YOUR COMPANY IS LOOKING FOR RECEIVABLES FINANCE!
REASONS WHY ACCOUNTS RECEIVABLE FINANCING FINALLY MAKES SENSE!
UPDATED 05/23/2025
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"Cash flow is the lifeblood of any business. You've got to make sure that you've got enough cash to keep the business running." - Sir Richard Branson, Virgin Group
Receivables Finance ! said the client. ‘Give me one good reason why .... '
We hear that one a lot, so we'll do one better and provide him or her with 8 solid business reasons to consider an accounts receivable service for your cash flow financing needs.
Accounts receivable financing is based on your ability to fund company growth objectives. The combination of accounts receivable and inventory financing is a key asset in your Canadian business financing toolkit. Here's your step-by-step guide to business capital success.
The Cash Flow Crisis That's Strangling Your Business Growth
Your invoices are outstanding for 30, 60, even 90 days, while bills pile up daily.
This cash flow nightmare forces difficult decisions - delay supplier payments, skip growth opportunities, or stress about payroll.
Let the 7 Park Avenue Financial team show you how business factoring solves this immediately by converting unpaid invoices into instant cash, eliminating the waiting game that's holding your business hostage.
Want Proof? We've got it!
8 REASONS WHY RECEIVABLE FINANCING AND FACTORING WORKS!
Reason # 1 is simply growth... one of the ultimate ironies we have found in business financing is that many clients are punished for growing.
Generally, of course, that's growing too fast, and traditional bank loans in Canada somewhat dislikes high growth when it comes to optimizing working capital. Receivables Financing Helps Your Company To Grow by creating an instant early payment option for your A/R investment!
But tell that to the entrepreneur who has been building his or her company or working forever on that major contract or sale. We have said it before, and we'll repeat it; a surefire method to generate positive cash flow immediately is to slow down sales and accelerate collections. You'll be flush with cash, but guess what, you won’t be growing, and that’s the dream of most entrepreneurs and business owners.
A/R finance likes, no, scratch that, loves! Growth. In fact, under most facilities, you will enter into this method of Canadian business financing; you are automatically approved for whatever level of financing you need, as long as you have the sales and qualified receivables to back up your request. When we speak of qualified receivables financing at 7 Park Avenue Financial, we're referring to the fact that a/r must be under 90 days, as well as your ability to demonstrate that goods or services have been delivered.
Reason # 2 - the ability to purchase smarter and harder.
With the cash on hand from your instant a/r collections via receivables finance factoring, you are in a position to negotiate better pricing with key suppliers, giving them at the same time the assurance you will pay. When it comes to business factoring in accounts receivable needs, it's a clear case of Cash Is King. Accounts receivable financing companies deliver on that key metric in the success of your business.
Reason # 3 - This is a powerful but often overlooked one.
It's simply your newfound ability to take prompt payment discount, typically 2% off major purchases. That reduces the invoice factoring cost of an accounts receivable service significantly.
The cost of a invoice factoring provider solution should always be ' factored' into your financing decision when it comes to solving the working capital conundrum. Your receivables turnover ratio will determine your financing costs as your ability to collect a/r to your payment terms is key. Accounts receivable finance charges are widely misunderstood.
Here is an excellent overview from Freshbooks on how important that ratio is - Click here
Reason # 4 - Timing and speed. A solid invoice discounting A/R facility financing receivables finance agreement can usually be put in place within a week or two.
Compare that to the time it takes to set up a bank financing facility with all the requirements imposed by Chartered banks in Canada, which by the way, also include profitability, personal guarantees, potential outside collateral, etc. Larger corporations use sophisticated receivables finance off-balance sheet funding via securitization.
Reason # 5 - This one is a bit tricky.
Under traditional A/R finance in Canada, utilizing the popular U.S. model, the finance firm takes over all your collections; after all, they have purchased the receivable. That reduces collection costs and focus by the Canadian business owner.
That’s all good, but we'll point out that our favourite and our recommended facility is confidential invoice financing, wherein you bill and collect your own receivables and sales. So, in this case, opting for our recommended solution would, in fact, not save you the burden of collections and customer interfacing.
By achieving the benefits of selective invoice financing and managing your own facility, you've turned your company into an immediate cash flow machine!! In effect, it's ' undisclosed receivable finance '. Your competitors can mind their own business.
Reason # 6 - You're in control. In Canadian A/R finance, you are under no obligation to finance all your A/R, so you only pay for financing you use when you need it.
That’s flexibility. Many bank facilities have standby and usage fees that kick in when the facility is not used. That’s not the case with Canadian accounts receivable service finance.
Reason # 7 - Customers who have liabilities with Canada Revenue for source deductions, H.S.T., etc. and use their A/R advances to clear up these federal and onerous obligations.
That's a good thing, as the taxman should be on your side, not at the door!
Finally, reason # 8. It's the concept of the bridge.
View receivables finance as your temporary bridge to more traditional financing. A properly constructed facility should have little or no contractual obligations, allowing you to move on to another financing method that might come with a lower cost.
Accounts receivable inventory financing combinations are best managed via a non-bank asset-based line of credit which combines your key assets of a/r, inventory, and fixed assets to allow leveraging all of these into a business credit line.
RECEIVABLES FINANCING VS FACTORING: TWO TYPES OF RECEIVABLES FINANCING OPTIONS FOR YOUR BUSINESS NEEDS
Account Receivable Factoring is unlike commercial loans that come with carrying debt on your balance sheet and requirements in the areas of bank covenants and maintaining financial ratios acceptable, and in fact, required by a bank.
How does invoice factoring work? It is quite simple. The process of selling your receivables on an ongoing basis to a third-party business factoring firm allows you to receive cash almost instantly on the receivables that have been pledged.
Receivables finance has numerous advantages for Canadian businesses looking to supplement their cash flow.
First of all, it is viewed as quick and flexible compared to many other forms of financing, such as commercial business loans and term working capital loans.
Your firm's ability to receive cash from clients via asset-based factoring of accounts receivable that have been paying anywhere from 30-90 days is key in the world of business survival.
It is widespread for firms to receive funding on the same day that they generate sales invoices.
There are numerous other reasons to consider A/R finance as a business financing strategy for Canadian business owners and financial managers.
WHAT ARE 5 ADVANTAGES OF A RECEIVABLE FINANCE SERVICE
Here are some of the benefits for your business:
1. The amount of financing available when factoring receivables is directly related to the amount of your sales and receivables
2 . Approval decisions are made on sales volumes versus the overall financial viability and credit profile of your firm by financing companies
3.No debt comes on the balance sheet in an a/r financing facility when factoring invoices.
4. The additional cash flow derived from a factoring solution allows owners not to consider an additional equity infusion.
5. Accounts receivable financing facilities, such as Confidential Receivable Financing allow you to bill and collect your own receivables without any notification to clients/suppliers, etc..
To learn more about Confidential A/R Finance and the best accounts receivable financing companies, click here
Receivable finance risks can be lowered by choosing a non-recourse facility, thereby transferring credit and bad debt risk to your financing partner.
THE GROWTH AND POPULARITY OF RECEIVABLES FUNDING
Industry experts such as Grandview Research estimate that " It is expected to register a compound annual growth rate (CAGR) of 7.5% from 2020 to 2027.
The growth can be attributed to the increase in open account trade, the accelerating expansion of businesses in Asia, mainly led by China, the increase in cross-border factoring, and the rapid development of invoice factoring services in Europe.
Moreover, the increasing need for alternative financing solutions for Small and Medium Enterprises (SMEs) has also been driving the market growth."
CASE STUDY
Company: Canadian Manufacturer - Toronto
The Challenge: $250,000 in outstanding invoices creating cash flow gaps, preventing new equipment purchases
Solution: Implemented factoring with an 85% advance rate - The factoring company agrees to return the advance , less fee, when client pays.
Results: Received $212,500 within 48 hours, made down payments on equipment needed, increased production capacity by 30%, and grew monthly revenue from $180,000 to $240,000 within six months. Factoring costs of 1.5 % were offset by improved efficiency, and new contract acquisitions were enabled by reliable cash flow.
CONCLUSION
Is receivables finance right for you?
Accounts receivable financing, small business solutions work. We have touched on some of the key ones, but further investigation by you will no doubt lead to other potential benefits.
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can help you implement a receivables financing program that makes sense for your company when it comes to accounts receivable financing in Canada.
FAQ: FREQUENTLY ASKED QUESTIONS
What is receivables finance?
Receivables finance is the method in which a business can utilize to raise cash by financing the sales/outstanding invoices from its customer base. Generally, these trade receivables can be financed by either selling or assigning their A/R to a bank or commercial finance company, allowing it to invest funds in day-to-day operations and future growth objectives.
What is the purpose of receivables financing?
Accounts receivable finance allows a company to receive cash on their outstanding invoices prior to their customer payment. Firms can arrange to selectively fund some or all of their sales in this manner. Factoring companies charge a fee for the transaction, typically in the 1-2% range, which is expressed as a fee, and not an interest rate per se.
What types of businesses benefit most from factoring?
Factoring works exceptionally well for B2B companies with creditworthy customers, particularly manufacturing, staffing agencies, transportation, wholesalers, and professional services. Companies experiencing rapid growth or seasonal fluctuations find factoring invaluable for maintaining steady operations.
How quickly can I access funds through factoring?
Factoring typically provides funding within 24-48 hours after invoice value verification. Unlike traditional loans that take weeks or months, factoring companies focus on your customers' creditworthiness rather than your credit history, dramatically speeding up the approval process.
What are the typical costs associated with factoring?
Factoring rates range from 1-5% of invoice value, depending on factors like industry risk, invoice size, customer credit quality, and factoring volume. While higher than traditional lending, the speed and accessibility often justify the costs for businesses needing immediate working capital.
Do my customers know I'm using factoring services?
Factoring can be either disclosed or non-disclosed. With disclosed factoring, customers pay the factoring company directly. Non-disclosed factoring allows you to maintain customer relationships while the factoring company works behind the scenes, though this option typically costs more.
What happens if my customer doesn't pay the factored invoice?
Factoring arrangements vary between recourse and non-recourse agreements. Recourse factoring requires you to buy back unpaid invoices, while non-recourse factoring transfers the credit risk to the factoring company, providing additional protection for your business.
Who qualifies for factoring services?
A factoring qualification from invoice factoring companies focuses primarily on your customers' creditworthiness rather than your personal credit score. Most factoring companies require B2B invoices from established customers with good payment histories.
What is the difference between factoring and traditional business loans?
factoring purchases your invoices for immediate cash, while traditional loans provide borrowed money, requiring repayment with interest. Factoring doesn't create debt on your balance sheet and approval depends on customer credit rather than your credit history.
When should a business consider using factoring services?
Factoring becomes valuable when cash flow gaps threaten operations, growth opportunities require immediate capital, or seasonal fluctuations create funding challenges. It's particularly useful for businesses with strong sales growth but slow-paying customers.
Where can Canadian businesses find reputable factoring companies?
Factoring companies operate throughout Canada, with many offering specialized services for specific industries. Research factors include rates, terms, customer service quality, and industry expertise when selecting the right factoring partner.
Why choose factoring over other financing options?
Factoring offers speed, accessibility, and flexibility that traditional financing often cannot match. It provides immediate working capital without adding debt, making it ideal for businesses with limited credit history or those needing quick funding solutions.
How does the factoring process work?
Factoring involves submitting invoices to the factoring company, receiving immediate advance payment (typically 70-90% of invoice value), and collecting the remaining balance minus factoring fees once customers pay their invoices. Lower factoring fees are achieved by better collections!
Which industries use factoring most frequently?
Factoring serves the manufacturing, staffing, transportation, healthcare, construction, and professional services industries most commonly. These sectors often face extended payment terms that create cash flow challenges that factoring can solve.
What documentation is required for factoring?
Factoring applications typically require recent financial statements, accounts receivable aging reports, customer lists, and sample invoices. The documentation process is generally simpler than traditional loan applications.
How much can businesses typically factor?
Factoring limits depend on your monthly invoice volume and customer creditworthiness. Most companies can factor invoices ranging from $10,000 to several million dollars monthly, with limits growing as relationships develop.
Why do factoring rates vary between companies?
Factoring rates reflect risk assessment, including your industry, customer credit quality, invoice amounts, and factoring volume. Companies with stable customers and higher volumes typically receive better rates.
How does factoring improve cash flow management?
Factoring transforms unpaid invoices into immediate working capital, eliminating the cash flow gaps that force difficult business decisions. This steady cash flow allows you to meet payroll, pay suppliers on time, and take advantage of growth opportunities without waiting 30-90 days for customer invoice payments.
What competitive advantages does factoring provide?
Factoring enables you to offer extended payment terms to customers while maintaining your own cash flow, often winning contracts from competitors who can't provide such flexibility. The immediate capital also allows faster response to market opportunities and better supplier relationships through prompt payments.
How does factoring support business growth?
Factoring provides the working capital needed to fulfill larger orders, supply chain financing challenges, hire additional staff, or invest in equipment without waiting for customer payments. This acceleration of cash conversion cycles often enables growth rates that wouldn't be possible with traditional payment timing.
What risks does factoring help businesses avoid?
Factoring with non-recourse agreements transfers customer credit risk to the factoring company, protecting your business from bad debts. Additionally, professional collection services often improve payment rates while preserving customer relationships.
How does factoring compare to other financing methods?
Factoring offers faster approval and funding than traditional loans, doesn't require collateral or perfect credit, and grows with your sales volume. Unlike loans that create fixed monthly payments, factoring costs align with your actual revenue, providing more flexible financing.
Can startups use factoring for initial funding?
Factoring works well for startups with B2B customers and established invoices, as approval depends on customer creditworthiness rather than business history. However, startups need actual invoices to factor, making it unsuitable for pre-revenue businesses seeking startup capital.
Does factoring affect credit scores or borrowing capacity?
Factoring typically doesn't impact personal credit scores since it's not a loan requiring credit checks. Some factoring arrangements may appear on business credit reports, but as asset sales rather than debt, potentially improving your debt-to-equity ratios.
What happens during economic downturns with factoring agreements?
Factoring can provide stability during economic uncertainty by ensuring consistent cash flow despite market volatility. However, if your customers face financial difficulties, most factoring companies may become more selective about which unpaid invoices they'll purchase.
Are there minimum volume requirements for factoring?
Factoring minimum requirements vary by company, with some serving businesses factoring as little as $10,000 monthly while others focus on larger volumes. Many factoring companies offer flexibility to accommodate seasonal businesses or those with fluctuating invoice volumes.
How does factoring work with international customers?
Factoring with international customers is possible but typically involves higher rates due to increased collection risks and complexity. Some factoring companies specialize in export factoring, providing expertise in international credit assessment and collection procedures.
What is the fundamental concept behind factoring?
Factoring converts accounts receivable into immediate cash by selling invoices to a third-party company at a discount. This financial tool addresses the timing mismatch between earning revenue and receiving payment, providing businesses with predictable cash flow regardless of customer payment schedules.
How do factoring companies make money from this arrangement?
factoring companies profit from the discount they receive when purchasing invoices, typically charging 1-5% of invoice value. They also earn from the spread between advance rates (70-90% immediate payment) and full collection, plus potential additional fees for services like credit checking and collections.
What key factors determine success with factoring?
Factoring success depends on customer credit quality, invoice verification accuracy, and choosing the right factoring partner for your industry and volume. Businesses with reliable, creditworthy customers and clean invoicing processes typically achieve the most favourable terms and outcomes.
Citations / More Information
- International Factoring Association. (2023). "Global Factoring Market Report 2023." https://www.ifgroup.com
- Bank of Canada. (2023). "Small Business Credit Conditions Survey." https://www.bankofcanada.ca
- Statistics Canada. (2023). "Business Financing and Growth in Canada." https://www.statcan.gc.ca
- Commercial Finance Association. (2023). "Asset-Based Lending and Factoring Market Study." https://www.cfa.com
- Export Development Canada. (2023). "Trade Finance Solutions for Canadian Exporters." https://www.edc.ca
