YOUR COMPANY IS LOOKING FOR WORKING CAPITAL SOLUTIONS
ALTERNATIVE OR OTHERWISE!
FACTORING RECEIVABLES - INVOICE FACTORING WORKS - HERE'S HOW!
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Unlock immediate cash from your unpaid invoices and boost your business growth today!
INTRODUCTION - MAXIMIZE CASH FLOW WITH EFFECTIVE INVOICE FACTORING
Everyone is talking about ‘factoring‘ these days, even those who don’t understand it! While one could maintain that factoring, the most popular solution in alternative financing, has been around for many years in Canada it is getting more prominence.
WHAT IS RECEIVABLE FINANCING GOOD FOR YOUR BUSINESS - HOW DOESINVOICE FACTORING WORK
Factoring invoices/accounts receivable financing is a proven way to generate immediate working capital - Using your accounts receivables as a source of cash flow is a solid funding option for companies that can't access traditional financing or a bank loan.
TRADITIONAL FINANCING HAS BEEN CURTAILED FOR MANY BUSINESSES AFFECTING CASH FLOW
We feel that it is getting that prominence for potentially all the wrong reasons, namely that in the current Canadian economic and banking reality financial, cash flow and working capital facilities from traditional institutions such as the banks have been significantly curtailed.
Invoice factoring vs other financing options such as bank loans and invoice discounting offers distinct advantages. Unlike bank loans, which often require extensive credit checks and collateral, invoice factoring provides quicker access to funds. Additionally, invoice discounting maintains confidentiality but may not offer the same level of immediate cash flow improvement as factoring.
A PRIMER ON INVOICE FACTORING
So, let’s do a basic primer on factoring/invoice financing and then discuss how it’s similar and different from what is offered in other parts of the world, why it works, and when it is problematic.
We also have a solution for some business owner challenges associated with factoring and receivable financing. Factoring is simply a transaction between your firm and a commercial lender.
To understand how invoice factoring works, you must sell your invoices to a factoring company in exchange for immediate payment. Instead of ‘assigning’ your accounts receivable as you would to a bank, a factoring agreement allows you to sell accounts receivable as you bill for your goods and services. This will enable firms to meet short-term funding needs necessary to run a business.
THE BACKGROUND ON FINANCING RECEIVABLES VIA FACTORING COMPANIES
Factoring has existed for hundreds of years (if not longer!). Invoice factoring companies play a crucial role in the industry, with the best companies known for their transparency in fees and practices. However, some companies may be stigmatized due to bad practices unless explained and executed correctly.
What’s the basic premise? It’s simple. You sell one, (or a number) of your receivables, and you immediately get cash. In our article, we will try to point out some of the nuances of factoring that get Canadian firms into trouble - here is the first one - when you sell your receivables, make sure you understand
FACTORING SOLUTIONS ARE A SUBSET OF 'ASSET BASED LENDING '
Let’s touch on another relatively unknown point in factoring: it is a key component of a potential asset-based lending strategy. A third-party factoring company can provide different types of invoice factoring arrangements, helping small businesses improve their cash flow and ensure they can pay their expenses. Asset-based lines of credit are available to Canadian firms. These facilities are generally not offered by our Canadian chartered banks and are a solid way to use your sales and business assets to access a line of credit.
HOW DOES TRADITIONAL FACTORING WORK
When businesses factor their receivables in Canada, they, for the most part, are no longer involved in the collection function of those receivables. Two essential points come into play here -
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You have just eliminated cost, personnel, and time involved in collections - ( that's a good thing)
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You have just handed over part of the key customer relationship to a third party with whom your customer has no previous knowledge or dealings. (That we feel is a bad thing!)
IS THERE A BETTER SOLUTION TO TRADITIONAL ' OLD SCHOOL' FACTORING ?
SPOILER ALERT! IT'S CALLED CONFIDENTIAL RECEIVABLE FINANCING AND RECOURSE FACTORING
At 7 Park Avenue Financial, our recommended solution is Confidential Receivable Financing. Click here to learn more about how this solution works. It gives you all the benefits of a traditional factoring solution and allows you to bill and collect your invoices, while achieving all the traditional benefits of this AR Financing solution.
KEY TAKEAWAYS
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Factoring Process: It is crucial to understand the basic steps involved in converting invoices into cash. These include submitting invoices to a factoring company, getting a cash advance, and the factoring company collecting payments from your customers.
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Types of Factoring: Knowing the differences between recourse and non-recourse factoring and the various options available (such as spot factoring and whole ledger factoring) helps make informed decisions.
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Benefits of Factoring: Recognizing the advantages such as improved cash flow, quicker access to funds, and not increasing debt can significantly impact business operations.
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Factoring Fees: Awareness of the factoring cost , including service fees and discount rates, ensures better financial planning and budgeting.
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Factoring Companies: The key to a successful factoring experience is choosing the right company based on industry experience, reputation, and service offerings.
CONCLUSION
In summary, we have touched on a few key basics regarding factoring and receivable financing for small businesses in Canada—i.e., the history of factoring and why it's growing more popular. In addition, we have focused on some of the ' nuts and bolts ' of a factor / receivable financing offering with respect to some positive and negative aspects of such an alternative financing facility.
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your business capital needs.
FAQ
What is invoice factoring, and how does it work?
Invoice factoring is a financing method where businesses sell their unpaid invoices to a factoring company to receive immediate cash. The factoring company then collects the payments from the customers.
What are the main benefits of invoice factoring?
Invoice factoring improves cash flow, provides quick access to funds, and does not increase business debt. It helps businesses manage operational expenses and invest in growth.
How is invoice factoring different from a loan?
Invoice factoring involves selling invoices for immediate cash, while a loan requires borrowing money that must be repaid with interest. Factoring does not create debt on the balance sheet.
What types of businesses can benefit from invoice factoring?
Invoice factoring can benefit businesses of all sizes, especially those with lengthy payment terms and cash flow challenges. It is beneficial for industries like manufacturing, transportation, and staffing.
Are there any risks associated with invoice factoring?
The primary risk is the invoice factoring cost, as factoring fees can add up. Additionally, non-recourse factoring may involve the factoring company rejecting specific invoices based on customer creditworthiness.
How do I choose the right factoring company?
Evaluate the factoring company's experience, reputation, industry specialization, and fee structure. Read reviews and compare terms to make an informed decision. The best invoices factoring companies will tailor facilities to your business needs.
Can factoring invoices affect customer relationships?
Accounts Receivable Factoring can positively impact customer relationships by enabling timely payments and smoother operations. However, choosing a reputable factoring company that maintains professionalism in collections is essential.
What is the difference between recourse and non-recourse factoring?
In recourse factoring, the business is liable if the customer fails to pay the invoice. In non-recourse factoring, the invoice factoring service company assumes the risk of non-payment.
How quickly can I get funds through invoice factoring services?
Funds are typically available and deposited into your business bank account and the factoring company pays you within 24 to 48 hours after submitting invoices to the factoring company, providing immediate access to cash. Funds are advanced on 80-90% of the total invoice value, with the company receiving the balance, less factoring fees, when the customer pays.
Can startups use invoice factoring?
Yes, small business owners who are startups with reliable customers and outstanding invoices can factor invoices and use invoice factoring to improve cash flow and support business growth. The factoring company collects payment.
How does invoice factoring impact my business's balance sheet?
Invoice factoring provides immediate cash without adding debt to the balance sheet, improving liquidity and financial stability.
What factors determine the fees associated with invoice factoring?
Fees are determined by the invoice amount, customers' creditworthiness, and the factoring company's terms. Understanding these factors helps negotiate better rates.
How can invoice factoring help in scaling my business?
Invoice factoring provides the necessary cash flow to invest in growth opportunities, hire more staff, and expand operations without waiting for customer payments.
