Factoring and Working Capital Financing in Canada – Do I know my’ Cost of Credit’? - By Stan Prokop - 7 Park Avenue Financial
The cost of credit is the cost of not taking credit terms extended for business financing. When Canadian business owners extend, or receive business credit the credit terms are expressed as the amount of discount that is given for prompt payment, when the prompt payment discount expires, and when the invoice is due.
Let’s look at an example. We might say that we are being offered 2% ten, net 30. What does that mean? It means that if we pay the invoice in 10 days we can subtract 2% of the invoice amount for our payment. We can assure you that your supplier, if it is your firm being offered the discount truly means ten days! Not take 2% and pay in 30 days as some try to do. (Those discounts are charged back)
Lets work thru and example. Supposed you are being offered 9000.00 of credit on 2% ten net 30 days. You can either pay 9000.00 x 98% = 8820$ in ten days, or of course, as we have noted, pay the full 9000.00 in 30 days. If your company is in a position to take the discount you can save a significant amount on your purchase price from that supplier.
If you wait the full 30 days you effectively borrow 8820 for 20 days, paying 9000- 8820 , or 180$ of interest .
So what is the ‘credit cost ‘in borrowing this money? The calculation is done as follows:
Credit cost = % discount / 100-%discount x 360days/ credit period – discount period.
If you work through the numbers in our example the credit cost = 36.7%.
As our example shows, the annual percentage cost of being offered a 2 % 10 day/ net 30 days scenario is almost 37%. Remember also that this discount is continually offered, so it was offered 18 times a year the effective annual credit cost is 43%!!
Selling on credit is an accepted an important part of business. From the customer perspective it’s a source of financing, because you receive goods or services that you don’t have to pay for until a specific future point in time, usually 30 days more often than not. As business grows between a supplier and customer the amount of financing being extended or taken grows.
So what is the final point of interest in our article? Its is as follows. More and more Canadian firms are looking at factoring and working capital financing facilities outside of bank financing. If our business could pay cash for goods and services we would take the discounts and arrange with our bank to allow us to pay for everything in Cash! Unfortunately our balance sheets and income statements don’t allow us to generate those sorts of bank facilities.
Factoring is the immediate sale of our accounts receivable for cash. It also can cost anywhere from 1 – 3% per month in ‘discount fees that are taken by the factor firm.
Is that expensive. Yes. And maybe not! Because as we have seen if we can sell our receivables immediately for cash and then take supplier discounts we can offset a large portion , ( maybe all ) of the financing costs .
That allows us to be in the best of stead with our suppliers – We have cash to pay our bills and we receive immediate cash for our invoices. In a high growth scenario that’s worth its weight in gold so to speak!
Factoring can serve the dual purposes of generating significant cash flow and receiving significant price or payment discounts from our preferred major suppliers.
That is a winning cash flow combination!
Want expert knowledge on what it takes to secure the perfect working capital financing for your business?
Will my Canadian Company benefit from an Accounts Receivable Factoring Facility? - By Stan Prokop - 7 Park Avenue Financial
If you want to wash away your cash flow problems by securing Scarborough Ontario working capital financing for your business, 7 Park Avenue Financial knows what it takes to get your business sailing smoothly again. When you work with us, you work with experienced navigators in the world of business finance – but don’t take our word for it, why not look at our track record here? We sourced above and beyond one million dollars in financing between March and April 2008 for our clients, and we believe this proves our dedication to finding real and personalized financial solutions.
Canadian business owners and financial managers are hearing more and more about the concept of ‘factoring ‘their accounts receivable as a cash flow solution and overall strategy. Increasing numbers of companies are investigating what most people consider to be an ‘alternative financing’ strategy.
‘Alternative ‘clearly is in the context of alternative to a Canadian chartered bank line of credit. As Canadian companies build up their investments in accounts receivable ( and inventory ) they are finding it more difficult than every to ensure that their customers are paying them on time, typically not receiving those payments in 30 days per the terms they provide to their customers . Naturally the current somewhat difficult economic environment as we head into the 2010 Business year lends itself to slow paying receivables. Management therefore is paying more and more attention to managing cash flow, and, most notably, this is taking more and more of senior management and business owner time.
The basic challenge is as simple as it gets - suppliers, landlord, and, dare we say it, your employees want to get paid on time , while the source of that cash is tied up in receivables that are paid in , many times 60-90 days.
Enter Factoring as a potential solution that will allow the Canadian company to benefit from increased cash flow, albeit at a cost. Just to be clear, the term factoring is also referred to as ‘invoice discounting’ and ‘accounts receivable financing ‘.
The mechanics at the outset seem overly simple . You send your invoice (or invoices) to the ‘factor’ firm who immediately, usually same day, sometimes next day, issues you funds for that invoice or group of invoices. All of a sudden you immediately have the working capital and cash flow to run your business.
Let’s be clear, this is not a loan per se. It is an immediate advance of funds against money owing to your firm for products and services you have delivered. We used alternate term ‘invoice discounting’ as noted above. The ‘discount ‘referred to be the amount of the finance charge the lender keeps for carrying the receivable.
We cant over emphasize the fact that the funds generated from an accounts receivable financing facility such as we have describe should be used for short term working capital needs . You need to view the factoring facility in exactly the same manner as your bank line of credit (if you had one!)
So more about the potential ‘benefit ‘of factoring that we have alluded to. We can somewhat easily say that a factoring facility can be set up in fairly short time, certainly in much less time than it would take for your firm to negotiate a bank cash term loan or a Canadian chartered bank line of credit. Another benefit? It’s simply that you receive that much needed cash same day. A very significant amount of the invoices, usually 80-90% is ‘advanced ‘to your firm the same day. The difference is held back as a temporary holdback, and remitted to your firm, less the finance fee, when you customer pays.
We have focused on some of the benefits of factoring, such as the strong cash flow aspect of this type of facility, and its ease of set up once you have found a solid partner firm. However, the cost of the facility is usually between 1 -3% of the invoice amount for a 30 day period – Naturally you entered into such a facility because your customers probably weren’t paying you in 30 days already, so you can see that the financing fees can add up .
So, as in all business evaluations there are trade offs – if you firm can absorb the financing costs with adequate profit margins on your products and services you can categorically benefit from a factoring, a ka working capital facility .!
What does that mean for you? It means that when you work with us, you’re working toward a financial solution that caters to the unique needs of your business. We don’t hand out cookie-cutter solutions to our clients and send them on their way – instead, we listen to the needs of your business, and then match your unique situation with an ideal lender for those needs. This ensures that turnaround times are workable, avoiding costly delays that can arise when a business isn’t matched with a lender or financing program that works for them.
We want to help you secure the Scarborough Ontario working capital financing your business needs!
We’re here to answer any questions you have; don’t hesitate to give us a call today! The ideal solution for your business financing is just a phone call away – allow us to help you secure the capital you need to grow!
