The Secret to Unlimited Working Capital

Q: What is receivable financing?

Receivable financing is a financial strategy where businesses sell their accounts receivable or invoices to a third party, known as a factor, in exchange for immediate cash. Visit: https://www.7parkavenuefinancial.com

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The Ultimate Guide to Receivable Financing for Canadian Businesses

Introduction

Cash Flow Crisis? Your Invoices Hold the Solution

Your business is thriving, orders are pouring in, but cash flow remains tight because customers take 30-90 days to pay.

Meanwhile, suppliers demand immediate payment, payroll is due, and growth opportunities slip away.

2 Uncommon Takes on Business Receivable Factoring

Receivable financing solutions in Canada, often called "business factoring," offer a genuine second chance regarding the business owner or financial manager's ability to turn adversity into opportunity.

This business finance solution for small business and SMEs in Canada goes by a few names: invoice factoring, invoice discounting, receivable factoring, etc.

Different Forms of Factoring

There are different forms of factoring, so we forgive new clients at 7 Park Avenue Financial for sometimes getting overwhelmed with the terms!

The ability of your company to turn cash flow for business challenges into a significant win in working capital and cash flow might just come from one of Canada's newer forms of business financing, called "business factoring." It's a popular business loan solution for thousands of Canadian businesses.

The Cash Flow Challenge

Getting the order or sale, and then getting paid. The old cliché of "the order is not complete until it's paid for"—as trite as that sounds—seems to hold even today, especially for new, small, and medium-sized firms.

Many clients we meet with are in the enviable position of getting larger orders and contracts than they might have imagined based on their innovative products and services. But with that success, as we noted, comes the challenges of cash flow financing.

Impact of Economic Turmoil

During the past few years, with all the economic turmoil, Canadian business financing options seem limited or have disappeared—that's how many clients feel.

The impact of accounts receivable growth is a huge challenge, not to mention inventory and purchase order/contract funding needs. Many companies find traditional bank financing restrictive because Canadian banks can't meet their business credit needs.

The concept of "selling A/R" to a third-party factoring company and generating immediate cash as you grow sales has become popular with thousands of companies in Canada.

This differs from assigning accounts receivable to a bank. Note that almost all of the commercial factoring in Canada is done by nonbank commercial lenders.

Canadian banks will often refer customers seeking A/R financing to a specialty lender or an experienced advisor familiar with factoring.

Advantages of Factoring versus Other Types of Financing

There are, of course, some significant differences between A/R finance and the concept of a commercial loan versus solutions from factoring companies.

This type of business credit is not a loan per se—your company does not take on debt on your balance sheet. The amount of factoring financing is directly related to the amount of your A/R.

Almost every industry in Canada uses factor financing. Industries in the oil and gas sector, staff placement, manufacturing, distribution, wholesaling, trucking, technology, and business services are all major clients of the receivable financing industry.

Although some businesses are financially challenged in some manner, the proverbial "bad credit" industry statistics show that the factoring industry is experiencing strong growth and popularity.

Business cash flow, à la "cash is king," has never been more relevant for the economy.

Key Points in Determining the Financing Value of Your Accounts Receivable

Numerous factors are considered when commercial lenders set up their accounts receivable financing facility.

It's all about the true value and quality of your A/R. Regarding your accounts receivable aging, it's no secret that newer invoices have more significant value—numerous industry statistics validate that point.

Setting Up Your A/R Financing Facility

Generally, borrowers will be pleased to know that the entire application process in setting up your facility is straightforward.

How Receivable Financing Works

Receivable financing from invoice factoring companies, addresses the issues of your customers paying you in 30, 60, or, dare we say it, 90 days.

You can carry those receivables and continue to invest highly in current assets, or you can turn your sales into immediate cash. Let's cover some other basics around how this innovative method of business financing works which is similar to a line of credit as a total solution to a company's cash flow.

Companies typically opt for "recourse factoring," from invoice factoring providers, which carries the traditional risk around bad debt and collection on unpaid invoices.

Unpaid accounts receivable /outstanding invoices can also be addressed via an invoice financing company by opting for a non recourse factoring agreement, which transfers credit/payment risk to factoring companies -the factoring company collects or absorbs credit risk.

The Cost of Factoring

Key Takeaways

Receivable Financing/Invoice Financing is a business selling/financing its accounts receivable (invoices) to a third party (a factoring firm) at a discount for the cash advance. It's a financial transaction where a business sells its receivables to get immediate cash.

Difference from Traditional Financing: Account receivable factoring is not debt, unlike a traditional bank loan. The company doesn't incur any new debt on its balance sheet. Instead, it's an advance against your invoices—thereby addressing cash flow issues in the company.

Industries That Use Factoring: Almost every sector, from oil and gas, staffing, and manufacturing to business services, utilizes this financing form. It's trendy among businesses with extended payment terms with their customers but need cash sooner in areas such as supply chain financing.

Advantages: The primary benefit is immediate cash flow. Instead of waiting for customers to pay their invoices in 30, 60, or even 90 days, businesses get most of the money right away. It's also useful for companies that might not qualify for traditional bank financing as a typical financial institution due to restrictive conditions.

Costs and Setup: The cost of factoring typically ranges from 1 to 1.5 percent a month in Canada. Companies must provide a credit application, A/R and A/P aging, incorporation details, and a sample invoice to set up an invoice purchasing facility. Occasionally nominal services fees might apply.

Case Study

Manufacturing Company Doubles Production Capacity

AToronto-based manufacturer, struggled with 60-day payment terms from major customers while facing immediate material costs. Traditional bank lending required extensive collateral and lengthy approval processes.

By implementing business receivable factoring through 7 Park Avenue Financial, the company accessed 85% of invoice values within 24 hours.

Within six months, the company doubled production capacity and increased annual revenue by 40%. The factoring relationship provided not just funding but also professional credit management and collections support.

"Factoring transformed our business from constantly worrying about cash flow to confidently pursuing growth opportunities," said the company owner.

Result: Sustainable growth, improved vendor relationships, and elimination of cash flow stress.

Conclusion

In summary, at its core, "cash flow business factoring and receivable financing" revolves around businesses selling their invoices to third parties to generate immediate cash flow. This method offers a solution to the cash flow challenges that many businesses face, especially those with long invoice payment terms or those who might struggle to secure traditional financing.

It is essential to understand how accounts receivable factoring work and why it can be valuable to your business in good times and less than good times! Your firm accelerates cash flow and unties the capital you have invested in sales to clients.

If you want to factor receivables, call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your business factoring and A/R financing needs.

FAQ

What is receivable financing? It's a financial strategy where businesses sell their accounts receivable or invoices to a third party, known as a factor, in exchange for immediate cash.

How does this differ from a traditional bank loan? Unlike bank loans, factoring isn't debt. You're essentially getting an advance against your invoices, so there's no new liability on your balance sheet.

Which industries commonly use this form of financing? Factoring is popular across many sectors, including oil and gas, staffing, manufacturing, and business services, especially those with extended invoice payment terms.

What are the primary benefits of using factoring? The main advantage is instant cash flow from the financing company versus waiting for clients to pay their invoices. Businesses receive a majority of the money upfront, aiding in consistent business operations.

Are there any associated costs with factoring? Yes, Canada's factoring fee typically ranges around 1 to 1.5 percent a month. This cost is a percentage of the invoice amount and is deducted from the final payment.

How does receivable financing differ from other financing options, such as traditional bank loans? Receivable financing focuses on advancing cash against invoices, unlike traditional loans, which add debt to a company's balance sheet. For financing companies, the company's credit history is not as important as the quality of the accounts receivable.

Is there a limit to how much a business can factor? No, there's virtually no upper limit in factoring receivables. The amount is tied directly to the volume and quality of your accounts receivable.

What's the typical time frame for setting up a factoring facility? The setup process for a factoring facility is straightforward and can be arranged relatively quickly, especially with the right documentation.

Are all invoices eligible for factoring? Most invoices for completed work or delivered products are eligible, but their value may depend on the invoice's age and the client's creditworthiness.

Can businesses choose which invoices to factor? Absolutely! Businesses can decide whether to factor specific invoices, a portion of their A/R, or their entire accounts receivable portfolio.

What types of businesses benefit most from business receivable factoring? Business receivable factoring is most effective for B2B companies with creditworthy customers, including manufacturers, staffing agencies, transportation companies, wholesalers, and service providers that invoice other businesses rather than consumers.

How quickly can I access funds through business receivable factoring? Business receivable factoring typically provides funding within 24-48 hours of invoice submission, with some companies offering same-day advances for established clients with verified customers.

What percentage of my invoice value can I receive immediately? Business receivable factoring typically advances 70-90% of invoice value immediately, with the remaining balance (minus fees) paid when your customer settles the invoice.

Do I need good credit to qualify for business receivable factoring? Business receivable factoring approval depends primarily on your customers' creditworthiness rather than your business credit score, making it accessible to companies with credit challenges.

What fees are associated with business receivable factoring? Business receivable factoring fees typically range from 1-2 % of invoice value, varying based on factors like customer credit quality, invoice volume, and payment terms.

Who qualifies for business receivable factoring services in Canada? Business receivable factoring qualification focuses on B2B companies with creditworthy customers, regardless of the business owner's personal credit history or time in operation.

What documents are required for business receivable factoring approval? Business receivable factoring requires basic documentation including recent invoices, customer payment history, business registration, and bank statements to verify transaction patterns.

When should a business consider using receivable factoring services? Business receivable factoring becomes valuable when cash flow gaps exceed 30 days, growth opportunities require immediate capital, or seasonal fluctuations create working capital shortages.

Where can Canadian businesses find reputable receivable factoring companies? Business receivable factoring providers operate throughout Canada, with many offering nationwide services through online platforms and regional offices in major business centers.

Why choose receivable factoring over traditional business loans? Business receivable factoring offers faster approval, no debt creation, automatic scaling with sales growth, and approval based on customer credit rather than business credit history.

How does the business receivable factoring process work? Business receivable factoring involves submitting invoices, receiving immediate advance payment, and collecting the balance when customers pay, with the factor handling collections.

What industries commonly use business receivable factoring? Business receivable factoring serves diverse industries including staffing, transportation, manufacturing, wholesaling, and professional services that invoice business customers.

How much does business receivable factoring cost compared to other financing? Business receivable factoring costs vary but often prove more economical than emergency loans or lost opportunities from cash flow constraints.

When do factoring companies pay the remaining invoice balance? Business receivable factoring companies pay remaining balances within days of collecting payment from customers, minus agreed-upon factoring fees.

What credit requirements apply to my customers for factoring approval? Business receivable factoring approval requires customers to have reasonable credit ratings and payment histories, typically verified through credit agency reports.

How does business receivable factoring improve cash flow management? Business receivable factoring provides immediate access to invoice value, eliminating 30-90 day payment waits and enabling consistent cash flow for operational expenses and growth investments.

What competitive advantages does factoring provide over bank financing? Business receivable factoring offers faster approval, no collateral requirements, automatic credit line increases with sales growth, and qualification based on customer creditworthiness.

How can factoring help businesses during seasonal fluctuations? Business receivable factoring provides flexible funding that scales with invoice volume, supporting businesses during peak seasons while reducing during slower periods without fixed payment obligations.

What operational benefits beyond funding does factoring provide? Business receivable factoring includes credit screening services, collections management, and accounts receivable administration, effectively outsourcing these time-consuming functions.

How does factoring support business growth and expansion? Business receivable factoring provides immediate working capital for inventory purchases, equipment acquisition, and staff hiring, enabling businesses to accept larger orders and pursue growth opportunities.

Is business receivable factoring the same as getting a loan? Business receivable factoring is not a loan but an asset sale where you sell your invoices for immediate cash, creating no debt on your balance sheet.

Can I factor invoices from all my customers? Business receivable factoring allows selective invoice factoring, meaning you can choose which invoices to factor while collecting others directly from customers.

What happens if my customer disputes or doesn't pay a factored invoice? Business receivable factoring agreements vary, but many include recourse provisions where you're responsible for customer non-payment, while others offer non-recourse protection.

How long are typical factoring agreements? Business receivable factoring agreements range from month-to-month flexibility to annual contracts, with many companies offering trial periods for new clients.

Will my customers know I'm using a factoring company? Business receivable factoring can be structured as notification (customers pay the factor directly) or non-notification (you collect payments and remit to the factor).

How does business receivable factoring differ from asset-based lending? Business receivable factoring involves selling invoices for immediate cash, while asset-based lending uses receivables as collateral for a loan that must be repaid with interest.

What factors determine the advance rate in receivable factoring? Business receivable factoring advance rates from most factoring companies depend on the customer's credit quality, invoice payment history, industry risk factors, and the overall strength of the relationship with the factoring company.

Can startups and new businesses access receivable factoring? Business receivable factoring is available to startups and new businesses since approval focuses on customer creditworthiness rather than business operating history or credit scores.

Citations

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR: Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Business Receivable Factoring: Canada's Premier Cash Flow Solution | 7 Park Avenue Financial