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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
Asset-based invoice finance solutions, also known as ' receivable factoring / invoicing financing ' has become a ' steady as a fault ' business finance solution for thousands of Canadian businesses who utilize it as their main working capital source. Why asset-based lending and how does it work? Let's dig in.
RECEIVABLE FINANCING
Accounts Receivable financing / factoring provides companies with an efficient and, most importantly fast method to finance sales based on the overall credit profile of their customers. Small and medium-sized companies - the SME sector of Canada utilizes this method of financing their business when traditional financing may not be available through banks, others. These facilities are more complex when they are part of an asset based loan and non-bank line of credit similar to bank credit lines.
We can make the case that asset-backed invoice financing could be called ' ABL light ' - it is utilized for firms that don't require full-service non-bank lines of credit that require monetizing and funding your inventories and fixed asset such that an asset based line of credit would.
One expert has stated it quite nicely - simply that invoice finance is quicker and easier to put in place than asset based loans, and those ABL full liens are much easier to get approved for than traditional Canadian bank finance.
Thousands of businesses in Canada find it a challenge to manage their businesses from ' get up and go ' to a ' get up and grow ' stage. Firms that are new, smaller, or financially challenged in some way find it even more difficult...
WHY FINANCE RECEIVABLES
Although the cost to finance accounts receivable is in the 1.5-2% range, which of course necessitates a reduction in that amount from your profits thousands of Canadian companies use this method of funding operations to increase their business funding and take some of the pressure off the process of collecting your receivables promptly.
All business financing in Canada comes with a cost and risk - while many firms shy away from this method of financing the balance sheet solely due to cost they often don't realize the true cost of carrying their own receivables and the management focus required on that issue. And of course, you are still responsible for any bad debt. Also utilizing facilities such as CONFIDENTIAL RECEIVABLE FINANCING allows you to avoid any of the 'notification' aspects of this method of finance - allowing you to bill and collect your own receivables!
So how does this all work? It’s simpler than you might think. Given that your accounts receivable are typically the largest next to liquid cash asset that your company has, this asset becomes your short term financing strategy. The result? With the right solution in place you're now in a position to meet payrolls, buy products and services, and... dare we say it... grow your business.
By ' pledging' your receivables as the asset you are ' monetizing ‘you’re in effect securing ongoing short term lending via an asset-based financing solution. Here it's important to emphasize though this is not a loan/debt scenario. The Accounts Receivable factoring paperwork/security documents position your company as selling your receivables as you generate sales to access the amount of cash flow you need.
DO BANKS OFFER INVOICE FINANCING?
While Canadian chartered banks have ' dabbled' in asset based invoice finance / invoice factoring , the reality is that on balance 99.9% of all receivable invoice financing is done via a pure factoring company or commercial finance firms who compete with the banks for your working capital business credit lines.
If it was all about price and rate the banks would win hands down, given that commercial receivable financing from factor firms is more expensive than those low bank rates. The reality though is that many businesses can't qualify for the amount of financing they need in part or whole.
If you're looking for some even better news in how these facilities working then consider looking into Confidential Receivable Financing, which allows you to garner all the benefits of ' traditional’.. aka ' old school' factoring but given you the power to do all the invoicing and collecting with no notice to your clients, suppliers, etc. This eliminates the ' notification' required by old school firms that insist your clients be notified of what's going on.
5 REASONS WHY CANADIAN COMPANIES UTILIZE ASSET BASED INVOICE FINANCE
The majority of firms that utilized asset based via a factoring company invoice finance facility do this as a bridge to going back to accessing traditional bank capital. Typical current scenarios in their businesses include:
1. An urgent requirement for cash flow
2. Inability to get Canadian chartered bank financing
3. Requiring more cash flow than is typically available
4. High growth
5.The requirement to carry higher levels of inventory and A/R
THE A/R RECEIVABLE FACTORING FORMULA
The formula for receivable factoring is quite simple:
Your receivables are eligible for 90% financing of your month-end a/r for all accounts under 90 days (Note - if you have a/r over 90 days you probably have a bigger problem )
Receivable factoring is not a loan, brings no debt to your balance sheet, is easier to get approved. Factoring comanies allow you to grow in an almost unlimited manner as long as you have revenues that are stable or growing.
CONCLUSION
Despite some of the perceived costs and issues around factoring via asset finance solutions thousand of businesses continue to utilize this method of Canadian Business Financing successfully. The attraction of instant financing, as you generate sales is key to a/r finance Generating cash via asset finance factoring, allows for the immediate reinvestment of that cash into the business - to fund operations and grow the company. In many cases that allows a company to take on additional projects, in some cases larger than the company might be able to take on otherwise.
The greatest advantage of debt factoring is its ability to improve cash flow, as it allows businesses to instantly release the cash value of their invoices. This means that they can instantly use the cash to operate and reinvest in the business.
At 7 Park Avenue Financial, we also point out to clients that PURCHASE ORDER FINANCING is also a solution to an SME firm taking on larger business volumes. Companies that utilize this method of financing successfully stay on top of their receivables and utilize the cash they generate from this financing to fund operations, not long term asses or corporate objectives. Many firms utilize asset-backed financing solutions as a bridge to get back to traditional financing and in our experience, at 7 Park Avenue Financial, these facilities tend to last a year or so.
If you're suspecting that the bank financing you seek is somewhat remaining in the bank vaults seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with ' steady to a fault ' asset loans and financing solutions.
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Stan Prokop 7 Park Avenue Financial/Copyright/2020
