Accounts Receivable Factoring Loans: A Business Solution to Cash Flow Challenges | 7 Park Avenue Financial

 

Tweet

YOUR COMPANY IS LOOKING FOR  BUSINESS CASH FLOW  SOLUTIONS!

THE PROS AND CONS OF ACCOUNTS RECEIVABLE FINANCING SOLUTIONS

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

Financing & Cash flow are the  biggest issues facing business today

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

CONTACT US

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

EMAIL - sprokop@7parkavenuefinancial.com

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

 

 

Accounts Receivable Factoring Loans

 

 

AR cash flow can be achieved in several ways. Accounts receivable factoring provides businesses with a cash advance, enabling them to access capital while awaiting customer payments.

 

Many business owners and financial managers immediately think of bank financing when they hear the term " receivable loans" (not loans, by the way!).

 

But that’s not always the case, as we’ll see. You might find the ‘design genius’ of some of these offerings quite interesting and, more importantly, achievable. Let’s dig in.

 

  

WHAT IS ACCOUNTS RECEIVABLE FINANCING?  

 

Accounts receivable financing is a financing service solution that allows a company to get paid on outstanding invoices.

Accounts receivable financing is an agreement in which a lender provides cash based on the value of outstanding invoices. The factoring company charges a fee for funding a company's outstanding receivables, typically in the 1-2% range.

 

Accounts receivable financing allows companies to receive early payment on their outstanding invoices. A company using accounts receivable funding commits some or all of its outstanding invoices to a funder for early payment in return for a fee.

  

 

Step-by-step Explanation of the Factoring Process  

 

 

Invoice factoring is a straightforward process that helps businesses access working capital quickly. Here’s a step-by-step explanation of how it works:

 

 

1. Application and Approval: The business owner applies for invoice factoring with a factoring company, providing necessary documents such as invoices, financial statements, and customer information. The factoring company reviews the application and approves the business for factoring.

2. Invoice Submission: The business owner submits outstanding invoices to the factoring company for financing.

3. Verification and Approval: The factoring company verifies and approves the invoices for financing.

4. Advance Payment: The factoring company advances a percentage of the invoice value to the business owner, typically between 70% to 90%.

5. Rebate Payment: Once the customer pays the invoice in full, the factoring company rebates the remaining balance to the business owner, minus the factoring fee.

6. Ongoing Factoring: The business owner can continue to submit invoices for factoring, and the process repeats.

 

 

By following these steps, businesses can quickly convert their outstanding invoices into immediate cash, improving their cash flow and enabling them to meet their financial obligations.

 

  

SHORT-TERM FUNDING FOR BUSINESS CASH FLOW NEEDS  

 

 

The concept of financing accounts receivable revolves around the need for short-term day-to-day operations.

 

Businesses often face cash flow problems due to slow-paying accounts receivable, which can significantly impact their ability to manage daily operations and growth.

 

Factoring can solve these cash flow challenges, especially for companies whose clients take 30 to 60 days to pay their invoices. That challenge is accentuated when it comes to ‘growing’ your revenues and profits.

 

Businesses requiring SME COMMERCIAL FINANCE should not feel alone in this area—some of Canada’s largest companies constantly have to address cash flow needs as they focus on getting paid by clients while growing the company at the same time.

 

  

Advantages of Using Account Receivable Factoring  

 

 

 

Account receivable factoring offers several advantages to businesses, including:

 

 

1. Improved Cash Flow: Factoring provides immediate access to working capital, helping businesses to manage cash flow and meet financial obligations.

2. Reduced Administrative Burden: Factoring companies handle invoice collection, allowing business owners to focus on core operations.

3. Increased Flexibility: Factoring allows businesses to choose which invoices to factor and when, providing flexibility in managing cash flow.

4. Competitive Advantage: By accessing working capital quickly, businesses can seize new opportunities and stay competitive.

5. No Debt: Factoring is not a loan, so businesses do not incur debt or risk damaging their credit score.

 

 

These benefits make receivable factoring an attractive option for businesses looking to improve their cash flow and operational efficiency.

 

 

WHAT IS CONFIDENTIAL A/R FINANCING, AKA ' NON-NOTIFICATION ' FACTORING

 

 

So what then is Confidential accounts receivable-based finance?

 

At its simplest, it’s securing financing via money owed by your client receivable base on a typically ongoing basis. When dealing with a bank, your accounts are ‘pledged,’ but a commercial finance firm utilizes paperwork to reflect an ongoing ‘sale’ of your accounts as they turnover. That’s the essential difference.

 

 

Comparing various invoice factoring companies in Canada is important when considering financial solutions. These companies offer different services and terms, and businesses in regions like Ontario can benefit from understanding which provider best meets their needs.

 

  

Overview of Factoring Companies and Their Services  

 

 

Factoring companies provide various services to help businesses manage their cash flow and access working capital. These services include:

 

 

1. Invoice Factoring: Factoring companies purchase outstanding invoices from businesses and advance a percentage of the invoice value.

2. Accounts Receivable Financing: Factoring companies finance businesses based on their outstanding invoices.

3. Invoice Discounting: Factoring companies offer invoice discounting services, where businesses can access a short-term loan using outstanding invoices as collateral.

4. Cash Flow Management: Factoring companies provide cash flow management services, helping businesses to manage their cash flow and make informed financial decisions.

 

 

By leveraging these services, businesses can effectively manage their cash flow and ensure they have the working capital needed to grow and thrive.

 

  

THE COST OF BANK FINANCING VERSUS ALTERNATIVE FINANCING  

 

 

It’s no secret that bank rates for any business financing are typically the lowest cost of borrowing.

 

While Confidential's non-notification loans are more expensive, their benefits mirror a traditional bank facility. This is achieved via your ability to bill and collect your invoices while reaping the cash flow benefits of same-day financing for all your sales.

 

When considering how accounts receivable financing works, it is essential to understand how invoice financing costs are determined.

 

 

USE A/R FINANCING AS A BRIDGE BACK TO TRADITIONAL LENDING

 

 

Many firms that utilize commercial A/R cash flow loans are in a transitory phase. They are either leaving the bank (having been asked to!) or seeking commercial financing for their sales as they repair any financial issues in their business, allowing them to migrate back to... You guessed it... the bank!

 

 

2 KEY REQUIREMENTS FOR ACCOUNTS RECEIVABLE FINANCING

 

 

No business can finance its accounts receivable; the only requirement is sales and commercial A/R. You don’t have a solid way to finance outstanding invoices on the balance sheet.

 

 

Various industries use invoice factoring services to manage cash flow effectively. These services are provided by companies, often referred to as factors, that advance funds based on the invoice amount while taking on the responsibility of collecting payments from the original customers.

 

 

While we have painted a picture of many businesses having no bank funding, numerous firms have access to some bank credit, but not all of it meets their needs. That is where the factoring company solution comes in and acts as a line of credit for ongoing financing needs.

 

  

Overview of Industries That Commonly Use Account Receivable Factoring  

 

 

Account receivable factoring is commonly used in various industries, including:

 

 

1. Construction: Construction companies use factoring to manage cash flow and access working capital for projects.

2. Manufacturing: Manufacturers use factoring to finance inventory and manage cash flow.

3. Transportation: Transportation companies use factoring to manage cash flow and access working capital for fuel, maintenance, and other expenses.

4. Healthcare: Healthcare providers use factoring to manage cash flow and access working capital for medical supplies and equipment.

5. Technology: Technology companies use factoring to manage cash flow and access working capital for research and development.

 

 

These industries benefit from factoring by improving their cash flow and ensuring they have the necessary funds to operate efficiently.

 

 

A PROFILE OF A COMPANY USING EXTERNAL FINANCING

 

 

From an approval perspective, Confidential A/R funding takes a holistic look at your business, including your current financial position, its challenges, your industry, and your overall client portfolio.

 

Issues that can slow down but not hinder your AR financing might be CRA issues or having some clients or a client represent a large part of your whole business - i.e. the concept of ' concentration.' This type of financing allows you to take on larger orders and contracts.

  

 

2 KEY DRIVERS IN A/R FINANCE SOLUTIONS  

 

What then are some key ' drivers' that you would consider in receivable loans? They include:

 

Positive: The ability to achieve daily financing, facilities revolve, growth becomes virtually unlimited, and greater flexibility in negotiating terms with key / new /large clients.

 

Less than Positive - Higher cost, occasional higher reporting needs

 

How Account Receivable Factoring Can Affect a Business’s Credit Score

 

 

Account receivable factoring can positively and negatively affect a business’s credit score, depending on how it is used. Here are some factors to consider:

1. Positive Impact: Factoring can help businesses manage cash flow and access working capital, which can improve their credit score over time.

2. Negative Impact: If a business relies too heavily on factoring, it may be seen as a sign of financial instability, which can negatively impact its credit score.

3. Credit Reporting: Factoring companies may report payment history to credit bureaus, which can affect a business’s credit score.

4. Credit Score Improvement: Businesses can improve their credit scores over time by using factoring responsibly and making timely payments.

 

Understanding these factors can help businesses use factoring strategically to enhance their financial health and creditworthiness.

 

  

Case Study:   

 

A BC Manufacturer  secured a major contract with a national retailer, excitement quickly turned to concern. The $750,000 order required significant upfront investment in materials and additional staff, but payment terms stretched to 60 days after delivery.

With only $200,000 in available working capital, the company faced a difficult choice: decline the opportunity or find alternative financing. Traditional lenders required lengthy approval processes and couldn't meet their timeline.

The company turned to accounts receivable factoring, converting $320,000 in existing invoices into immediate cash. This provided the necessary capital to purchase materials and hire additional workers for the new contract.

 

 

  

CONCLUSION  

 

 

Receivable loans go a long way toward improving your business's liquidity. Businesses experience gaps in their ability to fund their business as expenses are paid while your firm waits for  30 days to 60 days or longer!! To get paid on outstanding invoices, your business requires higher investments in current assets such as receivables and inventory while maintaining payroll or investing in capital equipment.

 

 

Accessing a receivable loan gives your business the capital needed to fund and operate your company. It is important to understand the costs of receivables finance and, just as importantly, understand how factoring works daily.

 

Looking to better understand the effects of accounts receivable financing on cash flow?

 

Financing accounts receivable for the small business owner doesn't have to be a significant challenge in your search for capital and business credit.

 

Interested in the 'design genius ' of accounts receivables cash flow financing that mirrors a bank solution?

 

Call  7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor, who can assist you with your finances.

 

  

FAQ  

 

 

How quickly can I receive funds from accounts receivable factoring?

Most factoring companies provide funding within 24-48 hours after approving your invoices, with some offering same-day funding options for established clients.

 

 

What percentage of my invoice value will I receive through factoring?

Typically, you'll receive an advance of 80-90% of the invoice value immediately, with the remaining amount (minus the factoring fee) paid when your customer settles the invoice.

 

 

Do my customers know I'm using factoring services?

This depends on whether you choose notification or non-notification factoring. With notification factoring, customers are informed and make payments directly to the factor. Non-notification services maintain your relationship as the payment recipient.

 

 

What industries benefit most from accounts receivable factoring?

Manufacturing, transportation, staffing, construction, and wholesale distribution businesses particularly benefit from factoring due to their longer invoice payment cycles and high operational costs.

 

 

What documentation do I need to apply for factoring services?

Typically, you'll need your accounts receivable aging report, sample invoices, customer list, and basic business formation documents—significantly less paperwork than traditional loans require.

 

 

How does factoring improve a company's ability to manage seasonal demand fluctuations?

Factoring provides flexible funding that scales up during peak seasons when invoice volume increases, ensuring you have capital to meet higher operational costs without fixed loan payments during slower periods.

 

 

What advantages does factoring offer over traditional business loans for growing companies?

Factoring grows alongside your sales without requiring new applications or credit reviews for increased funding. In contrast, conventional loans provide fixed amounts regardless of your expanding needs, often requiring new loan applications as you grow.

 

 

How can accounts receivable factoring help businesses take advantage of supplier discounts?

By converting invoices to immediate cash, factoring enables companies to make early or upfront payments to suppliers, often securing discounts of 1-2% that frequently exceed the cost of factoring itself, creating positive cash flow.

 

 

How does factoring impact a business's ability to accept larger contracts?

Factoring eliminates cash flow concerns when taking on larger contracts by providing immediate funding against these larger invoices, enabling businesses to cover the increased material and labor costs without waiting for payment terms to complete.

 

 

How does accounts receivable factoring strengthen negotiating power with suppliers? With reliable cash flow from factoring, businesses can negotiate better terms with suppliers through consistent, timely payments, potentially securing lower prices, priority delivery schedules, and preferential treatment during supply shortages.

 

 

What exactly happens to my customer relationships when I use factoring services?

Factoring can be structured as either notification or non-notification services—with notification factoring, the factor handles collections directly, while non-notification arrangements keep your company as the primary contact, maintaining your customer relationships with minimal disruption.

 

Is my business too small to qualify for accounts receivable factoring?

• Most factoring companies work with businesses of all sizes
• Many accept clients with as little as $10,000 in monthly invoices
• This financing solution is accessible to small businesses and startups
• Factoring is often available to companies that don't qualify for traditional bank loans
• The application process is typically more straightforward than bank loans
• Many factors specialize in specific industries or company sizes
• Some offer startup-friendly programs with minimal requirements
•  

Can I factor only specific invoices or must I factor all my receivables?

• Many factoring companies offer selective or spot factoring
• You can choose specific invoices rather than committing your entire accounts receivable portfolio
• This provides flexibility to use factoring strategically
• Select invoices from particular customers
• Factor invoices only during certain seasons
• Use factoring only for larger invoices that impact cash flow

 

What happens if my customer doesn't pay the factored invoice?

• The outcome depends on whether you've chosen recourse or non-recourse factoring.
• With recourse factoring, you must repurchase unpaid invoices or replace them
• Non-recourse factoring transfers most payment risk to the factor
• Non-recourse factoring typically comes with higher fees
• Some factors offer hybrid arrangements with partial protection
• The repurchase timeframe varies between factoring companies
• Many factors work with you to resolve payment issues before requiring repurchase

 

How do factoring companies verify that my invoices are legitimate?

• Factors typically perform several verification procedures.
• They often directly contact your customers to confirm receipt of goods or services.
• Verification includes reviewing delivery documentation
• Some conduct site visits or inspections to ensure invoiced work was completed
• They may request proof of service completion or delivery
• Electronic verification systems are increasingly common
• The level of verification may vary based on your industry and relationship length
• Regular clients often experience streamlined verification processes

 

What factors determine the advance rate and discount fee in a factoring arrangement?

• Factoring rates and advance percentages vary based on your industry risk profile.
• Customer credit quality significantly impacts terms
• Invoice volume affects pricing structures
• Payment terms influence the cost of factoring
• Most Canadian businesses receive 80-90% advances
• Fees typically range from 1-2% depending on multiple variables
• Higher volume generally secures better rates
• Customers with strong credit improve terms
• Shorter payment cycles reduce factoring costs
• Industry risk assessment impacts overall pricing

 

How does international factoring differ from domestic receivables factoring?

• International factoring addresses complexities of cross-border transactions
• It provides currency exchange services
• International credit verification is included
• Export documentation assistance comes alongside traditional factoring benefits.
• These services effectively reduce payment risks in global trade
• Export factoring covers international shipping delays
• Currency fluctuation protection may be included
• Foreign customer credit assessment is provided
• Collection services navigate international requirements
• Compliance with international trade regulations is managed
• Documentation requirements are typically more extensive