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ACCOUNTS RECEIVABLE FINANCING VIA FACTORING COMPANIES
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Business receivable factoring in Canada. We suppose you can overthink anything in business today, but top experts in Canada say that more and more companies are choosing financing with receivables as their stated cash flow and working capital strategy. Let's examine why that might be the case with AR finance. Let's dig in on financing accounts receivable!
FINANCING RECEIVABLES FOR THE RIGHT REASON
There are of course a number of ways in which the Canadian business owner and financial manager can finance their cash flow for the goods/services your company sells. Next to 'cash on hand' of course receivables are your most liquid asset. Therefore their ability to turn customer commitments, i.e. your accounts receivable, into that 'cash on hand' is an attractive option - if you're doing it for the right reasons, and also ' doing it right!’
When we say doing it right we mean of course that there are a number of different approaches and options available to the business owner/ financial manager. All of those options revolve around the risk your finance partner is willing to take, and how your facility operates on a daily basis.
BANK FINANCING VERSUS COMMERCIAL A/R FACTORING
Chartered banks of course finance receivables - they do this under their ability to provide Canadian business with an operating line of credit. Their approach differs from factoring, aka ' invoice discounting, aka invoice financing. Your firm holds the risk of collecting your accounts while the bank holds the security to your accounts receivable, typically via a GSA, a general security agreement on all your company. Outstanding invoices and the average invoice amount play a role in final pricing considerations when factoring receivables. It's a short term funding, not a long term solution but nevertheless an effective cash management strategy.
THE PAPERWORK DIFFERS IN BANK FINANCE OF RECEIVABLES VERUS FACTORING
AR finance differs in that the mechanism under which your receivables are financed in a manner where the paperwork has you selling your A/R as you generate those sales. Ultimately under both scenarios, the bank and the finance factor firm, you have the ability to borrow and draw down on your receivables as you generate revenue. Naturally, it’s your call as to how much you borrow and when according to your needs.
AR FINANCE CAN BE COMBINED WITH OTHER ASPECTS OF ASSET BASED LENDING
We also point out to clients that financing your accounts receivable is essentially a subset of asset-based lending and bank borrowing in Canada. Depending on whether you are dealing with a bank or an asset-based lender you also have the ability to margin your inventory and equipment assets into a business line of credit. We don't want to get overly complex today, but there is also a business financing mechanism called ' Securitization' which is a more sophisticated form of moving your receivables from your balance sheet while generating cash. This is used by larger corporations and finance firms, but not today's subject matter - but worth mentioning.
FACTORING ACCOUNTS RECEIVABLE EXAMPLE
In business receivable factoring you simply pay a fee, called the 'discount fee' every time you finance via discount factoring, In Canada on a typical $ 10,000.00 invoice that fee would typically be $200.00 for a 30 day period. It's similar to a small business line of credit on an ongoing basis based on your funding needs. Financing the balance sheet via effective funding of current assets such as receivables and inventory is the key to business finance success.
WHAT IS THE BEST TYPE OF FACTORING
It's important to spend a lot of time, and get some solid advice around a business receivable factoring facility that you are paying for only what you use. You would be surprised at some of the tricks of the trade when it comes to the fine print from certain finance firms. In fact, at 7 PARK AVENUE FINANCIAL, our own chosen and recommended method of financing is the ' Confidential receivable finance ' solution via the right financing company, allowing you to bill and collect your own receivables and only pay for what you use when you want. Bottom line, you’re in charge. You can also choose between non recourse factoring or recourse factoring, allowing you to keep or transfer the bad debt risk at your option.
Don't get caught in the ' illusion ' of thinking you understand all the technical aspects of AR finance for small businesses and even larger companies for that matter. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your cash flow financing needs when it comes to accounts receivable factoring for your working capital needs.
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