Harnessing AR Financing Factoring : A Practical Cash Flow Finance Solution

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Cash Flow Finance Solutions In Canada : Are You Part Of  The Factoring &  AR Financing Boom ?
Inside the Business Of ‘Factoring’ In Canada



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Harnessing Accounts Receivable Financing Solutions: An Effective Solution for Business Cash Flow



Cash flow finance solutions in Canada are somewhat misunderstood and growing in popularity. To ensure you are a strong candidate for the A/R Financing boom it's, of course, necessary to understand what this short-term finance tool, aka ' factoring,' is all about





Accounts receivable factoring is a game-changer in business financing, providing a practical way for companies to stabilize their financial situation and drive growth. But what exactly does factoring entail, and how can it strengthen your company's cash flow?

Factoring and financing account receivables is crucial in managing liquidity by allowing businesses to sell their receivables. This enables a company to quickly access cash, reducing credit risk and improving cash flow. Additionally, the infusion of immediate capital empowers companies to fuel their expansion, covering daily operational costs and potentially expanding their product lines or services.





Accounts receivable financing through factoring is a financing method that enables businesses to promptly convert their unpaid invoices into immediate cash by selling them to a third-party company. This eliminates the need for businesses to wait for their customers to settle their invoices before accessing the funds required to sustain their operations. Instead, they can sell their invoices to a factor and receive a portion of the invoice value upfront.


Factoring AR financing is appealing, particularly for small and medium-sized businesses, as it offers a swift and streamlined alternative to traditional financing. It enables these businesses to quickly obtain the necessary funds without enduring the lengthy and often complex procedures associated with conventional financing. Furthermore, it saves companies valuable time and resources by relieving them of the responsibility of pursuing customers to pay outstanding invoices.




The terms  'factoring and accounts receivable ' are often intertwined and sometimes misunderstood - We're going to clarify some issues and debunk some of the misconceptions about how your firm can and should be financing its most liquid asset - accounts receivable! (Next to cash, that is!) So why would a small business need cash flow finance solutions? Let's dig in!


When a company can't leverage bank financing through traditional sources, and if they are unwilling to take on debt via working capital loans, then factoring is one solid solution to leverage cash flow and working capital. 


When appropriately financed, your accounts receivable can also help address other issues on your balance sheet, such as accounts payable and government super-priority payments. Key point - when financed properly!





At 7 Park Avenue Financial, we get that a lot - Banks in Canada do not offer traditional factoring of accounts receivable. They use your invoices are collateral for a business loan.

Factoring companies purchase your receivables, while the bank registers security against your receivables and reserves the right to contact your clients for payment if you default on a loan.


The easiest way to understand it revolves around who owns your receivables, i.e. Banks or financial institutions that have purchased your a/r, or the factoring company. That's the most common misconception about accounts receivable factoring and a traditional bank loan or bank line of credit.


Factor solutions deposit the money into your business account usually the same day, or the next date latest, as you generate sales! The sale of A/R at your option is what factor finance is all about.


Bottom line? Accounts receivable financing is a loan, while factoring is simply the process of cash flowing through your sales. If a bank rejects financing for your business, factoring is an obvious solution and easily accessible as long as you understand the available fees and type of facilities.


The advance rate on factoring finance is usually in the 80-90 percent range, which we note is also much higher than a typical bank advance on receivables which tends to be in the 75% range for your company's AR.






As we have hinted, factoring via accounts receivable finance is not the only be-all and end-all solution. You can add new owner equity to your business or take on debt via a cash flow loan or term debt (Bridge loans or sales leasebacks come to mind).


Those, of course, are fixed options and must be met, come ' hell or high water' as your lender will note. So working capital solutions such as non-bank A/R financing add no debt to the balance sheet, yet they supply the needed cash.


Sales revenues via your receivables investment generate profits for your firm. The goal is to ensure that key assets - your sales & receivables are financed properly - keeping your balance sheet stable. Additional term debt can render your firm 'unstable’ given that not all customers pay immediately!




Not all firms must secure and access business credit lines like bank facilities or commercial factoring solutions. However, when you don't, you'll often limit growth prospects. Self-financing companies are often viewed as stable and prosperous - it's just that without external financing, they don't often grow.


So the solution to growth finance. It's financing your accounts receivables as you generate sales. That helps to meet business goals, increase additional profits and grow the total value of your business.




When business owners / financial managers address the cost of external financing, several scenarios become very obvious:


-  Continue to self-finance and limit growth and competitiveness - including the apparent challenges around working capital and daily cash flows and payment of outstanding invoices

-   Borrow on a term debt or subordinated debt basis

-   Sell receivables as you generate them - increase sales and profits and capture all the opportunity costs of additional working capital


Somehow our third option remains more appealing!


So why do we not hear more about Canadian business owners who have discovered the holy grail of financing? When we talk to customers, we know the answer - they have entered the wrong factor facilities. By the way, every industry in Canada can access a/r financing if they are selling on a business-to-business basis for money.




The fragmented U.S. influence on factoring in Canada has many firms entering into the wrong type of facilities. We advocate CONFIDENTIAL RECEIVABLE FINANCING, also called 'non-notification factoring' with no locked-in contracts and fair, competitive pricing from the financing company. You manage your receivables until the invoice is paid, and you control the number of invoices your firm sells as cash is needed for day-to-day needs of funds.





  • Fixing  cash flow gaps :

    • Businesses can access cash by selling outstanding invoices to a factor.

    • No need to wait for customers to pay invoices, improving cash flow.

    • Especially beneficial for companies with extended payment terms or slow-paying customers.

  • Reduced Debt:

    • Factoring AR financing helps reduce debt compared to traditional financing options from a traditional financial institution

    • No need to take on additional debt through loans.

    • It helps maintain a healthy financial position and avoid financial strain.

  • Increased Flexibility:

    • Factoring AR financing offers flexibility for businesses.

    • No collateral or strict credit requirements.

    • Businesses with less-than-perfect credit can still access financing.

    • Choose which invoices to sell, giving control over cash flow.

    • Particularly useful for businesses with seasonal cash flow fluctuations or unexpected expenses.

  • Leveraging Client Credit History:

    • Factoring AR financing leverages the good credit history of clients.

    • Business credit history is not typically considered.

    • Allows businesses to benefit from their clients' creditworthiness and fund day-to-day operations, paying suppliers, etc





To qualify for factoring AR financing, businesses typically need to meet the following criteria: Creditworthiness. While factoring in AR financing does not require businesses to have perfect credit, they still need to demonstrate that they are creditworthy.

Factors will typically look at the creditworthiness of the business's customers when evaluating whether to purchase their outstanding invoices. Outstanding Invoices To qualify for factoring AR financing, companies must have outstanding invoices to sell to a factor. Factors will typically only buy invoices that are due within 90 days.


Factors will typically work with businesses that are profitable or have the potential to become profitable shortly.



Business owners should ensure they understand the benefits of customer invoice factoring and selling accounts receivables, which can be done via receivable recourse factoring or non-recourse factoring, depending on whether your business wishes to maintain the credit and bad debt risk in your A/R - Non-notification AR financing offered via many factoring companies proves that   Confidential receivables finance is a solid solution allowing you to bill and collect your accounts.


Accounts receivable factoring allows the business owner a solid and easy way to boost cash flows and eliminate cash flow problems as they generate additional sales before your customers pay the invoice. Numerous invoice finance solutions can address your business needs and be similar to a business line of credit with competitive pricing and service fees.


You can also access an asset-based credit line, which is a facility that allows you to borrow against the combined value of receivables, inventories, fixed assets and real estate if the latter is applicable.


Cash flow success is at the heart of small businesses in Canada.  Check out the benefits of selling invoices /financing accounts receivable and receivable finance by working with Canada's best factoring and accounts receivable factoring companies to address cash flow issues.




Solution for Cash-Flow Crunches:

    • Factoring provides a quick alternative when traditional loans are not readily available.

    • Offers a quick injection of cash into the business to address cash-flow challenges.

  • Fast Money Injection:

    • Factoring enables companies to raise money rapidly, providing immediate cash infusion.

  • Streamlined Collections Process:

    • Factoring helps expedite collections, eliminating the need to chase overdue invoices.

  • Debt-Free Financing:

    • Unlike conventional loans, factoring allows companies to generate funds without incurring new debt.

  • Alternative for Challenging Bank Loan Qualifications:

    • Factoring is an excellent option for businesses struggling to qualify for a bank loan due to strict lending criteria.

  • Assistance with Collection Efforts:

    • Factoring can support businesses with limited or non-existent collection departments.

  • Improved Cash Flow and Timely Payments:

    • Factoring ensures fast payment, enhancing the business's cash flow and maintaining healthy supplier relationships.

  • Stress Reduction for Critical Payables:

    • Factoring reduces the stress of meeting terms for important payables.

  • Enhancement of Customer Portfolio:

    • Factoring often results in acquiring better-paying customers, leading to an improved customer portfolio.




AR Financing: The Cash Flow Solution Your Business Has Been Waiting For!


Factoring AR financing/invoice discounting offers valuable benefits for businesses seeking swift cash access with outstanding invoices. Companies can enhance cash flow, reduce debt, and gain flexibility by selling these invoices to a factor. However, businesses must evaluate factors such as fees and other considerations when selecting a factoring company. This guide equips businesses with the necessary information to decide on the suitability of factoring AR financing for their specific needs.

Speak to 7 Park Avenue Financial,  a trusted, credible, experienced Canadian business financing advisor who can assist you with your capital and cash flow needs with tailored financing services.




What is factoring?

The cash flow solution known as factoring is an AR Financing financial solution that allows a company to sell receivables to a third party for cash via a financing company, ' the factoring company. ' Factoring companies buy the receivables at a discount, not an interest rate but a ' factoring fee. '


How does accounts receivable factoring work?

You send invoices to the factoring company as your business sells its products and services. Your business receives 80-90% of the invoice value immediately, and the remaining balance is paid to you when the customer pays the invoice - less a factoring fee in the .75-1.5% range.

How can accounts receivable factoring benefit my business?

 Accounts receivable factoring provides immediate cash flow, which can help businesses meet urgent financial obligations. It also reduces the burden of debt collection and relies on the creditworthiness of your clients rather than your credit history. Furthermore, it can support business growth by providing the necessary funds to invest in new opportunities.



Are there any downsides to accounts receivable factoring? 

Yes, like any financial solution, factoring has some downsides. These include the factoring fees you must pay, which may result in receiving less money than if you waited for the customer to pay. It's essential to weigh these costs against the benefits for your specific business situation.


What types of businesses can benefit from accounts receivable factoring?  


Any business generating B2B or B2G invoices can benefit from accounts receivable factoring. This includes businesses in various industries like manufacturing, transportation, wholesale, and more. It can benefit small to mid-sized companies or those with cash flow challenges.

Any business generating B2B or B2G invoices can benefit from accounts receivable factoring as the factoring company pays the company a cash advance as sales and invoices are generated. These cash advances ensure positive cash flow for the company. This includes businesses in various industries like manufacturing, transportation, wholesale, and more. It can benefit small to mid-sized companies or those with cash flow challenges.


What is Recourse Factoring?

Recourse factoring is when a business sells its outstanding invoices to a factor but remains responsible for collecting payment from its customers. If a customer fails to pay an unpaid invoice, the business must buy back the invoice from the finance company.. Recourse factoring is typically less expensive than non-recourse factoring but carries more risk for the company.


What is Non-Recourse Factoring

Non-recourse factoring is when a business sells its outstanding invoices to a factor, and the factor assumes the risk of non-payment by the customers. If a customer fails to pay an outstanding invoice, the factor absorbs the loss, and the business is not responsible for paying the invoice. Non-recourse factoring is typically more expensive than recourse factoring, but it carries less payment risk for the company.


What are Common Misconceptions About Factoring AR Financing


There are several common misconceptions about factoring in A/R financing. Here are a few of the most common:


Factoring AR Financing is a Last Resort

Many businesses believe that factoring receivables is a last resort and should only be used when all other financing options have been exhausted. However, factoring AR financing from commercial finance companies can be a viable financing option for businesses of all sizes and stages of growth.

Factoring AR Financing is Expensive

While factoring AR financing can be more expensive than traditional financing options, it is often more affordable than taking on additional debt or missing out on business opportunities due to cash flow shortages. Factoring AR Financing is Complicated

Factoring invoice financing is often less complicated than traditional financing options. The process is straightforward, and the accounts receivable factoring company/finance company typically handles much of the administrative work involved in collecting payment from the customer. When traditional notification factoring is utilized, the factoring company takes responsibility for collections.



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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