AR Receivable Finance: Important Cash Flow Solutions For Canadian Businesses | 7 Park Avenue Financial

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YOUR COMPANY IS LOOKING FOR  FACTORING AND FUNDING FOR RECEIVABLES!

ACCOUNTS RECEIVABLE FINANCING / WORKING CAPITAL SOLUTIONS

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing businesses today

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

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CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

"Never take your eyes off the cash flow because it's the lifeblood of business." — Richard Branson

ACCOUNTS RECEIVABLE FINANCING /  FACTORING ACCOUNTS RECEIVABLE    

Key differences in banking, accounts receivable financing, and invoice factoring can confuse the Canadian business owner and financial manager.

Let's try to " un-confuse "some of that information to clarify why thousands of firms are gravitating to accounts receivable factoring in Canada.

The Cash Flow Conundrum  

Is your business rich on paper but cash-poor in reality? Outstanding invoices representing thousands or millions in earned revenue sit idle while operational expenses demand immediate attention. This financial paralysis strangles growth and threatens survival.

Let the  7 Park Avenue Financial team show you how AR Receivable Finance transforms those waiting invoices into immediate working capital, aligning your cash flow with your business reality – no more waiting or missed opportunities.

Uncommon Takes on AR Receivable Finance

1. Beyond Emergency Funding: While many view AR Receivable Finance as a last resort for struggling businesses, forward-thinking companies strategically implement it during growth phases to accelerate expansion without diluting equity or increasing.

2. Silent Working Capital Solution: Unlike traditional loans or lines of credit, AR Receivable Finance typically operates without customer awareness. Your clients continue paying invoices as usual, maintaining your business relationships while your cash flow improves behind the scenes.

THE DIFFERENCE BETWEEN TRADITIONAL BANK A/R FINANCE  AND FACTORING  

The core differences are pretty clear... how they are interpreted and what sort of solution you choose is where things get exciting! 

And those key differences aren't as complex as you might think.

Simply speaking, the ability to borrow in this method of Canadian business finance revolves solely around the size, quality, and value of your sales.

Point number two is that this is not, we repeat, ' not debt ' financing - so you are, in effect, just monetizing assets for cash flow.

That’s a good thing when working with a good factoring company. Compare it to bank financing and how a Canadian chartered bank would finance the balance sheet.

Let's examine some of the key issues surrounding using  a/r factoring solutions versus a traditional bank line of credit. Both types of financing serve the same goal: generating cash flows from unpaid invoices through a post-invoicing method.

FINANCING COSTS   

It's no secret that banks offer the lowest interest rate on Canadian business financing solutions. These rates are typically nominally over the prime rate and in the low to high single digits.

The consensus is that receivable financing is expensive. At the same time, some may argue strongly that it is essential to understand that the way the industry delivers pricing is not in the form of an interest rate per se.

It’s a discounted amount based on receivables covered under the financing arrangement known as ' accounts receivable factoring '. That is what ' factoring fees' are all about. It's not an interest rate per se, which confuses small business owners when they consider the invoice amount and the cost to finance it—typically 1.5-2%.

We feel that your ability to borrow as much as you need to now based on sales revenue, new contracts, large orders, etc., is more important than the rate. If you're on top of your receivables and inventory turns, we are saying that you're turning over more assets... more often, and that equates to... you guessed it... more profits.

BANK FINANCING

Bank credit facilities usually have margin restrictions, are subject to a credit limit, and typically require annual reviews of the borrower's financial statements. Companies using bank financing must fall within the bank's parameters of credit risk based on various key indicators such as profits, balance sheet ratios, covenants, etc.

Banks will typically allow a company to borrow in the 75% range of the outstanding accounts receivable, and all receivables must fall within 90 days old timeframes - A/R Factoring companies typically advance 85-90% of receivables -

This higher advance rate brings more cash into the business and, in many cases, helps justify the additional cost. That's the factoring accounts receivable formula.

Banks prefer that funds used on a business line of credit drawdowns be used for general working capital and cash flow needs to fund day-to-day operations - fewer restrictions exist with factoring companies.

What are the types of accounts receivable factoring in finance?

Recourse and non-recourse factoring services are types of accounts receivable factoring services. In a non-recourse factoring facility, a company transfers credit risk / bad debt risk to the factoring firm. Most factoring companies offer financing on the firm's accounts receivable balance.

Borrowers also have the option of choosing a non-notification facility, allowing the business to bill and collect its invoices without any notice to clients -

Traditional ' old school ' factor finance typically involves some form of client notification. Not all factoring companies offer confidential receivable financing without notifying a company of its accounts receivable.

Companies can choose to finance all of their a/r through a factoring firm or selectively finance specific invoices and accounts—that is commonly called ' spot factoring ', and it works similarly to when the factoring company pays other transactions.

Many factoring companies that are non-bank commercial finance firms offer invoice financing and financial accounting assistance for funding transactions.

Accounts receivable financing is typically funded by banks via unsecured credit facilities on the accounts receivable balance on the balance sheet of the business   - factoring solutions transfer ownership of the invoices to a factoring company -

Banks secure facilities via general security agreements and hold an assignment of a client's receivables.

Factoring companies charge factoring costs and fees versus interest rates charged by banks - that is the difference between factoring and a bank loan structure where financing a/r is a straight interest expense.

The factoring industry is used by thousands of small and medium-sized companies in Canada, and the finance company, via the factoring cash advance, assumes the role of the main lender to the business when bank credit is not available -

Factoring receivables has numerous benefits for the SME sector in Canada.

THERE ARE 3 PARTIES TO THE FACTORING / ACCOUNTS RECEIVABLE FINANCING TRANSACTION   

Our third difference is that the type of facility you undertake when choosing the finance strategy via financing accounts receivable is critical.

That’s because your firm is not a borrower per se; you are a party to a three-way business transaction involving your firm, your factoring partner, and your client.

HOW DOES A/R FACTORING FINANCE WORK?   

In the factoring financing transaction, a company utilizes a factoring agreement to sell the receivable / receivables at a discount to the face value  -

This is known as the advance rate on the transaction and is similar to a loan-to-value calculation. A bank, for example, established a borrowing based on the client's receivable base  -

Using a 100k invoice as an example, factoring companies would advance 90k to the borrower, and on the collection of the receivable, the client receives the remaining 10% balance less a finance charge for the time the invoice was outstanding.

What are the types of accounts receivable factoring in finance?

Types of accounts receivable factoring services include recourse and non-recourse factoring - in a non-recourse factoring facility a company transfers credit risk / bad debt risk to the factoring firm.

Most factoring companies offer financing on the firm's accounts receivable balance.

Borrowers also have the option of choosing a non-notification facility, allowing the business to bill and collect its invoices without any notice to clients -

Traditional ' old school ' factor finance typically involves some form of client notification. Not all factoring companies offer confidential receivable financing without notifying a company of its accounts receivable.

A FACTORING SOLUTION WITHOUT NOTIFICATION TO YOUR CLIENTS     

Companies can choose to finance all of their a/r through a factoring firm or selectively finance specific invoices and accounts—that is commonly called ' spot factoring ', and it works similarly to when the factoring company pays other transactions.

Many factoring companies that are non-bank commercial finance firms offer invoice financing and financial accounting assistance for funding transactions.

Quite frankly, we recommend leaving your client out of it! Is this possible? It is if you choose a confidential receivable financing facility that allows you to bill and collect your accounts receivable without notice to any other party - i.e. your client! 

This can be easily accomplished with the right assistance and guidance from a receivables professional.

Businesses can also choose non-recourse factoring, eliminating risk around the company's financial health and allowing you to pass the credit risk to the factoring company. Not all factoring companies offer all types of factor finance solutions - talk to the 7 Park Avenue Financial team about your needs.

We always point out to clients that although our focus today is on financing a business A/R, this type of facility can be nicely combined into a comprehensive working capital solution that bundles your receivables, inventory, and even unencumbered equipment into one borrowing facility.This is an asset based lending solution to better manage cash flow for their own business and to cover operational expenses. Its a total solution financial strategy!

That supercharges your borrowing ability and often delivers additional financing with 50 -100% or more cash flow power.

HOW CAN YOUR BUSINESS BENEFIT FROM FACTORING / ACCOUNTS RECEIVABLES FINANCING  

The most significant benefit of a factoring solution is a firm's ability to access cash immediately when providing invoices to customers for goods or services delivered and owed.

That ability to consistently access cash reduces the cash flow crunch faced by many small and medium-sized businesses in Canada, allowing the company to fund day-to-day operations. A business's ability to receive same-day funds helps justify the cost of the financing. It comes without bank restrictions placed on borrowers, allowing business owners to focus on growing sales and profits. 

10 Specific Use Cases for AR Receivable Finance  

1. Rapid Growth Scaling: A technology company lands a major contract requiring immediate staffing expansion and equipment purchases, but payment terms are 60 days after project milestones.
2. Seasonal Inventory Build: A holiday decoration manufacturer needs to purchase raw materials in June for products that won't sell until October-December.
3. Government Contract Fulfillment: A security services provider wins a lucrative government contract but faces 90-120 day payment cycles while needing to hire and equip staff immediately.
4. Export Market Expansion: A food products company begins shipping internationally but faces extended payment terms and currency conversion complexities.
5. Supply Chain Disruption Recovery: A manufacturing firm needs to stockpile critical components due to global supply chain uncertainties, requiring capital beyond normal inventory levels.
6. Tax Obligation Management: A professional services firm faces significant quarterly tax payments that conflict with slow-paying client invoice cycles.
7. Acquisition Opportunity: A distribution company has the chance to acquire a competitor's customer list but lacks liquid capital while having substantial outstanding receivables.
8. Emergency Equipment Replacement: A transportation company experiences unexpected equipment failure requiring immediate replacement while major customer invoices remain unpaid.
9. Staff Retention During Slow Payments: A consulting firm needs to meet biweekly payroll obligations for their financial planning despite clients extending payment terms to 45-60 days.
10. Supplier Discount Capture: A retail operation has the opportunity to receive 12% discounts for early payment to suppliers for money owed but lacks the immediate cash despite strong sales.

Case Study: Benefits of AR Receivable Finance

When a Canadian manufacturer faced a critical expansion opportunity requiring $250,000 in immediate capital, their growing sales paradoxically created a cash flow crisis. With $500,000 in outstanding invoices from creditworthy customers but payment terms of 60-90 days, traditional financing would take weeks for approval.

The company implemented AR financing, receiving $425,000 (85% of invoice value) within 48 hours of application. This immediate funding allowed them to:

1. Purchase raw materials at volume discounts, saving 12% on input costs
2. Add second shift production capacity, increasing output by 40%
3. Meet all existing order deadlines while accepting new business
4. Maintain perfect supplier payment history, preserving vendor relationships

KEY TAKEAWAYS  

A/R  financing solutions  bring valuable cash flow into the business - allowing for better working capital management

le cash flow in the form of  financing with no debt coming on the balance sheet

Cash for factoring solutions is received the same day as invoices are submitted

The advance rates on factor finance are higher than bank margins and come with no covenants around company financials or use of funds

Accounts receivable financing companies help businesses of all sizes - from start-ups to major corporations

Factor finance solutions for accounts receivable AR  work best when customer payment and industry practices are unpredictable regarding collecting payments in a timely fashion

Financial accounting for receivables financing adheres to standard accounting rules

CONCLUSION  

Call  7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor, to discuss what makes sense for your firm regarding an accounts receivable factoring program that best suits your needs. Finally, there is clarity on accounts receivable financing!

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