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AR finance, aka ' factoring ' in Canada. You have to admit, of all the great advice you got from Mom on life and perhaps business she never really covered off critical aspects of receivables financing in Canada! So we suppose that’s our job...
INTRODUCTION -
Receivable finance/ factoring companies provide a cash flow facility that is for the majority called ' factoring' - It's a process, unlike banking where your receivables are assigned, which allows you to ' sell ' accounts receivable to the finance company on an ongoing basis. Cash received goes on to your balance sheet - the whole process is done as a ' fee ' to your firm, NOT an interest rate which is a point often, almost always, misunderstood! Factors that affect the fee are the amount of your facility, the time in which it takes your clients to pay, and the factoring company overall opinion on the credit profile of your customer base/industry.
BREAKING DOWN THE TERMINOLOGY AND THE METHODOLOGY
Some of both the terminology, as well as the methodology of invoice finance in Canada is potentially very confusing to the Canadian business owner. Let's cut through some of that confusion and explain 7 things you need to know.
RECOURSE OR NON RECOURSE - WHAT FITS YOUR FACILITY BEST?
First of all, all receivable finance in Canada is done on either a 'recourse' or 'non-recourse' basis. Two very legal-sounding terms that simply mean one thing - if your client goes under you're either 'on the hook‘, or 'off the hook ' respectively. There are in fact facilities that you can obtain that are non-recourse - just imagine, a perfect world, you sell your A/R as you generate sales, and your finance partner takes all the risk.
Naturally, this type of financing is a bit more expensive... a better solution might be in fact to take on some credit insurance, which you probably want to do anyway if you have high risk, concentrated, or foreign receivables. 7 Insurance companies in Canada offer credit risk insurance.
CONFIDENTIAL RECEIVABLE FINANCING IS AVAILABLE
Point 2 - This is probably our greatest area of discussion with clients. The majority of AR finance, aka ' factoring ' in Canada, requires that your clients be notified about your sale of receivables to them. We don't like this practice; it can easily be avoided if you’re working with the right party. That way you can CONFIDENTIALLY finance your firm and be successful without others, aka suppliers and clients, knowing your business. Point importantly taken! Hopefully!
HOW MUCH CAN YOU GET ON YOUR A/R INVOICES
POINT 3- Advance amounts. When you finance receivables via a factoring process you get immediately, same day, cash for sales you choose to finance. Typically you should receive 90% of the invoice amount; the balance is a holdback, which is remitted to you as soon as your client pays... less financing costs. That’s the ABC of receivables financing!
WORKING WITH THE RIGHT FACTORING COMPANY
POINT 4 - Remember Mom talking about marriage and picking the right partner. She probably wasn’t referring to a corporate marriage of sorts, but you need to pick a partner finance firm that meets your goals, provides you with a rate and structure that is clear and understandable, and that fits your day to day method of doing business. Nothing could be more important... after we talk to clients that have been misinformed, overcharged, etc. it's clear that they missed the boat on Point 4!
THE COST OF FACTORING EXPLAINED - FINALLY - SPOILER ALERT - IT'S NOT ABOUT THE INTEREST RATE!
Point 5 - Rates. This is not important when it comes to AR finance in Canada. HELLO
???? Yes, it is, as this seems to be the only issue clients want to discuss when it comes to financing their firm. In Canada rates, in general, are in the 2% range for a 30 day receivable. That means you receive a total of 49,000.00 for your 50,000.00 invoice - as an example. Don't forget to take that reserve into account, which we mentioned in Point # 3. Oh and by the way, take that 49,000.00 and pay some supplier invoices utilizing the 2% prompt pay discount your vendors offer.
Congratulations, as you have just cut your financing costs by 50% or more!!
CONCLUSION
Final Point: Spend some time on the basics of receivables financing as it would pertain to your firm - focus on the process flow. It's as follows: You sell your products or services, you invoice your client who accepts the invoice - you get your cash immediately from your AR finance partner firm; your client then pays you and you receive the balance of the holdback - less financing costs. See point 3 above.
Business owners searching for valuable financing methods can keep it complicated, or simple. Use our 6 points Mom never told us to understand how this financing works and then fit it into your business model, with a suitable party that meets your needs.
Speak to a trusted, credible and experienced Canadian business financing advisor for assistance on proper structuring of AR finance for your Canadian company.
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Stan Prokop
7 Park Avenue Financial/Copyright/2020
