Factoring In Canada Invoice Factoring | 7 Park Avenue Financial

As confusing as you might think factoring in Canada is relative to how it works to address cash flow needs, what it costs, what are the benefits, and what is the downside … we firmly believe there is only one thing you need to know and make sure of.

THE MOST IMPORTANT ISSUE IN  RECEIVABLE FINANCING / FACTORING SERVICES?

What is that?

It is simply that a factoring or receivable financing solution works best when you pick the right partner firm!

How do you qualify for invoice factoring?

The majority of companies in Canada qualify for receivable finance solutions - if a company sells on a business-to-business basis and offers trade credit a  business qualifies. Typically most firms utilizing this method of funding have little or no access to the bank credit they need to run their business on day-to-day business. Companies that have accounts receivable less than 90 days old can receive funds immediately, as well as when they generate a sale.

What types of businesses use invoice factoring?

A wide variety of industries utilize invoice finance as they provide payment terms to clients - some major industries include trucking and transportation, healthcare, oil and gas,  temporary and permanent staffing firms, service providers, etc. Small and medium sized companies are the main users of this form of funding.

We all either have heard or basically understand the basics of receivable financing in Canada.

Compared to bank financing or other forms of business financing arrangements receivable financing in Canada has some key advantages – you can get approved fairly quickly of course, because essentially the only collateralized asset in this type of financing is the receivable itself.

Once approved the basic beauty of factoring in Canada is that the facility you set up grows with you; remarkably you can actually say that at this point you have negotiated an almost unlimited supply of working capital.

When you are relying on your current cash flow and the profits that come from being generated in your business the challenge to grow your business and expand to the next level is very daunting.

Let’s get back to our basic premise though – that it all comes down to choosing the right partner firm to factor your receivables with. The relationship that comes out of that financing is clearly key to your success and long-term growth.

Factoring, aka receivable financing in Canada, can be very confusing if you don’t consider yourself an expert in this area of business financing. Therefore great care should be taken to seek out and work with a trusted, credible, and experienced business financing advisor in this area of working capital and cash flow.

It is therefore recommended that you ensure you have key basics under your belt when you make the ultimate choice of a receivable financing partner. It is not as complex as it seems -

It’s a case of knowing who owns the firm (many firms are only branch offices of foreign subsidiaries), and how have they funded themselves (don’t forget you are relying on them to fund your company) and there is one final critical, and we can't overemphasize ‘critical‘ issue – how will they treat your customers?

If you have any basic knowledge of factoring in Canada you should be aware that if you pick the wrong factoring partner there is a significant amount of what we call ‘customer intrusion’ that will backfire on you. As a business owner or financial manager customer relations and long-term goodwill are important to you.

There are two kinds of factoring in Canada. If you don’t know those two choices and choose the wrong one you are at the risk of significant customer goodwill erosion. That is because ‘most ‘of the factoring in Canada is done on what is known as a full notification type of financing.

The factoring firm validates your invoices, notifies customers that the funds are to be remitted to them directly and quite often corresponds in writing with your customer around the collection of the amount that is due to your firm.

The legal concept behind factoring in Canada is that it is the ‘sale‘ of your receivables, you receive the cash for that A/R almost the same day you generate the receivable, the other side of the coin is that the receivable no longer belongs to you.

You have monetized it or sold your rights in that receivable. When you have a bank line of credit the receivables are held as collateral, they are not ‘sold ‘per se to your bank. That’s the main difference.

What is the cost of factoring financing?

Factoring costs vary and are often negotiable based on a number of factors - typical rates range from single-digit financing or 1.1/4% per month. It is important to note that these rates are expressed in the industry as fees as opposed to interest rates per se. Other factors that affect rates are the quality of accounts receivable, size of the a/r portfolio, concentration issues, average invoice size/ monthly volume etc.

THE KEY BENEFITS OF INVOICE  FACTORING COMPANIES FINANCE  / CONFIDENTIAL RECEIVABLE FINANCING

Ultimately you want to be in a position to enjoy the full benefits of factoring in Canada – These are:

• Instant cash for your receivables when you bill

• Access to unlimited credit for your sales

• A minimum of customer intrusion and a maximum of business goodwill in all customer dealings and collections.

Many businesses might not qualify for all of the financing they need given the requirements of traditional banks. This alternative financing method allows a firm to cash flow invoices as they generate sales to credit-worthy clients - many businesses find they can not offer either better terms to clients or most importantly generate more sales given the positive working capital position achieved via this method of Canadian business financing.

If you have the right factor firm as a partner your total financing costs should be clearly understood and laid out to you (factoring can be expensive if not negotiated properly); you should receive immediate prompt funding on your receivables, and, as importantly, you should be able to pick and choose what invoices you wish to factor or finance.

We must add that we recommend a facility that allows you to bill and collect your own receivables without any level of customer intrusion – that is when factoring, in our opinion, works best.

Is factoring considered a loan?

Factoring financing via an invoice factoring company is not a loan, it does not bring debt to the balance sheet - it is the monetization of assets by small business owners of the a/r asset already on the balance sheet. Non recourse factoring allows a company to transfer credit risk to the finance firm. Recourse factoring allows for the business to maintain credit and bad debt risk while achieving predictable cash flow when addressing clients with a slow paying invoice / unpaid invoices.

CONCLUSION - BUSINESS INVOICE FINANCING IN CANADA

So we have taken you through a myriad of technical issues on what was already somewhat of a mysterious or misunderstood subject around the best factoring companies solutions via factoring financing in Canada.

Can your firm benefit from slow-paying clients as well as the ability to increase sales in an almost unlimited manner via fast approval and simplified qualification and approval?

So remembering our golden rule should help you avoid the pitfalls of your financing decision vis-a-vis a receivable financing facility to address cash flow problems/challenges - Talk to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor - Let our team put together a  solid cash flow and working capital business financing strategy!

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

What is Invoice Factoring

Factoring invoices is a financial transaction which allows a business to sell its invoice to a factoring company or commercial finance firm in the factoring industry. The approval process is generally quick compared with the processes of traditional financing firms, allowing the business to access immediate cash as sales are generated. This funding allows the business to alleviate the investment a company makes in current assets such as accounts receivable. The financing of the invoices brings immediate cash to the balance sheet. The ability of a business to sell invoices to a third party provides funding for day-to-day operations.

Example Of Factoring In Finance 

The factoring process is relatively easy to understand - A business sells its goods or provides services to clients - As sales are generated a copy of the invoice is supplied to the finance firm - Factoring firms advance funds immediately for approx 80-90% of the invoice value. When the end-user client pays the invoice the balance of the invoices is received by the business, less a factoring fee.

Is factoring the same as invoice financing?

Invoice finance allows a business to borrow against outstanding invoices - Banks as an example take an assignment of accounts receivables which allow the company to borrow funds. The  Factoring agreement allows a company to sell a/r at a discount. Non notifacation factoring, also called Confidential Receivable finance allows a firm to bill and collect its own invoices while achieving all the cash flow benefits of traditional a/r finance.

' Canadian Business Financing With The Intelligent Use Of Experience '

 STAN PROKOP
7 Park Avenue Financial/Copyright/2024

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil