YOUR COMPANY IS LOOKING FOR WORKING CAPITAL SOLUTIONS
ALTERNATIVE OR OTHERWISE!
FACTORING RECEIVABLES - INVOICE FACTORING WORKS - HERE'S HOW!
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Everyone is talking about 'factoring' these days, even the people who don't really understand it! While one could maintain that factoring, the most popular solution in alternative financing, has been around for a number of years in Canada it is absolutely getting more prominence.
TRADITIONAL FINANCING HAS BEEN CURTAILED FOR MANY BUSINESSES
We feel that it is getting that prominence for potentially all the wrong reasons, namely that in the current Canadian economic and banking reality financial, cash flow and working capital facilities from traditional institutions such as the banks have been significantly curtailed.
A PRIMER ON FACTORING
So let's do a basic primer on factoring/invoice financing, and then discuss how it's similarities and differences from what is offered in other parts of the world, and why it works and when it is problematic. We also have a solution for some of the business owner challenges associated with factoring and receivable financing. Factoring is simply a transaction between your firm and a commercial lender. Instead of ' assigning' your accounts receivable as you would to a bank, a factoring agreement allows you to sell accounts receivable as you bill for your goods and services. This allows firms to meet short term funding needs necessary to run a business.
THE BACKGROUND ON FINANCING RECEIVABLES VIA COMMERCIAL LENDERS
Factoring has been around for hundreds of years (if not longer!). What's the basic premise? It's simple. You sell one, (or a number) of your receivables, and you immediately get cash. In our article, we will continually try and point out some of the nuances of factoring that get Canadian firms into trouble - here is the first one - when you sell your receivable make sure you understand whether it's recourse or non-recourse.
By that we mean that on a recourse deal if your customer never pays, goes bankrupt, etc you are responsible for paying back the finance firm. If you arrange what is known as 'non-recourse' financing the finance firm is responsible for the loss, not you. As you can imagine non-recourse factoring is a bit more expensive, as you are eliminating all collection risk.
FACTORING SOLUTIONS ARE A SUBSET OF 'ASSET BASED LENDING '
Let's touch on another relatively unknown point in factoring, and that is that it is a key component of a potential asset-based lending strategy. Asset-based lines of credit are available to Canadian firms - these facilities are generally not with our Canadian chartered banks and are offered by very specialized firms. Not only can the business owner get financing for its receivables, but inventory and equipment and real estate can be included also. As the business owner knows, inventory and equipment are crucial parts of working capital, inventory more so.
HOW DOES TRADITIONAL FACTORING WORK
When businesses factor their receivables in Canada, they, for the most part, are no longer involved in the collection function of those receivables. Two very important points come into play here -
- You have just eliminated cost, personnel, and time involved in collections - ( that's a good thing)
- You have just handed over part of the key customer relationship to a third party with whom your customer has no previous knowledge, dealings - (That we feel, is a bad thing!)
IS THERE A BETTER SOLUTION TO TRADITIONAL ' OLD SCHOOL' FACTORING - SPOILER ALERT ! IT'S CALLED CONFIDENTIAL RECEIVABLE FINANCING
At 7 Park Avenue Financial our recommended solution is Confidential Receivable Financing. Click here to learn more about how this solution works, giving you all the benefits of a traditional factoring solution, and allowing you to bill and collect your own invoice.
CONCLUSION
In summary, we have touched on a few key basics revolving around factoring and receivable financing for small business in Canada - i.e. the history of factoring and why it's growing more popular; and, in addition, we have focused on some ' nuts and bolts ' of a factor / receivable financing offering with respect to some positive and negative aspects of such an alternative financing facility.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your business capital needs.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
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