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Receivable funding in Canada. While A/R business financing may perhaps not be the all-time greatest invention ever in business in certain ranks up there. But when it comes to short term working capital and the finance of receivables, or even just its management, are there some 'HIGH NOON' issues you need to both know and keep top of mind. We think so, let's dig in!
WHAT IS A/R FINANCE / RECEIVABLE FUNDING
The essence of A/R finance couldn’t be simpler. It's simply a bridge to allow you to receive cash/working capital prior to payment from clients on your outstanding invoices. The world of accounting allows you to classify this as a 'current asset', which simply means you have to collect it within a year, which, unfortunately, is the same timeframe that your clients seem hell-bent on paying you in!! Financing the balance sheet allows you to unlock your cash flows.
REVENUE RECOGNITION = CASH FLOW
When you're financing your accounts one of the key factors to keep in mind in discussions with your banker or your commercial finance firm is the idea of revenue recognition. You need to remember that you must be able to clearly demonstrate that the product or service you have delivered is in fact 'recognized' and that there is an assurance that the customer has an obligation to pay you. So selling on consignment or on a contract type basis with milestone payments presents real problems when it comes to financing your accounts receivable.
CONTRACTS AND PROGRESS PAYMENTS CAN BE FINANCED ALSO
We do work with many businesses who do in fact sell on a ' contract ' type basis, and we would add that if the milestones are clearly defined. And that you've delivered on your commitment to the client, you are still in a position to finance AR.
QUICK EXAMPLE OF HOW A/R RECEIVABLE FINANCING WORKS
Receivable financing fast become one of the most popular methods of business finance. Using a 10k invoice as an example the Canadian business owner/manager receives approximately 9.8k immediately on invoicing, with the 200 dollars considered a discounting or carrying charge. It's as simple as that if you're dealing with the right party. Business owners can view their factoring facility as a kind of line of credit.
UNDERSTANDING THE CASH DISCOUNT CONCEPT
Whether you finance your A/R or you don’t the issue of cash discounts is an important one. They are not a reduction of your price offered to your clients; they are simply an incentive for the client to pay you earlier. If you are financing your A/R a huge amount, if not all of the cost of financing your business can be reduced by using cash flow from AR financing to take discounts with your own key suppliers. Small businesses should always be focused on supplier/vendor relationships.
ELIMINATING THE WAIT IN COLLECTING YOUR RECEIVABLES
Understandably, (because it’s a cruel world) many of your clients will try and take as long to pay as possible. Major corporations in Canada use their size and buying power clout to their advantage by paying smaller firms in either 60 to 90 days. That enhances their own cash flow in a big way. The financing of your A/R via a bank facility or a commercial invoice discounting facility allows you to fight that battle, and if you have priced your products and service with that delay in mind you'll be a strong competitor in your marketplace and industry.
CONCLUSION
Financing accounts receivable doesn't have to be a challenge for small business owners. These then are some key issues that affect your management and financing of accounts receivables on your company's balance sheet. There are others which we will cover off in the future, but seek the advice and services of a trusted, credible and experienced Canadian business financing advisor who can assist you with your business funding needs. You’ll then be a formidable competitor when HIGH NOON rolls around when you have the 7 Park Avenue Financial factoring company solution.
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Stan Prokop
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