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Sounds like a great name for a movie right? Well, maybe not, but Canadian business owners and financial managers seem to have one large struggle with the cost of receivable financing from Canadian business factors. But when you understand how the cost of this finance vehicle works then factoring, aka 'receivable finance' suddenly becomes a lot more clear, and desirable. Let’s explain.
In A/R finance it's all about making the use of your second most liquid asset, your receivables portfolio. (Cash is of course a bit more liquid!)
So when you understand the true cost of the method of Canadian business finance you all of a sudden potentially realize that you are immediately more productive from a working capital and cash flow point of view.
When we step back it's somewhat immediately obvious that your uncollected A/R is only doing one thing on that left-hand side of your balance sheet. It's both unproductive, hasn’t allowed you to realize your profits, and in effect are costing you money. That's a triple threat for sure!
So why then is the cost of the receivable financing solution from Canadian business factors such a mystery or concern, It’s simply that the issue is either poorly presented, or more commonly, just plain misunderstood.
While the business owner or his finance person stares into the cost of A/R finance he often forgets the carrying cost of his A/R portfolio that stands there uncollected. This can be analyzed and calculated in a number of ways, including the discounted cash flow model, but we don’t want to get too overly technical when in fact things can be explained a lot easier than that.
If you are going with a traditional method of a/r finance in Canada (and by the way, that’s not our favourite or recommended one - we prefer 'confidential receivable finance') the other factors that affect your a/r costs are administration around your collections, the lost sales you are losing by having to instead carry your a/r, the financing costs you currently are absorbing, and of course the cost of a potential bad debt if the receivable is uncollected.
As we noted, the best solution, in our opinion, for factoring in Canada is a confidential invoice financing facility whereby you bill and collect your own receivables without any interference from your finance partner. At the same time, you receive all the benefits of factoring, which include immediate cash flow advances on your A/R, allowing you to operate, and grow. This facility, as well as the more traditional one offered by many, does in fact take care of the time cost of your current A/R.
Receivable finance actually is a lot more simple a process then you think. You receive the cash from selling your A/R on an ongoing basis, giving you the ' opportunity ' to reinvest cash more quickly into your business. In Canada A/R financing ranges in the 2-3% area assuming a 30 day collection period from your clients.
Depending on how you allocate your time, admin, lost opportunity, and current financing costs you might find by some careful analysis that your current costs are anywhere from 10-20% on a 2-3 month uncollected receivable.
The bottom line today? Simple. Understand the costs of your current a/r financing and investigate how you can turbocharge your cash flow via a receivable financing solution. Speak to a trusted, credible and experienced Canadian business financing advisor for help on cash flow finance.
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