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Working Capital Financing Made Easy: The Benefits of Confidential Receivable Financing
UPDATED 05/26/2025
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"Cash flow is the lifeblood of business. Without it, even the most profitable company can fail." — Richard Branson
CASH FLOW FREEDOM - EMPOWERING YOUR WORKING CAPITAL FINANCING NEEDS
Cash flow is almost always the focus of business owners and financial managers.
Most realize it turns about to be a full-time job! It's relevant only for the fact that working capital financing is all about growth in sales and, hopefully, profits.
One solution, among several available, is receivable financing and 'factoring'.
WHAT IS WORKING CAPITAL FINANCING?
Working capital financing is the funding a business uses to cover operational expenses on a day-to-day basis.
When using ' invoice discounting ' as a working capital solution, the business finances its outstanding receivables, for immediate cash flow, with a third-party finance company when the business sells invoices, called a 'business factor.' The business receives immediate cash for the goods and services they have provided to its customers.
One popular method of factoring is Confidential Receivable financing, which allows a company to maintain control over both billing and collections while at the same time receiving same-day cash for the outstanding invoices the company wishes to finance.
Financing provided by accounts receivable financing providers improves cash flow and eliminates the waiting for payments to be made from customers.
BREAKING THROUGH THE CASH FLOW BARRIER
Businesses need working capital to cover expenses in the day-to-day operations of the company.
But for many businesses in Canada the access to capital is limited for a number of different reasons, so ongoing healthy cash flow is not always abundant! A/R finance helps a business overcome the cash flow gap while eliminating the financing challenges a business faces.
The 2008-2009 world economic crisis drastically affected business liquidity.
Every financial institution in Canada, i.e. Banks, trust companies, life insurance companies, third-party independent finance companies, etc., all had liquidity issues and concerns, and these were the lenders!
And let us not talk about Covid and Pandemics and the worldwide economic challenges of 2022-2023 around supply chain struggles as well as increasing interest rates after a period of low financing costs / aka ' easy money '
THE SME FINANCING CHALLENGE!
Larger companies can look at equity financing, long-term permanent working capital, and other esoteric solutions the 'big boys' use.
But what about SME COMMERCIAL FINANCE needs? Start-ups, smaller and ye,s even medium-sized firms have to ' scramble ' to fill the void that top experts acknowledge exists in the Canadian business financing arena.
UNDERSTANDING RECEIVABLE FINANCE / FACTORING
How does factoring work? Simple - Factoring is a receivable finance cash flow strategy, allowing a business to finance their accounts receivable through commercial factoring companies in exchange for immediate cash -ie immediate working capital.
Traditional " old school' factoring has the finance company then assume collection of the receivable from the business customer.
The company pays a fee based on a percentage of the total invoice amount. The finance company pays the balance of that ' holdback' amount when the client pays the invoices, less a financing fee. Simple as that.
For businesses that can't, or do not want to, wait for clients to pay in 30-60 days ( or more?!) the factoring financing solution delivers immediate cash as a company generates sales -
That allows the business to meet its obligations for key areas such as payroll, inventory purchases, and growth opportunities.
WHAT ARE THE DIFFERENT TYPES OF FACTORING
Business owners should understand that there are some different types of factoring, and the industry at times makes it hard for customers to understand how basic these different solutions are
Recourse factoring is a/r financing with the company continuing to assume full bad debt and collection risk in terms of a potential non-payment from a client.
If the company has received funding from the invoice factoring company for that now uncollectible invoice, it must pay back the finance firm, or provide an invoice of equal value as payment.
Non-recourse factoring is when a company chooses to transfer the risk of bad debt to the finance company, although this method of financing is typically more expensive when collection risk is transferred to the finance firm.
CONFIDENTIAL RECEIVABLE FINANCING
Confidential receivable financing is a method of receivable factoring that allows the company to enjoy all the benefits of traditional factoring for unpaid invoices while maintaining full account control and communication with its client.
The company continues its normal billing and collection process while still receiving immediate cash for sales that are generated and invoiced to the client.
This solution provides positive cash flow and keeps client relationships the same as they were in the past, without any knowledge of how the business is financing its operations.
Additionally, the factoring fee in confidential a/r financing does not cost more!
So why factoring as a cash flow financing vehicle? Yes, it will always have a higher cost, but... It's available, and it works.
The CONFIDENTIAL RECEIVABLE INVOICE FACTORING process mirrors traditional bank loans and lines of credit - i.e. you can bill and collect and manage your own A/R without notification to any other firm, i.e. waiting for customers to pay.
IMPROVING CASH FLOW VIA FACTORING AND A/R FINANCING
Factoring financing is a proven financing mechanism used by thousands of companies in Canada.
It provides a quick and efficient method of cash flow generation, allowing a business to operate efficiently and meet its day-to-day operational needs around cash flows.
What then are the challenges around factoring receivables? Although it's historically been around for almost forever, it's incredibly misunderstood.
Many players aren’t Canadian (which doesn't necessarily have to be a concern), but the real truth is the way these firms operate and deliver on your financing. Also, prices and fees vary.
But whatever challenges come from factoring A/R, it's safe to say that the ability to turn sales into 'immediate cash' is the greatest selling point to clients we talk to.
THE DIFFERENCE BETWEEN WORKING CAPITAL LOANS AND RECEIVABLE FINANCING
At 7 Park Avenue Financial, we are often asked about the difference between working capital loans are a term loan structure versus invoice financing.
Each method has its benefits. While banks , via traditional bank loans, and other business lenders offer working capital loans for short-term cash needs , these loans to have long amortizations and require regular installment payments. They can be viewed as a source of permanent working capital for overall financial stability.
Invoice financing is the receipt of immediate cash for invoices, which are the collateral for the cash. Companies receive the cash immediately, and the company pays a fee on the invoice they choose to finance.
In general, receivable finance is easier to get approved than long credit checks and due diligence performed by working capital providers.
KEY ISSUES TO UNDERSTAND IN FACTORING FOR WORKING CAPITAL NEEDS
Things to both understand and consider when looking at factoring working capital financing include:
The requirement to finance all your A/R & Sales - Spoiler alert - you don't have to!
Rates/cost/fees -
Security arrangements - in all cases, the key collateral is, of course,e your A/R
Size of facility and quality of your customer base
Amount of financing extended against invoices - typically it should be at least 85-90%
THE DOWNSIDE OF TRADITIONAL FACTORING - IS THERE A SOLUTION? SPOILER ALERT !! YES, THERE IS!
Factor firms have very different levels of involvement in your business when you have such a facility.
The factor financing can have a strong level of daily 'intrusion' into the Canadian firm's business - the invoice factoring company might insist on delivering invoices to your customer, notifying them of the financing arrangement, and yes, you guessed it, even calling the customer and collecting the receivable.
Naturally in a perfect world, most firms would rather perform these functions themselves as part of the overall 'customer relationship '.
That's why we don't recommend that solution to our clients, instead, we prefer the CONFIDENTIAL A/R FINANCE solution.
Case Study
Challenge: A Toronto-based automotive parts manufacturer faced 60-day payment cycles from major customers while needing immediate funds for raw materials and payroll.
Solution: Implemented working capital factoring program, advancing 85% of invoice values within 24 hours.
Results:
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Reduced cash flow gaps by 45 days
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Increased production capacity by 30%
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Negotiated better supplier terms with improved cash position
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Grew revenue 25% within 12 months through expanded operations
CONCLUSION
Find out why 7 Park Avenue Financial is your best choice for a business financing partner for financing solutions tailored to your firm's needs. Use our industry experience and reputation to ensure you have access to the best business finance solutions.
Are you focused on winning the working capital financing game?
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who is focused on the cash flow and factoring solution you need to grow and survive.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK/ MORE INFORMATION
Does factoring decrease working capital?
No factoring does not decrease working capital - it allows a business to improve cash flows and to have the ability to run and grow a business. Factoring monetizes accounts receivable into cash.
Is there a drawback to factoring in receivables?
While factoring receivables improves cash flow for a company cost is often seen as a potential drawback as it is a higher cost of financing in the majority, but not all cases. Companies that choose traditional factoring versus confidential a/r finance might view this method of financing as a negative to their reputation, which is not really the case.
What are the benefits of working capital financing?
Working capital financing provides businesses with numerous benefits, including:
1. Ability to be cash flow positive
2. Providing flexibility in cash flow management
3. Improved chances to access growth opportunities in areas of expansion, staffing, technology access, etc
4. Minimizing credit and collection risk and management while providing positive working capital to the business
Why do companies utilize factoring as a working capital solution?
Factoring allows a business to meet its obligations of the business as is a popular financing tool in many industries. Businesses can have ongoing positive cash balances and cash control around different aspects of the business.
Businesses should focus on the tradeoffs in financing costs versus their ability to generate a positive return on capital in their business operations.
Traditional factoring solutions provide credit information on new clients, manage risk on approved non-recourse accounts, a well as providing a collection process without the need for additional staffing investment in managing accounts receivable.
How does the Factoring Process Work
The factoring process is a basic financial transaction around the initial setting up of the account facility as well as the ongoing financing of receivables.
Initial approval requires a business to submit a standard business application as well as a detailed account receivable aging and sample client invoices. Typical other requirements include copies of several months' bank statements and info on business owners and incorporation details,
Once the facility is established and a facility limit is approved, factoring companies send out a notice of assignment to customers of the business. Companies submit invoices for financing and funds are remitted to the company, usually on the same day. Typical advances are in the 90% range, and when the customer pays the company receives the balance of funds on the invoice, less a financing cost.
What are the 5 Important Terms In Factoring Financing That Business Owners Should Understand In Working Capital Factoring
Reserve Account - This is the amount that is held back on each invoice in the factoring account until the client pays, typically in the 10% range
Spot Factoring - Spot factoring allows a company to finance a single invoice when required - it is often a more expensive solution for financing specific accounts receivable.
Advance rate - This is the amount the factoring company advances on each invoice.
Monthly minimums - clients must determine whether they will finance all of their invoices or only some of them at their choice
Discount rate - This is the financing fee for factoring, typically between 8% per annum up to 1.25% per month, depending on a number of factors such as size, overall risk profile and credit worthiness, trends in customer payments, type of industry, etc.
Many different industries are frequent users of accounts receivable factoring, such as commission advances, medical receivables, government receivables, construction, trucking, staffing, etc. - Many factoring providers specialize in certain industries where asset-based lending solutions are a solid alternative business loan alternative to traditional financial institutions, which would provide a line of credit.
Citations / More Information
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Statistics Canada Business Financing Survey (2023) - https://www.statcan.gc.ca
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Canadian Federation of Independent Business Cash Flow Report (2024) - https://www.cfib-fcei.ca
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Bank of Canada Small Business Credit Conditions (2024) - https://www.bankofcanada.ca
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International Factoring Association Market Research (2024) - https://www.factoring.org
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Export Development Canada Trade Finance Studies (2023) - https://www.edc.ca
