Invoice to Cash Factoring: Boost Business Cash Flow

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Cash Flow Constraints? Discover the Power of Invoice to Cash Factoring!

Discover why "Invoice to Cash Financing" is a buzzword among Canadian businesses because it's revolutionizing how they manage cash flow and growth opportunities.

THE IMPORTANCE OF INVOICE TO CASH FINANCING

Invoice To Cash Financing should always be a top priority for Canadian business owners and their financial managers. Whether it is a cash flow loan, factoring your receivables, or utilizing a combination of asset-based lending solutions available to your firm, it's always about ensuring you have the best strategy to convert sales revenues into much-needed working capital and cash flow.

THE RISE OF RECEIVABLE FINANCING IN CANADA

It is no secret that even the largest corporations in Canada emphasize ensuring the right strategies and people are in place to monetize sales revenues and generate cash from unpaid invoices.

Accounts receivable financing solutions such as factoring (those Bay Street boys have a fancier name - ' Securitization ', but it's pretty well the same) are gaining tremendous popularity with Canadian businesses.

FACTORING AND SME COMMERCIAL FINANCE SOLUTIONS

So, business wants to know more - what those solutions are, why they work and how to ensure your company has the best strategy. These solutions are particularly applicable to those looking for SME COMMERCIAL FINANCE solutions - that small and medium-sized sector of Canada that powers a huge portion of the economy. Interestingly, definitions of SME always vary, depending on who you are talking to - governments usually use under 100 employees as the benchmark!

EXPLORING ALTERNATIVE FINANCE SOLUTIONS

We wish! For those that buy into the concept of looking at 'alternative financing solutions', it should be a priority and focus on ensuring they enter the suitable facility - it's all about avoiding financial pitfalls. The Canadian alternative financing marketplace is significantly different from the U.S. and European markets where these forms of financing, such as factoring asset-based lending and working capital loans, originated.

It is, therefore, important for Canadian businesses to consider which type of receivable financing, sales financing and inventory finance solutions come with what options and benefits and how they work daily and long-term.

THE ROLE OF ASSET BASED LENDERS IN CANADA

NOTE - Many non-traditional financing services act as a bridge to bring the client back to solutions offered by banks, etc.

That is because Canadian non-bank business financing companies - we can group them as 'Asset Based Lenders', fill the gap when a firm cannot obtain satisfactory receivable financing from their Canadian chartered bank. That also will often include the challenges of inventory finance, purchase order finance, and equipment financing and leasebacks.

CHALLENGES FACED BY CANADIAN BUSINESS

Many 7 Park Avenue Financial clients tell us they have some form of bank financing, but it does not meet their regrowth and facility size needs. In many cases, clients had a challenging 2008-2009 or have been impacted by 'COVID' in 2020 and on, and have no financing facilities, resorting to self-financing or looking at the alternate solutions we have mentioned, such as how does invoice factoring work as a cash flow solution.

UNDERSTANDING FACTORING AS A SOLUTION

Many firms are start-ups, have early-stage revenue, and cannot virtually qualify for standard Canadian operating facilities enjoyed by larger and established firms via Canadian chartered banks and insurance companies. For example, factoring works for your firm when you have decent receivables, but there are issues on your balance sheet and income statement that prohibit you from obtaining the amount of financing you need on an ongoing basis.

This working challenge is further exacerbated when you have large new contracts or volatile growth spurts based on the uniqueness of your industry.

At 7 Park Avenue Financial, we often focus on a combination of A/R financing and purchase order financing to ensure our clients can successfully monetize sales, enter into new contracts, explore new markets, etc.

BUYER BEWARE?

We have discussed the importance of ensuring you enter the 'right' finance strategy. Example: There are two types of factoring in Canada, ‘notification factoring', and non-notification factoring. Both work well if you understand how they are structured and priced. However, we favour non-notification factoring in our recommendations since we feel it more closely suits the Canadian way of doing business. At 7 Park Avenue Financial, we are a huge fan of Confidential Receivable Financing.

HOW DOES A/R INVOICE FINANCING WORK?

In ' old school ' notification type factoring, the process is straightforward and mechanical: Your firm invoices your customer. You generate an invoice. You receive a significant, almost same-day cash advance against that invoice (typically 90%). Your factor firm verifies the invoice with the customer before disbursing funds, and the factoring company pays your firm the same day you submit the invoice.

WHY CONFIDENTIAL RECEIVABLE FINANCE?

Non-notification invoice discounting and factoring are dramatically different. With this type of facility, more due diligence is spent on your firm and its business, invoicing, creating proper financial records, etc.

Your company bills and collects all its invoices, maintaining customer relationships, and you receive funds immediately after you ship and provide proof of delivery. Factoring pricing in Canada has dramatic price swings. Factoring rates range from 10% per annum to 1-2 % per month for some firms. This is a solid alternative to the client paying the third party company directly.

Non recourse factoring is also available at a higher cost and eliminates bad debt and collection risk.

WHAT FACTORS CONTRIBUTE TO HOW A/R FINANCING IS PRICED?

Factors that determine your price in invoicing factoring are the overall facility size, your usage of the facility, the overall quality of your customer base, and, unbeknownst to your firm, how the factoring firm itself is funded, usually either privately or institutionally. In summary, debt factoring and alternative financing work in Canada, and any business can benefit from this immediate positive cash flow solution.

KEY TAKEAWAYS

Cash Flow Management: Receivable factoring gives businesses a predictable cash flow, helping meet expenses, payroll, and investing in growth opportunities.

Types of Factoring:

Notification vs. Non-notification Factoring: In 'notification factoring', customers know that their invoices have been factored and make payments directly to the factoring company. In 'non-notification factoring', the business's customers pay the business directly, and it remains confidential.

Cost of Factoring:

Fees: Factoring isn't free. Once the client pays the invoice, the factor will return the remaining balance to the business minus their fee. This fee can vary depending on the arrangement but is typically 1-2% of the invoice amount or sometimes even higher.

CONCLUSION

Choosing the right facility shouldn't be a leap of faith in guessing how these concepts work. Take a hard look at solutions such as a/r financing, sale-leasebacks, purchase order finance, short-term working capital loans, and more extensive non-bank business lines of credit. They work everywhere in Canada for SME / Small business owners who face poor cash flow challenges.

FAQ

What is "Invoice to Cash Factoring"?

"Invoice to Cash Factoring" is a financial solution where businesses sell their outstanding invoices or receivables to a third party (a factor) for immediate cash. This accelerates cash flow and ensures businesses have the capital to operate and grow. In considering Invoice factoring vs. invoice financing, business owners should understand that the main difference between invoice factoring vs. invoice financing revolves around invoice collection. Factoring companies charge a fee for the service.

Under invoice financing, companies retain control of the collection. In invoice factoring, however, the factoring company collects the invoices purchased from the company under the factoring agreement. Invoice factoring and a/r financing benefit firms by providing funds before collecting the unpaid invoice.

How does this type of financing benefit businesses?

This financing method allows businesses to receive cash immediately rather than waiting for clients to pay invoices. It aids in improving cash flow, meeting operational costs, and investing in growth opportunities without incurring debt.

Are there any downsides or costs to using Invoice to Cash Factoring?

While invoice-to-cash factoring provides immediate liquidity, it typically comes at a cost. The factor usually takes a percentage of the invoice as a fee for their service. Businesses need to weigh the benefits of immediate cash of the outstanding invoice against the fees of the factoring firm.

Is this solution only for struggling businesses?

No. While it can undoubtedly aid businesses facing cash flow constraints, even successful businesses use factoring to manage their cash flow better, take advantage of growth opportunities, or bridge gaps between payable and receivable cycles until the customer pays.

How is Invoice Cash Factoring different from a traditional bank loan?

Unlike traditional loans that add to a company's liabilities, factoring is the sale of an asset (your invoice). It doesn't create debt on the balance sheet and doesn't require collateral in the traditional sense. Invoice factoring fees are expressed as a percent versus an interest rate.

Can any business use Invoice to Cash Factoring?

While many businesses can utilize factoring, it's especially beneficial for those with a significant volume of invoices. Industries with longer invoice payment terms, like manufacturing or wholesale, often find it particularly useful. The invoice factoring cost should be easily managed for businesses with good gross margins.

How quickly can a business receive funds from factoring?

Once set up with a factoring company, businesses can receive funds within 24 to 48 hours of submitting an invoice. Invoice factoring involves an initial setup, which might take a bit longer as it involves due diligence by the factor. Most factoring companies have a simple application process.

Does my business's credit score affect eligibility for factoring?

Factoring primarily concerns the creditworthiness of the invoiced client, not the business selling the invoice. However, factors might still consider the selling business's general financial health and the business owner's overall financial position.

Are there industries that commonly use Invoice to Cash Factoring?

Yes, industries with longer payment cycles, such as manufacturing, transportation, staffing, and wholesale, frequently use invoice factoring services. However, any business owner with outstanding receivables can consider this type of financing.

Can I choose which invoices to factor finance, or is it an all-or-nothing approach?

Most invoice factoring companies allow you to choose which invoices to factor in, giving businesses flexibility in managing their cash flow and overall credit control.

a. ABC Manufacturing delivers goods to XYZ Retailers and issues an invoice worth $100,000 with terms of net 30 days.

b. Instead of waiting 30 days to get paid by XYZ Retailers, ABC Manufacturing uses QuickCash Factoring Services to get immediate funds.

c. Based on the agreed advance rate of 90%, QuickCash provides ABC Manufacturing with an immediate advance of:

100,000 \times 90\% = $90,000

d. ABC Manufacturing receives the $90,000 immediately, which they can use to meet operational costs, payroll, or other immediate needs.

e. XYZ Retailers will pay the invoice directly to QuickCash Factoring Services within the 30-day terms.

f. Once QuickCash receives the payment from XYZ Retailers, they will remit the balance to ABC Manufacturing after deducting their factoring fee.

Calculation: Factoring Fee = $100,000 x 1% = $1,000 Amount remitted to ABC = Invoice Amount - Advance - Factoring Fee = $100,000 - $90,000 - $1,000 = $9,000

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

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