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Unlocking Cash Flow: The Power of Receivables Funding
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Financing & Cash flow are the biggest issues facing business today
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"Receivables funding, often hailed as the financial lifeline for businesses seeking working capital solutions, has revolutionized the way companies manage their cash flow."
"Imagine unlocking the power to grow your business without the constraints of traditional financing. Discover how receivables funding can be your game-changing solution."
Introduction: Understanding Receivables Funding in Canada
It's probably just us, but when it comes to business financing in Canada, no other method of financing your business is as controversial or misunderstood as sales of receivables financing, aka factoring funding.
According to the World Factoring Statistics report released by FCI, a global representative body for factoring and financing of open account domestic and international trade receivables, the industry grew at a double-digit rate in 2022.
Clarifying the 'Good, Bad, and Ugly' of Receivable Financing
Let's examine some key points that will clarify the 'Good, Bad, and Ugly' of receivable financing in Canada.
The Good
Let's start off with the 'good' as we think you will soon find that the 'bad' and the 'ugly' are simply misunderstandings, but we'll let you decide.
Supercharging Cash Flow
So why do Canadian business owners and financial managers embrace this newer form of financing in Canada? Simply because it supercharges your cash flow - by selling your A/R you in effect maintain cash flow for operations, and eliminate the need for additional debt or taking on or putting in new equity. We constantly remind clients that the dilution of their equity is the costliest method of financing, everyone pretty well agrees on that.
Unlimited Capital and Cash Flow
What are the benefits of receivables financing financing companies?
Receivables financing, also known as accounts receivable financing or invoice financing, offers several benefits, including:
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Improved Cash Flow: Receivables financing provides immediate access to cash by converting outstanding invoices into working capital, helping businesses cover expenses, invest in growth, or meet short-term financial needs.
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Faster Access to Funds: Unlike waiting for customers to pay invoices on their terms, receivables financing allows businesses to receive a significant portion of the invoice value quickly, usually within 24-48 hours.
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Risk Reduction: Receivables financing can help mitigate the risk of bad debt since the financing company often assumes some responsibility for collecting payments from customers.
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Flexibility: It offers flexibility because businesses can choose which invoices to finance, depending on their immediate financial requirements.
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No Debt Incurred: Receivables financing is not a loan, so it doesn't create debt on the company's balance sheet.
Another point in our 'Good' column is that if structured properly your sale of receivables financing sets you up for unlimited capital and cash flow - simply speaking your working capital grows lockstep with your sales. Not too many other methods of business financing can make that statement.
HOW DOES FACTORING WORK AND WHAT DOES IT COST
The following point is simply the most recognized complaint when we talk to clients. It involves the mechanisms under which A/R financing works. 99% of the structures used by factor companies involve the factor firm validating the creditworthiness of your clients, and getting involved in the billing and collecting of your receivables. Why. They would answer that you have sold them the receivable and it’s theirs to collect.
So that’s bad, right? Most Canadian business owners and financial managers that we speak to would say they would prefer to bill and collect their receivables and maintain those client relationships that are so important.
The Good News - 'Confidential Receivables Financing'
Enter 'the good'! Here's the good news, most Canadian businesses contemplating the sale of receivables funding/factoring are eligible for what we term 'Confidential receivables financing'. Utilizing that mechanism your firm bills and collects its receivables, maintaining total control of the billing and collection function. You, in turn, remit those funds to your finance firm, simply because you have been advanced those funds already.
Misunderstanding Reigns Supreme
Here is where misunderstanding reigns supreme in A/R financing. It's the 'price' or 'cost' of this method of business financing.
When you finance a receivables portfolio a factor firm buys your A/R at an ongoing discounted price. That price, on balance, in Canada is 1-2 %. Business owners in Canada confuse that purchase discount fee as an interest rate, and that’s a large part of the problem.
In reality, it's how you manage that 1-2 % that ultimately reflects your total cost of financing. You can manage that cost by adjusting part of the cost into your cost of sales - we remind you that you’re already absorbing a large cost by carrying receivables and inventory already.
And by the way, with that newfound sale of receivables funding cash flow, you can now take supplier discounts if they are offered, which by the way, are generally in the 1- 2 % range. Want more good, rather than bad or ugly?! You can now enhance your purchasing power with suppliers, and if you choose (not always recommended by us) you can offer extended terms to your clients that your competitors might not be able to.
Key Takeaways
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Invoice Factoring: This concept involves selling invoices to a third party, providing immediate cash flow.
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Accounts Receivable: Understanding how to manage these outstanding payments efficiently is fundamental.
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Creditworthiness Assessment: Assessing a customer's financial reliability helps minimize risk.
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Advance Rate: It's the percentage of the invoice amount you receive upfront from the funding provider.
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Discount Rate: This rate determines the fees charged for receivables funding services.
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Recourse vs. Non-Recourse: Know the difference in liability when dealing with defaults.
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Client Concentration: Diversify clients to reduce dependency on a single source of revenue.
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Credit Insurance: Protect against non-payment with insurance policies.
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Due Diligence: Thoroughly research and verify client financials before funding.
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Collections Management: Efficiently managing collections impacts cash flow and profitability.
Conclusion
The bottom line today. Thousands of Canadian businesses embrace the sale of receivables funding/factoring every day.
Call 7 Park Avenue Financial, a trusted credible and experienced Canadian business financing advisor to wade through the good of this method of business finance, and you might just find that bad and ugly are either misunderstood or don't exist. That’s a working capital solution!
FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is Receivables Funding?
Receivables Funding is a financial strategy that helps businesses access cash by leveraging their outstanding invoices.
How does Accounts Receivable Financing work?
Receivables Funding involves selling your unpaid invoices to a commercial non bank financial institution such as a factoring company at a discount in exchange for immediate cash.
What are the benefits of Receivables Funding?
Receivables Funding via accounts receivable factoring improves cash flow accelerates business growth, and reduces the risk of bad debt.
Is Receivables Funding suitable for my business?
Receivables Funding is ideal for businesses with outstanding invoices, regardless of their size or industry.
How do I get started with Receivables Funding?
To begin, you'll need to find a reputable Receivables Funding provider such as 7 Park Avenue Financial, submit your invoices, and receive cash within days.
What is the difference between Receivables Funding and traditional loans?
Receivables Funding via accounts receivable financing companies provides quick access to cash by selling invoices, while traditional loans involve borrowing money with interest.
How does Receivables Funding impact my credit score?
Receivables Funding is not a loan, so it doesn't affect your credit score. It relies on your customer's creditworthiness.
What industries benefit most from Receivables Funding?
Receivables Finance is versatile and benefits various industries, including manufacturing, services, and retail.
Is receivables financing the same as factoring?
No, receivables financing and factoring are not the same, although they both involve using accounts receivable to access cash. Here's the key difference
In receivables financing, a business uses its unpaid invoices as collateral to secure a loan or line of credit from a financial institution. The business retains control over the collection process, and the financing provider typically plays a more passive role, charging interest or fees for the financing.
Factoring, i.e. invoice discounting on the other hand, involves selling the unpaid invoices (accounts receivable) to a third-party company, known as a factor, at a discounted rate. The factor then takes over the responsibility of collecting payment from customers. Factoring accounts receivables often involves a more active role from the factor in managing the accounts receivable and may include services like credit checking and collections.
In summary, while both methods use accounts receivable to access cash, receivables financing involves borrowing against the invoices, whereas factoring involves selling the invoices to a third party.
How much does accounts receivable financing cost?
The cost of accounts receivable financing can vary based on several factors, including the financing provider, the creditworthiness of the business, the industry, and the terms of the financing arrangement. Here are some common costs associated with accounts receivable financing:
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Discount or Fee: Lenders typically charge a fee or discount on the value of the invoices being financed. This fee can range from 1% to 2% or more of the invoice amount.
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Interest Rate: If the financing arrangement involves a loan or line of credit, businesses may also incur interest charges on the borrowed funds.
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Service Fees: Some providers may charge additional fees for services such as credit checks, collections, and account management.
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Length of Financing: The duration for which the receivables are financed can impact the overall cost, with longer-term financing generally incurring higher costs.
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Business-specific Factors: The specific terms and conditions negotiated between the business and the financing provider will also influence the total cost.
It's essential for businesses to carefully review and compare offers from different financing providers to determine the most cost-effective solution for their unique circumstances. The exact cost can vary significantly, so businesses should seek transparency and clear terms from potential financing partners.
