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Confidential A/R Finance is a method that allows Canadian business owners and financial managers to benefit from the best parts of business accounts receivable factoring from factoring companies. How is this method superior to traditional A/R finance? Let's dig in.
MANAGING AND FINANCING RECEIVABLES IS A CHALLENGE
Carrying a business receivable, of course, always involves some level of risk when it comes to accounts receivable financing. Your ability to both manage and monetize your sales into cash is one benchmark of any successful business. That cost of extending business credit to customers is a key part of a/r financing/invoice factoring works and confidential receivable finance, also known as non - notification factoring in receivables factoring terms.
WHY COMPANIES DON'T FINANCE RECEIVABLES VIA A BANK OR FACTORING ARRANGEMENT
If you’re not financing your trade receivables / unpaid invoices through a bank, you either are self-financing and comfortable and successful with that or are simply unable to meet bank requirements for all the working capital business credit you need when it comes to invoicing amount and sales revenues and general creditworthiness of your client base.
DOES YOUR FINANCING SUPPORT YOUR SALES LEVELS?
Naturally, if your business can't finance your working capital and cash flow needs without receivable financing, you are not in a position to support sales through the ability to finance customers, purchase inventory, and fund operating expenses through normal accounts receivable turnover.
WHAT ARE THE ADVANTAGES OF USING A FACTORING COMPANY VIA DEBTOR FINANCE?
While most clients we meet seem to focus on both trying to understand how this method of financing works or what it costs, they seem to forget some of the other key benefits of financing your firm in this manner.
Factoring companies can be a beneficial service for businesses of all sizes because they provide potential mitigation of bad debt risk ( non-recourse factoring ) while allowing continued working capital liquidity. Start-up companies and newer businesses without a finance track record are excellent candidates for a/r financing - allowing them to not have to wait to receive funds from clients for their goods or services.
KEY BENEFITS OF FINANCING A/R
1. The ability to substantially strengthen and increase supplier relationships - i.e. paying them on time, purchasing more
2. The ability to capitalize on opportunities for growth - that might include larger contracts or new customers in other geographies within Canada or the U.S. (Non-North American receivables tend to need to be financed via credit insurance of some type)
3. Your overall business credit rating is critical to your long term success, and factoring via confidential AR finance as cash flow and payables can more easily be managed among all suppliers - Factoring costs can be reduced via efficient credit granting and better collection of receivables making even more sense for this fast funding solution
ACCOUNT RECEIVABLE FACTORING - HOW TO FACTOR INVOICES
Gaap accounting for factoring via accounts receivable factoring companies is easily handled by your accountant or bookkeeper.
So how do you record factored accounts receivable as a business owner - it's simple
1. The invoice is a credit to A/R
2. Cash received from the factor company is a debit to the cash account
3. The factor fee is recorded as a debt
We've shown that confidential invoice factoring allows you to fund your business in an unlimited manner without your customers and suppliers having any indication of how you are funding your company. This avoids the typical process around what we at 7 Park Avenue call ' old school' factoring, which has you go through an invoice verification process, as well as notification to your clients.
In most circumstances, you as a company do not want third parties to know how you are financed. In some cases, you might be asked to go through the uncomfortable process of showing your contracts and sales agreements with valued suppliers - allowing the factoring company to verify payment terms, etc.
At 7 Park Avenue Financial, we spend a lot of time explaining to clients that the confidential invoice finance solution makes your funding sources virtually non-existent. Certain industries almost demand that level of confidentiality.
UNLIMITED BORROWING POWER
Don't forget that there is typically no upper limit on your borrowing power under a commercial A/R financing facility with a factoring company.
That differs substantially from Canadian chartered bank credit lines, if only because those bank facilities tend to be capped at a certain limit. We should also mention that many customers who can, in fact, get approved by a bank often find themselves in the position of having a low cost of funds but not being able to access all the capital they need.
TALK TO 7 PARK AVENUE FINANCIAL ABOUT HOW CONFIDENTIAL A/R FINANCE WORKS!
So how does Confidential A/R finance work? Most factoring companies will consider this type of non-notification credit facility - While it is priced competitively to other forms of non-bank financing, it allows you to bill and collect your receivables under your own name- accessing all the capital you need concerning your sales growth. So, in our words, success and still being ' practically invisible '!
Your firm is qualified for Confidential non-notification factoring if you maintain proper financials and a/r ageings, have been in business for at least a year or two, and if you have a broad base of clients. It goes without saying ( hopefully!) that you have a solid credit policy and your client base is generally creditworthy. Firms with a reasonable level of bad debt experience should be able to demonstrate that and they will achieve good ar factoring rates.
FACTORING RECEIVABLES WITH RECOURSE / FACTORING RECEIVABLES WITHOUT RECOURSE
A business can choose non-recourse factoring as an invoice finance solution from an accounts receivable factoring company - transferring credit risk to your finance company under an asset-based receivable facility. Under recourse factoring, a company maintains credit and bad debt risk on their client base.
The small business funding challenge is always present. Not all factoring companies are the same - If you're interested in exploring what top experts deem to be the most innovative part of factoring, speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can help you make that ' inside secret ' into cash flow success.
FAQ: FREQUENTLY ASKED QUESTIONS/PEOPLE ALSO ASK/MORE INFORMATION ON FACTORING
How does accounts receivable factoring work?
Receivable factoring is a financial transaction and the process in which companies sell their accounts receivable to finance companies that specialize in buying and collecting accounts receivables at an agreed-upon advance rate and factoring fee. The business receives cash upfront prior to collection of the receivable from receivable factoring companies.
What is an example of factoring of accounts receivable?
For a example of factoring in finance and using a 100,000$ invoice as an example, a company will receive an advance on the invoice of 90,000 when they provide goods or services and factor the receivable. The company receives the remaining 10,000, which is viewed as a holdback by the factoring company, less the factor fee, which is typically in the 1-2% range for a 30-day collection period common in receivables factoring.
The factoring company charges a ' factoring fee ' for factoring invoices and those factoring fees are not an interest rate per se and the fee is a function of the time taken for clients to pay the invoice.
What are factoring companies? What is the meaning of factoring in finance?
Factoring is a short-term finance business financing service in which a company sells its accounts receivables / unpaid invoices to a third-party factor company. The factoring company pays the invoice to the company at an agreed-upon advance rate. The factoring invoice companies are usually commercial finance companies in the asset based lending and factoring industry who buy the receivables at an agreed-upon factoring fee which is the cost of factoring - Factoring companies are usually private corporations, although some are public entities.
What is days sales outstanding?
Days sales outstanding is also known as 'DSO' and is a calculation of the average number of days t a company takes to collect client payments after a sale has been made for goods or services. DSO is a key performance metric for financial success and small business management for many companies focused on working capital management
How much does accounts receivable factoring cost?
Various factors reflect the cost of financing accounts receivable, including the size of the facility, the number of invoices a firm generates and the time in which it takes to collect the payment from clients - Companies can finance individual invoices or finance their a/r in bulk amounts on a regular ongoing basis. Advance rates on the invoice are typically higher than bank margin rates, and typical factor fees are in the 1-2% range per month - a company with good gross margins is a good candidate for receivable factoring.