Canadian business owners and financial managers often ask about assessing the different alternatives to their overall business financing strategy – Receivable financing – factoring can be one of the cornerstones of a creative alternative financial solution for their business.
Cash Flow Solutions When You Need Them Most
Canadian businesses face constant cash flow challenges.
Unpaid invoices pile up while expenses continue, creating painful gaps between earning and receiving payment from the company's accounts receivable.
Let the 7 Park Avenue Financial team show you how Receivables financing transforms these waiting invoices into immediate working capital, eliminating the financial strain and allowing businesses to pursue growth opportunities without delay. Don't let slow-paying customers hold your business back
Three Uncommon Takes on Receivables Financing
- Receivables financing can strategically rebalance power dynamics with larger customers who impose extended payment terms, giving small businesses leverage they wouldn't otherwise have.
- Using receivables financing allows businesses to offer more competitive payment terms than competitors while maintaining better cash flow, creating a hidden competitive advantage.
- When structured properly, receivables financing can function as an outsourced credit department, reducing administrative burden while improving collection results.
ALTERNATIVE FINANCING?
We sometimes hesitate to use the word ‘alternative' because, quite frankly, this method of financing is becoming as mainstream as it can get!
Canadian businesses can be financed in one of four different ways. You need to assess the methods utilized in those four categories and which ones make sense for your firm.
Of course, business is financed by shareholder equity. Equity is expensive because when you give it up or sell ownership in your business, your overall position becomes diluted, and your return on investment diminishes.
4 WAYS TO FINANCE A BUSINESS IN CANADA
The three other methods of financing, instead of equity of ownership relinquishing, are:
Debt
Grants / Government Loans
Asset Based Lending Solution
Of course, debt comes in the form of good debt and bad debt. A commercial mortgage would be considered good debt, and a cash flow working capital loan might be another example. However, most business owners recognize the dangers of debt and how increased leverage can be a double-edged sword.
Clients always ask us about ‘government grants and loans'. In our opinion, there are only two respectable grant/loan programs in Canada—the SR&ED program and the CSBF program. The former is a non-repayable grant for refundable tax credits, and the latter is simply a great government loan for financing equipment and leaseholds.
ASSET MONETIZING FOR CASH FLOW
That brings us to # 4—Asset financing / Invoice Financing. Depending on your business and industry, your assets include inventory, land, equipment, and receivables.
Before assessing what business financing solution works best for your business, owners and financial managers should consider key issues such as the amount of business capital needed around regular or seasonality in the industry -
A firm's DSO ' will provide a solid picture of asset turnover in the company's investment in receivables. Some businesses, for a variety of reasons, may wish to explore a short-term working capital loan as an alternative to finance receivables. However, any business facing daily challenges around working capital and irregular cash inflows should consider some form of cash flow financing.
The costs of a/r financing compared to other business loans and traditional bank loans should also be considered.
HOW MUCH CASH CAN BE FREED UP IN YOUR BUSINESS
A powerful case can be made that #4 should be #1 regarding working capital and cash flow financing. Simply speaking, your assets must best be monetized to bring you liquidity.
HOW ACCOUNTS RECEIVABLE FINANCING WORKS
Receivable financing – factoring is the quickest and most efficient manner to bring immediate cash flow to your business. Why is that the case – simply because it involves no debt coming on our balance sheet, no payments are made as in a loan-type scenario, cash flow is immediate, and the reality is that if you have negotiated the right factor facility, then you are in control of your overall cash flow requirements in the receivables finance process
BENEFITS OF A/R FINANCING
The benefits of a receivable financing factor facility are very clear once you understand the process.
Generally, a factoring facility, also known as an invoice discounting or receivable financing facility, can be negotiated in a couple of weeks from start to finish.
To the extent that your business is growing, you have essentially completed a financing that gives you unlimited cash flow. We say unlimited because if your sales and receivables grow, your cash flow and working capital grow in lockstep with that growth!
Cash flow and working capital from a factoring facility can be used to increase inventory, take on more purchase orders and contracts, and generally meet working capital guidelines.
Numerous other benefits to your business may include:
- Unlimited financing capabilities of commercial non-bank lenders
- Faster approvals versus traditional bank financing approval timelines
- A/R financing is typically ' covenant light ' - no restrictive covenants around financial statements, maintenance of financial ratios, etc
- The right facilities chosen will not have a term commitment and minimal or no set-up fees
- When combined with asset-based lending solutions, inventories can also be included in the facility
- Typical advances on a/r loans are in the 90% range, significantly higher than bank advances - in some cases, an over advance might be possible
- No external or personal collateral of business owners is required
- A smaller company with poor credit or simply a lack of credit history can still qualify based on the quality of their customer base
ARE YOU ELIGIBLE FOR RECEIVABLE LOAN SOLUTIONS?
Any Canadian company selling on trade credit via business-to-business for their products or services is a candidate for A/R finance -
Accounts receivables can be domestic, U.S., or international. Invoices under 90 days old can be financed for company clients who are generally credit-worthy.
A receivable factoring facility is a simple-to-understand business financing solution. Invoices are either pledged or sold, allowing the company to receive up to 90% of the invoice as cash in the business bank account immediately on invoicing.
The business receives the invoice balance less than a ' discount fee' or ' factoring fee', which is in the .75% - 1.50% range.
WHAT IS THE COST OF RECEIVABLE FINANCING/FACTORING
Discount fees, or as clients prefer to call them, ‘factoring rates' vary in Canada.
Factors (excuse the pun) that affect your fee are the size of the facility, who you deal with, the method in which your facility operates, and the overall quality of your customer base.
The cost of a/r finance will vary depending on the type of bank or commercial finance firm you do business with - The combination of fees or interest rates will determine the costs of financing liquid assets such as receivables.
Case Study: Transforming Growth Through Receivables Financing
A Vancouver-based manufacturing company was struggling with 45-90-day payment terms from its largest customers. Despite strong orders, it couldn't purchase materials fast enough to meet demand.
After implementing receivables financing, they received 85% of invoice values within 24 hours of billing. This immediate cash flow allowed them to:
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Increase production capacity by 40%
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Accept three major contracts they previously would have declined
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Negotiate better terms with suppliers through prompt payment
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Eliminate the need for an expensive line of credit
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Grow revenue by 67% in just 12 months
KEY TAKEAWAYS
CONCLUSION - RECEIVABLE FINANCING FACTORING WORKING CAPITAL PROBLEMS AND SOLUTIONS
Any firm with slow accounts receivable turnover based on clients' payment habits can benefit from financing current assets such as receivables via accounts receivable financing companies.
As a company grows, it requires a higher investment in current assets such as inventories and a/r. Firms are also subject to bad debt risk, which can be offset by strong credit policies or trade credit insurance.
The ability to bridge the gap from invoice to the collection of outstanding invoices is key to business success.
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor.
Find out today why the fourth method of financing your business might be the best!
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is accounts receivable financing?
Financing receivables via a bank or factoring company/financing company allows a business to cash flow outstanding invoices on the company's balance sheet. Small businesses can achieve early payment, i.e. a cash advance for liquid assets such as accounts receivable - Companies should avoid long-term contracts, which some traditional factoring companies market,
This is a business finance method for the amount owed by clients, and it is not a personal finance solution, but it allows for business growth.
Traditional factoring occurs when a business sells invoices to receive cash immediately. That early payment allows the company to collect money owed and fund business day-to-day operations. Some or all of a company's—The ability to get funding via the cash flow of unpaid invoices is used by thousands of businesses in Canada. There are different types of business factoring, such as invoice discounting, confidential receivable financing, and a credit facility combined with inventory advances for small business needs.
Certain facilities have higher fees, and businesses need to understand they are still responsible for credit risk unless they choose a non-recourse type of factoring to reduce non payment risk.
