YOUR COMPANY IS LOOKING FOR FACTOR RATES!
Understanding Accounts Receivable Factoring / Invoice Factoring
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Financing & Cash flow are the biggest issues facing business today
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Oakville, Ontario
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We rarely meet a client who is comfortable enough to say they are a ' Master ' of AR financing pricing when it comes to receivables financing and factor rates vis a vis overall rate structure in Canada. Let's see if we can help you achieve some ' Master ' status in this often-confusing (but shouldn’t be) area of business financing in Canada. A factoring rates comparison is challenging for those not familiar with the terminology of the a/r finance industry, so let's dig in.
So What does it mean to factor receivables, and what is the cost involved - At 7 Park Avenue Financial that's a common question we get from new clients. The answer is that factoring receivables has become the go-to strategy for small and medium-sized businesses who struggle with working capital and cash flow solutions they require to fund their business. Through a method of ' purchasing a/r ' as opposed to taking an 'assignment of your a/r ' similar to a bank, your business can become a cash flow machine based on your revenue generation. Business experts use the term ' pledging accounts receivable ' via bank financing , while factoring is the collection of your receivables via yourself or a factoring company.
THE BOOKKEEPING AND ACCOUNTING AROUND THE FACTORING TRANSACTION
So why is there a combination of mystery and clarity around using just your accounts receivable for cash flow and working capital financing? It's key to remember that when you look at this type of financing it's important to understand what is happening, shall we say ' beneath the transaction'. Because factoring/receivable financing in Canada is essentially the sale of you receivable and that's how it must be both recorded in your bookkeeping and accounting.
Let's get some of that ' boring' accounting out of the way quickly. The entry is pretty basic - it’s a ' CREDIT ' to your accounts receivable and a DEBIT (that’s an increase in your cash by the way) to your cash account. Mission accomplished!
THE COST OF FACTORING FINANCE IS NOT AN INTEREST RATE - IT IS A DISCOUNT FEE
Since your factor company/financing partner takes a discount fee for purchasing your receivables, either once, or on an ongoing basis you also have to take into account the financing charge, so that’s an additional entry as a DEBIT to your interest account. Factoring rates are expressed as that ' discount ', which is why factoring cost is often misunderstood by borrowers, especially when companies are unable to achieve standard ' 30 days ' terms.
One final entry, and we promise, it’s the last one, but when complete you will have now understood the actual mechanics of AR finance pricing. That entry involves the ' holdback ' since typically you receive only 90% of your invoices as cash as you generate them. The 10% is a holdback; - you receive that when your client pays, so you need to set up one final entry as ‘DUE FROM FINANCE FIRM '. The 90% is known as the advance rate, meaning that your firm was advanced 90 percent of the total invoice.
WHAT IS THE BEST FACTORING COMPANY OFFERING
IT'S ' CONFIDENTIAL ' !
If we had to be honest in the world of factoring companies (that’s our preference always!) we would have to say that our favourite/ recommended method of financing receivables is a Confidential Receivable Financing ‘arrangement - that is one in which your firm bills and collects your own receivables - i.e. how you finance your business is your own business!
4 KEY BENEFITS OF RECEIVABLE FINANCE
That type of arrangement via a factoring company still allows you to receive all the benefits of receivables finance:
Immediate cash on your sales generations
Balance sheet strength
Ability to take supplier discounts and achieve better vendor pricing
Factoring is not consider loan / debt financing - no debt goes on your balance sheet - you are simply monetizing assets , namely receivables
Etc!
Those benefits help you offset the cost of the factoring rate, sometimes in its entirety.
CONCLUSION
Business owners and financial managers are looking for fast and flexible factoring solutions, but they also want to understand the cost of factoring as well as benefits and potential disadvantages - Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help you simplify Canadian receivable financing.
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Stan Prokop
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