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Smart strategies and effective tactics in A/R finance deliver cash flow that works
An account receivable financing agreement loan (by the way, it's not a ‘loan’!) comes, as do all forms of financing, with some pros and cons. What is the secret then to maximizing the pros and eliminating or ' downsizing' those cons? Let's dig in.
An a/r funding program is one consideration for almost all Canadian business owners and managers, retail businesses excepted of course. When that struggle to obtain some or the entire bank financing you need looms large and shortages of cash flow are an ongoing occurrence it just might be time to consider a commercial financing arrangement. The solution to the challenges you have in financing your business might then just be around the corner... if assessed and executed properly.
We've already referenced that A/R finance is not a loan in terms of taking on ' debt ‘. In actuality you're simply cash flowing your 2nd most liquid asset - your receivables. The ability to monetize sales immediately into cash is probably the largest ' pro' when it comes to accessing the working capital/cash flow you need.
Getting back directly to those 'pros and cons'. The pros often seem easier to understand and assess, if only for the reason that thousands of businesses use commercial A/R finance every day to run and grow their business. Almost irresistible right?
So is an accounts receivable financing agreement right for your company? In practice, the simplicity of this finance is almost overwhelming - turning sales into cash pretty well the same day. The legal paperwork, similar to a bank credit line agreement, allows for A/R to be financed on an ongoing basis, typically with a 90% borrowing margin. By the way, bank receivable agreements only offer a 75% borrowing base.
So for companies that can't or don't want to borrow outside capital in the forms of debt/loans a/r invoice finance seems like a marriage made in heaven. The ability to monetize sales and transform your largest ' current asset ' into operating and growth opportunities has appeal.
Traditional ' old school ' receivable finance also gets you assistance in collecting your accounts - although those firms that wish to maintain being ' masters of their domain ' can choose CONFIDENTIAL RECEIVABLE FINANCING , allowing them to bill, collect, and fund their accounts with 100% control of their mgmt/staff. Using this method of 'non-notification' keeps you 100% under the radar - let your competitors figure out how fast you're growing.
So while those competitors are out there having to consider equity capital or even providing personal assets as collateral the A/R finance solution doesn't force you dilute ownership, or, even worse, explain to the wife or husband why personal and business assets must be co-mingled!
So... about those cons! When we talk to new clients about accounts receivable finance typically cost and the, shall we say ' stigma ' of a non-bank solution require some healthy discussion. With respect to ' stigma' hopefully the fact that some of the largest corporations in Canada and the world utilize this and other similar forms of non-bank financing should remove any of that concern.
Because the cost in receivables agreements typically is 1.5 -2% per month, as a business owner/financial manager you need to balance that
against generating more profits, being able to buy products and services more efficiently, and being able to eliminate the huge investment required to finance A/R and inventory as you grow your business.
Working with the right advisor or the commercial receivable firm is key - as issues around contract length, financing rate, and being comfortable with the firm that you are dealing with is key. Turning the ' cons' into a smart easy financing solution is the secret.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your cash flow needs.
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