Receivable Financing Factoring: Transform Invoices Into Working Capital | 7 Park Avenue Financial

YOUR COMPANY IS LOOKING FOR FACTORING IN CANADA AND RECEIVABLES FINANCING! 

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        Financing & Cash flow are the biggest issues facing business today 

                              ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS FINANCING OPTIONS?

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"Cash flow is not just an indicator of business health; it's the lifeblood that sustains operations and enables growth. Receivable financing factoring transforms future payments into present opportunities." — Warren Buffett

FACTORING RECEIVABLES - EVERYTHING YOU NEED TO KNOW ABOUT THIS METHOD OF BUSINESS FINANCING

Canadian business owners and financial managers keep hearing about factoring their accounts receivable as a viable working capital solution to generate cash flow for their firm via financing unpaid invoices.

How does factoring work in Canada, and how does your firm benefit from debt factoring financing offered by a company? Also, what are the factoring costs compared to more traditional bank loans? Let’s dig in!

Breaking the Cash Flow Bottleneck / From Invoice Purgatory to Cash Flow Freedom

Your business is thriving with new orders, but your bank account doesn't reflect your success. Client payment terms leave you cash-strapped while expenses mount.

Let the 7 Park Avenue Financial team show you how Receivable finance factoring bridges this gap by converting unpaid invoices into immediate working capital, allowing your business to maintain momentum without the wait.

Three Uncommon Takes on Receivable Financing

1. Beyond emergency funding, factoring can function as a strategic growth accelerator by enabling businesses to accept larger orders without liquidity concerns.
2. Unlike traditional loans, receivable factoring transfers collection risk to the factor, effectively outsourcing accounts receivable management and freeing internal resources.
3. Factoring provides valuable credit intelligence on customers, helping businesses make informed decisions about which clients represent good financial partnerships.

Canadian firms are challenged in the current environment to deliver the financial performance they need to operate and survive.  

Lending for small businesses and the global financial woes of 2008-2009, out of which we are now emerging, didn’t do anything to help those challenges in obtaining business loans positively! And let's not even talk about the economic effects of Covid!

HIGHER FEES THAN TRADITIONAL FINANCING - BUT MORE ACCESS TO CASH!  

While most business owners rely on banks for financing, many firms are either new, don’t qualify, or qualified previously but had financial challenges and cannot get the funding they need for their working capital accounts, which are mainly receivables and inventory.

A/R Financing via a commercial financing company is a growing subset of the asset-based lending line of credit. Most factoring companies are divisions of ABL firms.

Canadian business owners want alternatives, and factored receivables provide one such alternative as a working capital source. Relying on just one source of financing, such as a bank or other outside lender, has proven to be dangerous for many smaller to medium-sized firms.

ADVANTAGES OF FACTORING RECEIVABLES

Factoring is the monetization, or in layman’s terms, the immediate cash flow of outstanding invoices in your accounts receivable.

Considering the timelines in supply chain financing, this business funding method has become increasingly popular.

The factoring process allows you to immediately overcome the biggest working capital challenge most businesses have: providing payment terms to customers and seeing those customers even take longer to pay than your terms!

Factoring puts you back in control of this timeless business challenge. Many of our clients use this type of financing as a bridge to traditional financing because your bank sees the cash flow coming into your firm regularly.

Also, providing extended payment terms that you are comfortable with to new or existing customers allows you to maintain a competitive advantage with your customers.

TYPES OF ACCOUNTS  RECEIVABLE FACTORING FINANCING  

Factoring is the sale of your accounts receivable to a finance factor firm. We encourage all clients to understand the different types of this financing when they need to access cash quickly –

• recourse factoring
• nonrecourse factoring
• insured receivables factoring
• non-notification factoring / Confidential receivable financing

We strongly recommend non-notification factoring to clients who qualify because it allows you to bill and collect your own receivables without notifying your customer base—and this method comes with the same factoring costs.

It is important to note that factoring accounts receivable without recourse to your business will be more expensive as a business transfers credit risk to the lender.

PICKING THE RIGHT ACCOUNTS RECEIVABLE FACTORING COMPANIES - UNDERSTANDING THE FACTORING ACCOUNTS RECEIVABLE FORMULA  

Factoring is perceived as expensive, but a true analysis will show that it can be profitable in many cases.

The financing costs associated with many factoring companies offering this type of cash flow financing can be offset by collecting your receivables faster, allowing you to buy smarter, taking supplier discounts, and improving relations with your suppliers.

Case Study:

A mid-sized industrial equipment manufacturer in Halifax, faced a critical cash flow challenge when landing their largest contract to date. With $1.2 million in new orders requiring upfront material purchases but payment terms of 60 days, growth threatened their very survival.

By implementing A/R  financing factoring, the company converted their invoices to immediate working capital, accessing 85% of the invoice value within 24 hours of shipment. This strategic financing decision enabled them to:

• Purchase necessary materials without depleting cash reserves
• Hire additional staff to meet increased production demands
• Eliminate collection concerns with professional receivables management
• Focus on production quality rather than payment follow-up
• Accept additional large contracts with confidence

Within six months, the company increased revenue by 47% while maintaining positive cash flow throughout its growth phase. Their CEO calls receivable factoring "the hidden engine behind our expansion success."

KEY  TAKEAWAYS

• Immediate cash conversion transforms your sales ledger into working capital without waiting for customer payments, solving cash flow gaps.
• Credit risk transfer shifts collection responsibility to the factor in non-recourse arrangements, eliminating bad debt concerns from your business model.
• Flexible funding growth scales with your sales volume, creating a sustainable financing mechanism that expands as your business grows.
• Customer creditworthiness assessment provides valuable intelligence about your clients' payment habits through professional evaluation by factoring partners.
• Collection management outsourcing removes the administrative burden of accounts receivable, freeing internal resources for core business activities.
• Verification services ensure invoice legitimacy and reduce fraud risk through third-party confirmation procedures.
• Simple qualification requirements focus on your customers' credit rather than your business history, making factoring accessible to startups and growing companies.

CONCLUSION - ACCOUNTS RECEIVABLE FINANCING 

Invoice factoring in Canada is a new and great alternative financing vehicle. It works because you receive immediate cash for accounts receivable, allowing you to kick-start your business cycle again.

Several different types of financing are offered in Canada. To maximize the advantages of this cash flow financing solution, speak to 7 Park Avenue Financial, a trusted, credible, and experienced advisor in this area.

FAQ: FREQUENTLY ASKED QUESTIONS /PEOPLE ALSO ASK / MORE INFORMATION 

What is accounts receivable factoring?

Invoice discounting, also referred to as   A/R factoring of accounts receivables, is a type of short-term debt financing used by some business borrowers. The factoring transaction takes place between the company and a commercial lender, typically an accounts receivable factoring company or commercial finance company rather than a bank. Factoring companies charge a fee that is not expressed as an interest rate per se.

Many business borrowers, such as small and medium-sized enterprises (SMEs), use factoring to manage working capital to avoid financial trouble. It is an invoice discounting transaction where the commercial lender provides cash up front while obtaining rights to invoice payment via the factoring agreement. Businesses typically receive an advance of 80-90% of the invoice value. When the invoice is paid by its customer, the company receives the remaining balance, which is less of a factoring fee.  This funding method frees up cash flow for the company's investment in carrying accounts receivable.

What are some disadvantages when considering factoring as a finance and cash flow solution? 

Some issues for small businesses to  consider include

Factoring Fees and miscellaneous costs associated with this type of alternative financing

Lower profits which good gross margins must absorb - some businesses consider merchant cash advances and short-term working capital loans, which are also expensive

Slow-paying clients impact your overall cost of financing  when credit terms are not respected by clients - Good accounts receivable turnover is critical to the success of any business

Businesses that use traditional notification-type factoring must be aware that customers are aware you are financing via factoring - the factor typically collects the unpaid invoice

What is a factoring accounts receivable example?  

If a company has one or several outstanding invoices totalling $100,000.00, the business will receive $90,000 immediately upon issuing the invoice/invoices for goods sold and delivered or services rendered. When the client pays the invoice, the factoring company remits the remaining $10,000 to the company, less financing costs—aka factoring fees.

How quickly can I receive funds from factoring?

Most factoring companies provide initial funding within 24-48 hours of approval, with subsequent funding often available within 24 hours of issuing new invoices. This rapid access to cash solves immediate cash flow needs.

What percentage of my invoice value will I receive?

• Typically, businesses receive 80-90% of invoice value upfront
• The remaining amount, minus the factoring fee, is paid when your customer settles the invoice
• Rates vary based on your industry, customers' creditworthiness, and monthly volume

Will my customers know I'm using factoring?

• Some factoring arrangements are notification-based, where customers are informed
• Non-notification factoring keeps the arrangement confidential
• Your factor can often present itself as your accounts receivable department
• Many B2B clients are familiar with factoring as a standard business practice

Is factoring more expensive than traditional bank loans?

• Factoring costs typically range from 1-2% of invoice value
• Unlike loans, factoring has no compounding interest or long-term debt
• The value of immediate cash access often outweighs the discount fee
• Factoring eliminates collection costs and bad debt risk in many arrangements

How does receivables financing factoring improve business cash flow?

Factoring converts unpaid invoices into immediate cash, typically within 24-48 hours, eliminating the traditional 30-90 day payment waiting period. This rapid conversion allows businesses to cover operational expenses, invest in growth opportunities, and maintain healthy cash flow regardless of customer payment terms.

What advantages does factoring offer over traditional bank loans?

Unlike loans that create debt and require lengthy approval processes, accounts receivable  finance factoring:

• Provides funding based on invoice quality rather than business credit
• Scales automatically with your sales volume
• Includes professional collection services
• Often transfers payment risk to the factor
• Requires no collateral beyond the invoices themselves

Can seasonal businesses benefit from receivable financing?

Due to its flexibility, factoring is particularly advantageous for seasonal operations. During peak seasons, funding automatically increases to match higher sales volume, providing necessary working capital for inventory purchases and operational scaling without fixed payment obligations during slower periods.

Does factoring help with customer relationship management?

Professional factoring services often strengthen customer relationships by:

• Establishing clear payment expectations
• Providing professional receivables management
• Offering early payment options to customers
• Identifying problematic accounts before they affect your business
• Creating consistent communication channels for payment inquiries

Will receivable factoring improve my business cash conversion cycle?

Factoring dramatically shortens the cash conversion cycle by eliminating the receivables waiting period. This acceleration allows businesses to reinvest in inventory, accept new orders, and fund operations without the traditional delay between sales and payment collection, creating a more efficient business model.

What types of businesses qualify for receivables financing ?

Businesses selling products or services to other companies (B2B) or government entities typically qualify for factoring. The primary qualification factor is having creditworthy commercial customers rather than your own business credit history, making factoring accessible to startups, growing companies, and businesses with limited credit history.

Is there a minimum invoice amount or volume required for factoring?

Most factoring companies have flexible requirements regarding minimum invoice amounts:

• Established factoring companies typically prefer monthly volumes of $10,000+
• Specialized factors serve businesses with lower-volume needs
• Single invoice factoring options exist for occasional use
• Higher volume arrangements generally receive more favourable rates
• Some industries have specialized factors with unique minimums

How does the factoring application process work?

The typical factoring application process follows these steps:

• Initial consultation and needs assessment
• Submission of accounts receivable aging report and sample invoices
• Review of customer creditworthiness
• Factor provides term sheet with rates and conditions
• Execution of factoring agreement
• Setup of verification and payment procedures
• Initial funding (usually within 1-3 business days)
• Ongoing relationship management

What makes AR  financing factoring different from other financing options?

Receivable financing  stands apart from traditional financing through several distinctive characteristics:

• It represents a purchase of assets rather than creation of debt
• Approval depends on your customer's creditworthiness, not your business history
• Funding scales automatically with your sales
• It often includes professional collection services
• It can transfer payment risk away from your business
• It provides immediate working capital without long-term obligations

How does the factoring process work from invoice to payment?

The standard factoring process follows a structured workflow:

• You deliver products/services and issue invoice to the customer
• The invoice copy is submitted to the factoring company
• Factor verifies invoice legitimacy
• Initial advance (typically 80-90%) is paid to your business
• Factor manages collection from customer
• Upon customer payment, the factor remits reserve amount minus fees
• The process repeats with new invoices

What factors determine factoring rates and terms?

Factoring costs are influenced by multiple variables that determine your specific arrangement:

• Customer creditworthiness and payment history
• Your monthly invoice volume
• Average invoice size
• Industry risk factors
• Length of payment terms (30/60/90 days)
• Administrative complexity of verification
• Recourse vs. non-recourse arrangement
• Contract length commitment

CITATIONS / MORE INFORMATION

1. Financial Post. (2024). "Alternative Financing Options Gain Traction Among Canadian SMEs." Retrieved from www.financialpost.com
2. Journal of Finance and Economics. (2023). "Impact of Accounts Receivable Financing on Business Growth Metrics." Vol. 18, Issue 4, pp. 127-142. Available at: www.jofeconomics.org
3. Bank of Canada. (2024). "Small Business Financing Trends Report." Ottawa, ON. Available at: www.bankofcanada.ca
4. Canadian Federation of Independent Business. (2023). "Cash Flow Challenges Survey Results." Retrieved from www.cfib-fcei.ca