed often outweigh these drawbacks for growing businesses.
How much does factoring cost in Canada?
Factoring fees in Canada typically range from 1% to 4% per invoice, depending on volume, customer credit, and payment terms. Costs vary by industry and risk profile. Higher margins help offset factoring expenses.
What is the typical advance rate for factoring?
Most factoring companies advance between 70% and 90% of the invoice value. The remaining balance is released after the customer pays. Advance rates depend on invoice quality and customer credit risk.
What is Days Sales Outstanding (DSO) and why does it matter?
DSO measures how long it takes to collect payment after a sale. Lower DSO improves liquidity and working capital efficiency. Factoring reduces DSO by converting receivables into immediate cash.
Are large customers better candidates for factoring?
Yes, large and creditworthy customers are ideal for factoring. These “blue-chip” accounts are reliable payers with strong credit profiles. Factoring companies prefer them due to lower collection risk.
Can startups use factoring accounts receivable?
Yes, startups can use factoring if they have completed sales and issued invoices to creditworthy customers. The focus is on the customer’s ability to pay, not the business’s operating history. Factoring is often used by early-stage growth companies to solve cash flow problems. Selling unpaid invoices is a solid cash flow tool.
Does factoring affect customer relationships?
When managed properly, factoring does not negatively affect customer relationships. Reputable factoring companies use professional and transparent collection practices. Clear communication helps maintain trust.
Is factoring a long-term financing solution?
Factoring is usually a short- to medium-term solution. Many businesses use it as a bridge to bank financing or internal cash flow stability. Some companies continue long-term when flexibility is preferred.
What gross margins are required for factoring?
Strong gross margins are essential for successful factoring. Businesses must remain profitable after factoring fees and cost of goods sold. Factoring works best when sales are well above breakeven levels.
How is factoring different from a bank line of credit?
A bank line of credit is a loan secured by business assets. Factoring is the sale of receivables, not borrowed funds. Factoring offers faster access and greater flexibility but at a higher cost.
Can factoring improve a company’s financial position?
Yes, factoring improves liquidity, stabilizes cash flow, and supports operational growth. It can also strengthen financial statements by reducing receivables and improving cash balances. This may help businesses qualify for future bank financing.
Statistics: Factoring Accounts Receivable
The global factoring industry processes over $3 trillion in invoice volume annually, with Canada representing approximately $100 billion of that total
Approximately 80% of factoring clients in North America are small to medium-sized businesses with annual revenues under $10 million
Companies using factoring typically improve their cash flow cycle by 45-60 days compared to traditional payment terms
The average factoring advance rate in Canada ranges from 75-85% of invoice financing value, with the remainder paid upon customer payment - that helps bridge cash flow gaps for a company's cash flow.
Non-recourse factoring typically costs 0.5-2% more than recourse factoring due to the additional credit risk assumed by the factor- the factoring company assumes that risk
Studies show that businesses using factoring grow approximately 30% faster than comparable companies relying solely on customer payment timing
The average approval time for factoring is 5-7 business days compared to 30-90 days for traditional bank financing
Approximately 65% of factoring clients use selective factoring rather than whole-ledger arrangements, choosing which invoices to factor based on cash flow needs
Citations
Deloitte Canada. "Working Capital Management Survey: Canadian Perspectives on Cash Flow Optimization." Deloitte LLP, 2024. https://www.deloitte.com/ca/en.html
International Factoring Association. "Annual Factoring Volume Report: North American Market Analysis." IFA, 2024. https://www.factoringassociation.com
Substack/Stan Prokop/7 Park Avenue Financial.Unlocking the Power Of Business Financing Cash Flow: Cutting-Edge Business Finance Solutions" .https://stanprokop.substack.com/p/unlocking-the-power-of-business-financing?r=2ovmjk&utm_campaign=post&utm_medium=web&triedRedirect=true
Bank of Canada. "Credit Conditions Survey: Small Business Financing Trends." Bank of Canada, 2024. https://www.bankofcanada.ca
Medium."Receivables Financing Versus Bank Loans — Outperforming Traditional Credit!" . https://medium.com/@stanprokop/receivables-financing-versus-bank-loans-outperforming-traditional-credit-fb77eceb0730
Export Development Canada. "Trade Finance Trends: Alternative Financing for Canadian Exporters." EDC, 2024. https://www.edc.ca
Canadian Federation of Independent Business. "SME Financing Report: Cash Flow Challenges and Solutions." CFIB, 2024. https://www.cfib-fcei.ca
Industry Canada. "Small Business Financing Profiles: Access to Working Capital." Innovation, Science and Economic Development Canada, 2023. https://www.ic.gc.ca
Financial Post. "Alternative Lending Market Expands as Banks Tighten Credit Standards." National Post Inc., 2024. https://www.financialpost.com
Business Development Bank of Canada. "Working Capital Solutions for Growing Businesses." BDC, 2024. https://www.bdc.ca
7 Park Avenue Financial." How Factoring Finance Works As Your Business Cash Flow Solution" .https://www.7parkavenuefinancial.com/finance-factoring-receivable-financing-canada.html
