EMAIL - sprokop@7parkavenuefinancial.com
LOOKING FOR THE BEST FACTORING COMPANY?
INTRODUCTION
Why business owners use A/R Finance
-
It can smooth cash flow when customers pay slowly.
-
It can help cover payroll, inventory, rent, taxes, and supplier payments without waiting for 30-, 60-, or 90-day extended payment terms.
-
It often fits B2B businesses better than consumer-facing businesses because the invoices are to commercial debtors.
-
Approval tends to depend more on your customers’ credit quality and invoice quality than on your own balance sheet alone.
-
In some cases, the financing cost is less important than the lost margin from delayed purchasing or missed payroll timing.
INVOICE BASED WORKING CAPITAL
Factoring finance in Canada continues to get strong positive traction as a form of financing and a tool for Canadian businesses.
In fact, as we see more of this every day, a once-alternative financing vehicle with negative connotations is now a prevalent, mainstream form of business financing with positive connotations!
As a general rule, business cash flow is often negative! A liquidity crisis can be a major source of a company's success or failure, and the immediate need for cash becomes a priority.
THE FACTORING ALTERNATIVE
Receivables Financing Factoring is a solid solution for managing cash flow and supporting the growth of your business. By converting sales on credit terms into cash immediately, businesses can ensure steady cash flow/working capital, eliminating the waiting periods typically associated with customer payments on unpaid invoices.
RECEIVABLES COLLATERAL LENDING
So what changed that, and what is the one mistake Canadian business owners and financial managers make when entering into a factoring program to receive cash from open invoices from their immediate sales from the ' indebted party,' i.e. your customers?
First of all, what changed is very clear to all Canadian business owners; financing has become a major challenge for funding future growth and profits. Therefore, all forms of business financing, including those from factoring companies, should be considered by every business owner and financial manager.
3 Uncommon Takes on Factoring
- It's customer-credit financing. Approval is driven largely by the credit quality of your customers, not just your business, so companies declined by banks may still qualify.
- Reporting matters. The biggest hidden cost is often the time required for regular borrowing-base and receivables reporting, not the financing fee itself.
- Best used before a cash crunch. The strongest businesses use accounts receivable financing to support growth, fund larger orders, and offer longer payment terms—not as a last-resort solution.
WHAT IS THE SINGLE BIGGEST MISTAKE YOU CAN MAKE WHEN CONSIDERING AN INVOICE FACTORING FACILITY?
The answer is:
Entering into a factoring program without understanding how it works and the limitations of the program! That’s a broad comment, so let’s get right into the mistakes clients make when we sit down with them and work towards a solid factoring and working capital facility that makes sense for their firm, based on their accounts' size, credit strength, and receivables.
IS FACTORING / INVOICE FINANCING A 'LOAN '?
First of all, you should not consider factoring services as a ‘loan‘ per se. Also, it’s not the same as how a Canadian chartered bank would run such a facility if your firm were eligible for bank financing.
When you enter into a factoring program, you are selling your receivables; however, under a true bank arrangement, you are collateralizing them and borrowing against them. That’s a big difference.
FACTORING UNPAID INVOICES VS BANK LOANS / EXTERNAL COLLATERAL
Factoring Finance differs from bank financing because a bank's due diligence focuses on a company's operating performance, overall financial strength, credit history, and financial performance. That prevents many small and growing companies from accessing bank credit when they cannot meet bank credit criteria such as financial statements, debt-to-equity ratios, consistent profits, etc.
The financing on the balance sheet reflects how traditional financing works, whereas a factoring solution focuses solely on the quality and size of your accounts receivable.
At 7 Park Avenue Financial, we've received many calls from bankers who recognize a shorter-term factoring solution will help their clients.
HOW DOES ACCOUNTS RECEIVABLE FINANCING WORK
So, clients ask, if we are selling our receivables, how much do we get?
The reality is that is one of the major mistakes uninformed clients make when they enter into such a facility. Some firms in the marketplace will hold back part of the receivables they fund, but your pricing will be based on the total receivables you fund or the group of receivables you are financing. Also, what's the cost of factoring?
The amount of financing you receive will vary depending on the overall amount, the size and quality of your receivables, the overall creditworthiness of your portfolio, and other factors, such as a large concentration in a single customer.
WHAT IS THE BEST TYPE OF FACTORING RECEIVABLES PROGRAM - HINT - IT'S CONFIDENTIAL!
What happens to your client relationships when you use accounts receivable financing?
Customer communication shifts depending entirely on whether you choose a notification or non-notification facility.
-
Under a standard notification facility, your clients are explicitly instructed to redirect their payments to the lender's lockbox.
-
Lenders handle collections with professional courtesy, but a visible change can occasionally signal cash-flow stress to conservative clients.
-
Choosing a non-notification or confidential setup allows you to manage all client interactions directly, keeping the financing arrangement entirely invisible.
At 7 Park Avenue Financial, we recommend Confidential A/R Financing as the best solution via a customized factoring program. With this 'non-notification financing' method, your firm can bill and collect payment from clients without notifying any third parties. When it comes to types of factoring finance, it's the best method to mirror a bank line of credit.
BENEFITS OF FACTORING & FAST FUNDING FINANCING SOLUTIONS
The approval process in business factoring is easy and fast, much quicker than traditional financing. The immediate cash advance on your receivables is usually processed the same day, or at most within 24 hours.
Advances are made at approximately 80-90% of the invoice's face value or total amount, with the balance paid to your firm when your client pays, less the factoring fee.
The ability to get access to funds based on the size of your receivables provides your firm with virtually unlimited funding!
Those remaining balances are accumulated in a reserve account or buffer, which is periodically released to your firm. Your firm's ability to manage good asset turnover in a/r is directly related to the cost of the investment you hold in your accounts receivable.
Invoice or factoring finance allows a company to build up its cash balance to cover current obligations, such as accounts payable. The ability to free up working capital allows a company to manage the current asset/current liability relationship positively, which is the essence of successful net working capital turnover and of maximizing opportunity cost.
While many specific industries are large users of factoring receivables, any business selling on commercial credit terms can use this type of financing.
UNDERSTANDING THE RECOURSE VERSUS NON-RECOURSE FACTORING RECEIVABLES TRANSACTIONS
At 7 Park Avenue Financial, we ensure that our clients understand they have the option of recourse factoring or non-recourse accounts receivable financing. Non-recourse financing costs more, but it removes all the bad debt and collection risk associated with carrying an investment in accounts receivable.
Those higher rates offset, of course, the fact that your factoring finance company takes the risk in assuming collection liability and non-payment bad debt risk. That is one of the factors in determining your overall financing cost to reduce risk.
HOW MUCH DOES ACCOUNTS RECEIVABLES FACTORING COST?
How Do Lenders Price A/R Finance?
Accounts receivable (A/R) financing is priced based on risk, collateral quality, and expected administration, not just your company's financial performance. Two businesses with the same revenue can receive very different pricing if their receivables differ in quality.
The Main Pricing Factors
-
Credit quality of your customers: Investment-grade or financially strong customers generally qualify for lower rates.
-
Average invoice size: Larger invoices usually cost less to administer than hundreds of small invoices.
-
Payment terms: Net-30 invoices typically receive better pricing than Net-90 invoices. Current macroeconomic pressures force buyers to demand 60- to 90-day terms, leaving suppliers to carry the financing burden.
-
Industry risk: Manufacturing, distribution, transportation, staffing, and wholesale each have different risk profiles.
-
Customer concentration: Heavy reliance on one or two customers may increase pricing or reduce advance rates.
-
Invoice aging: Current receivables are priced more favorably than older invoices.
-
Monthly funding volume: Larger facilities often qualify for lower pricing because fixed administrative costs are spread across more invoices.
-
Recourse vs. non-recourse: Non-recourse facilities generally cost more because the lender assumes additional credit risk.
-
Notification vs. confidential facilities: Confidential (non-notification) structures often carry a premium because they require additional monitoring.
The fees of a factor may vary - Most clients make the mistake of focusing totally on price when it comes to factoring finance companies/factoring providers – yes, that’s important. Still, the way your facility is structured and how it operates day to day over a given period can be many times more important than price.
WHAT IS THE INTEREST RATE ( SPOILER ALERT - THERE ISN'T ONE!)
Speaking of price, the reality is that most customers equate price in receivable financing as an annual interest rate. The industry does not view it this way, preferring to call the sale of the receivable a ‘discount ‘to its original value, with the cost being called a ' factoring fee. '
We can talk all day about that one, but if you are, in fact, focused on price, you need to understand the per-diem rate you are paying every day the receivable remains uncollected. How that rate is communicated to you, and when the rate terminates upon collection, is one of the most expensive errors you can overlook when working on a receivables financing facility.
In summary, our Boy Scout motto of ‘Be prepared‘ is highly appropriate to a factoring financing program.
KEY TAKEAWAYS
Invoice Discounting—Immediate cash is provided when invoices are sold to a financier at a discount.
Factoring Types—Distinguish between recourse and non-recourse factoring to manage financial risk effectively.
Factoring Costs—Understand the fees, including the discount rate and any additional charges, that are integral to evaluating factoring services.
Credit Assessment—Assess debtor credit to mitigate risk before engaging in factoring agreements.
Factoring Agreements—Comprehend the terms which define the relationship and obligations between the client and the factor.
Case Study - Accounts Receivable Finance
Company: ABC Company, a mid-sized industrial parts distributor in Ontario
Challenge: ABC Company had strong sales growth, but its bank line of credit hadn't kept pace. With customers regularly paying on 60-day terms, the business was turning down larger orders because it didn't have the working capital to cover supplier costs while waiting to get paid.
How We Got There: The company moved a portion of its receivables into a confidential accounts receivable financing facility, advancing funds against invoices as soon as they were issued rather than waiting for customer payment.
Results: ABC Company was able to accept two large orders it had previously turned away, significantly shorten its effective cash conversion cycle, and use the freed-up working capital to negotiate better pricing with its own suppliers through early payment.
CONCLUSION - SMALL BUSINESS RECEIVABLES FACTORING IN CANADA
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can guide you through the technical maze of factoring to ensure you sidestep our warning about entering into a facility that is not properly priced or explained to your firm concerning overall cash flow impact and day-to-day dealings on your receivables.
Most factoring companies understand that this type of A/R financing solution is generally a temporary one for small businesses that can help them grow. Factor facilities are acquired to fix a short-term cash flow problem as you work towards accessing more money from traditional lines of credit and business lines from banks.
In some cases, factoring might be a part of a total asset-based lending solution, which combines the receivables, inventory, equipment, and even real estate into 1 single borrowing facility for more cash access.
After all, your receivables are more often than not your largest financial asset – doesn’t it make sense to understand what type of financing you place around this asset?
Can your business benefit from factoring? We think it can, so let's get started!
Accounts Receivable Financing Programs Delivered!
Let the 7 Park Avenue Financial team focus on a solid facility with transparent costs, without long-term contracts/ hidden fees/additional fees, or contractual obligations when it comes to factoring trade finance solutions. 7 Park Avenue Financial originates receivable financing.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is factoring?
Factoring is a business financial transaction that allows a company to sell its invoice/accounts receivable to a third-party factor company at a discount, for a fee, to allow the business to meet day-to-day short-term funding needs.
How does accounts receivable financing factoring provide immediate cash flow?
It allows businesses to sell their invoices to a financier at a discount, who then provides immediate cash.
What are the main types of factoring?
The primary types are recourse and non-recourse factoring, each with distinct risk management profiles.
How does factoring differ from a traditional bank loan?
Unlike loans, factoring does not create debt but advances funds based on existing invoices.
What are the typical costs associated with factoring?
Costs include a percentage of the invoice as a fee, which varies based on the agreement and risk involved.
How can factoring improve my business’s credit management?
It provides immediate cash to settle debts promptly and invest in growth opportunities, enhancing creditworthiness.
What legal considerations should I be aware of in factoring agreements?
Understanding the terms, conditions, and any liabilities involved in such agreements is crucial.
Can factoring be used by startups?
Yes, factoring is particularly beneficial for startups that need to stabilize cash flow without an existing credit history.
How do international factoring arrangements work?
These involve exporting or importing companies factoring their foreign invoices to manage longer payment cycles.
What is the role of a credit risk assessment in factoring?
It evaluates the financial stability of debtors to protect against default on the receivables.
Does factoring affect relationships with my customers?
Transparent communication is essential as factoring involves a third party in receivable collections, which can impact customer perceptions.
What are the immediate benefits of accounts receivable financing factoring?
It offers quick access to working capital, improving liquidity and enabling more robust financial planning around sales and the company's accounts receivable.
How does non-recourse factoring provide additional security?
The factor assumes most of the credit risk, protecting your business from losses if a customer fails to pay.
What factors should I consider when choosing a factoring provider?
Evaluate their fee structure, services offered, and industry reputation to ensure they align with your business needs.
How does factoring finance a company?
A business sells accounts receivable, outstanding invoices from the company's customers, to a factoring company via a financial transaction and receives payment for the transaction, less a discount rate or discount fee' as agreed upon in a factoring agreement. The invoice discounting process is finalized when the customer pays the company or the factoring company directly.
Is factoring a good idea
Receivable factoring is a good idea if a company requires short-term cash for its operating needs and has a reasonably creditworthy client base. Good gross margins are required to absorb factoring fees, which are in the 1.5-2% range of the invoice value.
What is the definition of a factoring company?
The three parties directly involved in the factoring transaction are the factoring company, the company selling receivables for short-term cash needs, and the clients that make up the accounts receivable portfolio.
Statistics
Canadian SMEs report payment delays as one of their top three cash flow challenges, with average B2B payment terms commonly extending past 45-60 days in several industries (manufacturing, distribution, professional services).
Late payments remain a persistent and well-documented strain on small business liquidity in Canada, frequently cited in CFIB and BDC research on SME financing barriers.
Citations
Business Development Bank of Canada. "Working Capital and Cash Flow Management for SMEs." https://www.bdc.ca
Canadian Federation of Independent Business. "Late Payments and Small Business Cash Flow." https://www.cfib-fcei.ca
Medium/Prokop/7 Park Avenue Financial."Confidential A/R Finance: The Inside Secret To Financing Receivables Via Factoring".https://medium.com/@stanprokop/confidential-a-r-finance-the-inside-secret-to-financing-receivables-via-factoring-c03b6e7a010e
Investopedia. "Accounts Receivable Financing." https://www.investopedia.com
Innovation, Science and Economic Development Canada. "Small Business Financing in Canada." https://ised-isde.canada.ca
Investopedia. “What Is Accounts Receivable Financing? Definition and Structuring.” https://www.investopedia.com/terms/a/accountsreceivablefinancing.asp
7 Park Avenue Financial ."Cash Flow Revolution: Accounts Receivable Financing Explained".https://www.7parkavenuefinancial.com/factoring_in_canada_invoice_factoring.html
Factoring (finance). Wikipedia. https://en.wikipedia.org/wiki/Factoring_(finance)
Corporate Finance Institute. “Accounts Receivable Financing - Overview, Factors.” https://corporatefinanceinstitute.com/resources/commercial-lending/accounts-receivable-financing/
