YOUR COMPANY IS LOOKING FOR A/R RATES AND RECEIVABLE FUNDING SOLUTIONS!
Accounts Receivable Factoring Explained!
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Financing & Cash flow are the biggest issues facing business today
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7 Park AvenueFinancial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Struggling to secure financing for your business? Explore the transformative potential of accounts receivable factoring loans.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ASSET BASED LENDING ABL & solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
Accounts receivable factoring loans offer help businesses facing cash flow challenges. These loans allow companies to leverage their outstanding invoices as the only collateral to secure immediate funding, providing vital operational stability and growth lifeline. Business owners need to understand the terms and the nuances and benefits of accounts receivable. Factoring loans is crucial for businesses aiming to optimize their financial strategies.
Does the cost of factoring finance, i.e. AR rates for funding receivables, have to be a ' hot potato ‘? We don't think so, and here is why.
THE ACTUAL COST OF ' FACTORING RECEIVABLES ' IS A FEE - NOT AN INTEREST RATE
Of course, the cost to finance a receivable via invoice factoring revolves around the ongoing sale of your A/R at a discount. That discount is essentially the core of our cost perception issue. Factoring fees are often very misunderstood and confused with interest rates.
Otherwise, things are pretty much the same, meaning that in the ordinary course of business, you are still responsible for collecting your accounts promptly. In a worst-case scenario, the customer’s inability or refusal to pay your firm still incurs a bad debt for your company. So far so good, right? We should mention that you can get what is known as non-recourse AR finance, but that is a bit more expensive and essentially tied to the concept of credit insurance.
HOW DOES A FACTORING COMPANY ASSESS YOUR TRANSACTION
A Finance factor firm will hopefully look at the same issues that you look at when you extend credit to your clients - i.e. client references, credit limits, collection history, etc. That's just Business 101 and why large corporations invest hundreds of thousands/millions of dollars into credit and collection departments, ultimately driving the company’s cash flow and operational results for sales and collections.
2 KEY BENEFITS OF AR FINANCE
Benchmarked against the costs of funding receivables are, of course, the benefits. The key benefit is pretty apparent; your firm receives cash essentially the same day as you make your sales. You're now in a position to do something that many of your competitors may not be able to do: offer terms and credit limits to many of your clients that even your competition might not be able to do.
Second benefit. It's virtually unlimited credit to your firm - you're not going cap in hand to apply or renew Canadian chartered bank lines.
THE TRUE COST OF FACTORING YOUR ACCOUNTS RECEIVABLE
So, let's get down to the nitty-gritty. The cost of receivable finance. The key point we want to make today is simply that many Canadian business owners and financial managers don't understand the true cost of what they are paying already, even when they are not factoring. Let’s look at our key example today:
EXAMPLE OF THE COST TO FACTOR A RECEIVABLE
Let's say your firm has made a $10,000.00 sale and has generated an invoice for your client. Let’s say the customer is very late and pays you in 100 days. If we assume your company can borrow money at today’s rates in the 6% range as an example the cost to carry that receivable, i.e. just wait! is approx. $160.00.
What we have just demonstrated is the cost to carry a receivable. If your firm had a receivables funding factor facility in place, a typical cost to fund that receivable for a 60-day period might be 300.00. With that new cash that you have obtained immediately, you are in a position to take supplier discounts, buy more inventory, generate another sale, and make more profits.
Doing nothing and just waiting for a client to pay, carrying your clients, is not a great thing.
FACTORS THAT DETERMINE OF OVERALL A/R FINANCING RATES
Generally, in Canada, factors that determine your AR rates and cost of factoring are your sales volumes, average invoice balances, number of clients, and general perception of your clients' and industry's creditworthiness.
IS CONFIDENTIAL RECEIVABLE FINANCING, THE BEST AR FINANCE SOLUTION
At 7 Park Avenue Financial, Our recommended solution is confidential factoring, which allows you to reap all the benefits we have hopefully noted, with your firm being in control of billing and collections - i.e. no third-party involvement.
KEY TAKEAWAYS
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Invoice Financing
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Working Capital Management
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Cash Flow Optimization
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Credit Risk Assessment
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Factoring Companies
CONCLUSION
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your financial needs regarding receivables funding.
FAQ: FREQUENTLY ASKED QUESTIONS: MORE INFORMATION: PEOPLE ALSO ASK
How does accounts receivable factoring benefit my business? Accounts receivable factoring enables a company to receive immediate access to a cash advance by selling its outstanding invoices to a factoring company for a factoring fee in the 1-2 % range, improving cash flow and enabling business growth.
What are the typical rates for accounts receivable factoring? Factoring rates vary but are often based on invoice volume, customer creditworthiness, and industry risk. Rates typically range from 1% to 5% of the invoice value.
Can businesses of any size benefit from accounts receivable factoring? Yes, accounts receivable factoring is a flexible financing option suitable for companies of all sizes, including startups and small enterprises.
How quickly can I receive funding through accounts receivable factoring? The funding process can be expedited, with many factoring companies providing funds within 24 to 48 hours of invoice verification.
Are there any risks associated with accounts receivable factoring? While accounts receivable factoring can provide immediate cash flow relief, businesses should be aware of potential costs and the impact on customer relationships if invoices are sold to a third party.
How does accounts receivable factoring work? Accounts receivable factoring involves selling your outstanding invoices to a factoring company at a discounted rate in exchange for immediate cash.
What are the primary benefits of accounts receivable factoring? Accounts receivable factoring provides businesses with improved cash flow, reduced credit risk, and access to immediate funds without incurring additional debt.
What factors determine the eligibility for accounts receivable factoring? Eligibility for accounts receivable factoring is primarily based on the creditworthiness of your customers and the quality of your outstanding invoices.
How does accounts receivable factoring differ from traditional bank loans?
Accounts receivable factoring involves selling your outstanding invoices to a factoring company at a discounted rate in exchange for immediate cash, while traditional bank loans require you to borrow a lump sum of money and repay it over time with interest.
What industries commonly utilize accounts receivable factoring?
Various sectors, such as manufacturing, distribution, transportation, staffing, and healthcare, commonly utilize accounts receivable factoring to manage cash flow and improve liquidity.
What happens if my customers fail to pay their invoices after factoring?
Depending on the terms of your agreement, you may be responsible for repurchasing the delinquent invoices from the factoring company or reimbursing them for the unpaid amount.
Can I choose which invoices to factor in, or must I factor them all? Most factoring companies allow you to choose which unpaid invoices to factor in, providing flexibility to select only those invoices that require immediate cash flow assistance. Recourse factoring is the most common form of financing, but non-recourse factoring is available from many firms that take on the credit risk for an added fee.
What alternatives exist if accounts receivable factoring isn't suitable for my business? If accounts receivable factoring isn't ideal for your business, alternative financing options such as traditional bank loans, a line of credit, equipment financing, or merchant cash advances may be considered.
How does accounting for factoring transactions work? In accounting for factoring transactions with an accounts receivable factoring company, the sold invoices are removed from accounts receivable and recorded as cash received. Any fees or discounts associated with factoring are recorded as expenses or interest paid, respectively.
