Accounts Receivable Factoring Services For The Savvy Business Owner

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FACTORING RECEIVABLES IN CANADA

Canadian business owners are demanding more information on receivable factoring/invoice factoring and how these factoring services via the factoring industry can help their working capital and cash flow needs. When we talk to clients we talk about several myths and misconceptions about factoring in Canada.

Let's explore some of those myths, misconceptions and misunderstandings around factoring companies as a business sells its receivables for same-day cash.

1. Factoring is pledging your receivables:

This is a popular misconception around receivable financing. Some of the misconceptions revolve around the fact that various terminologies are used to describe factoring – these include invoice discounting, receivable financing, etc.

The reality is that factoring is the sale of your receivables for immediate cash. In effect, your company sells its receivables and your firm gets an immediate almost same day, (often same day) working capital and cash flow for your business. The factor firm benefits as they make an immediate profit on the purchase of that receivable.

We should point out that customers in Canada can sell one receivable or all their receivables; they have that option and often don’t necessarily know that. The transaction becomes extremely favourable to the factoring firm based on the amount of holdback you negotiate on your transaction. Many factor firms hold back up to 20% of the receivable and don’t give those funds back to you until your customer pays. A more typical holdback is in the 10 % range of invoice value in commercial accounts receivable financing.

2. Factoring is Expensive: The cost around invoice factoring fees and receivables factoring

This is clearly at the top of the list of every discussion we have with customers around factoring. The reality is that customers view the cost of factoring as an interest rate, while the industry itself views it as a discount on the sale of the receivable. A Factoring company charges a 'fee' which is not represented as an interest rate per se.

Discount rates in Canada vary from 9% per annum to 1-2% on the invoice amount per month. So yes, if you as a business owner view the factors ‘charge‘ as a finance interest rate you will perceive it as expensive. What Canadian business owners don’t do is reflect on how much it actually costs them to carry receivables for 30, and sometimes 90 days.

And, get ready for this – they also many times don’t realize they can use the immediate same-day cash they get for their receivables to take prompt payment discounts with their suppliers, and, furthermore to negotiate better pricing and larger purchases with valued suppliers. We have known some customers to totally 100% eliminate the entire cost of factoring by buying smarter and better and paying suppliers on a 2% 10 day scenario. That is true cash flow power!

3. Factoring came to Canada from the U.S. and Europe

It was very slow to catch on and is catching on very quickly these days, aided of course by the overall global credit crunch of 2008 and 2009 – We are still in that crunch of course and business financing is still difficult to achieve for small and medium-sized business in Canada. Factor firms in Canada vary in size, and many are simply branches of foreign operations.

ACCOUNTS RECEIVABLE FACTORING SERVICES

We believe a Canadian factor firm that understands the needs of Canadian business is best suited to your needs. Each factor firm has a different way of doing business, has a daily paper flow that differs often substantially, and prices their rates and holdbacks (remember the holdback!) in a different manner.

Factoring Of Accounts Receivable Example

A company that has $100,000.00 of accounts receivable invoices for goods and services they have delivered will get a 90% advance on the invoices - The remaining 10% is a holdback and is remitted to the company when the customers pay, less a factoring fee which is charged by the factoring company - This fee is typically in the 1-2% range. Companies should ensure they understand the factoring agreement around the financing of accounts receivables.

CONCLUSION

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK/MORE INFORMATION

What is accounts receivable factoring?

Businesses that sell on credit terms are able to quickly access cash and improve cash flow by selling their receivables as part of a financial transaction with a 3rd party bank or commercial finance firm. The process of accounts Receivable Factoring via debtor finance is where borrowers assign or sell specific invoices in exchange for cash, and the factoring company collects payment from customers per the terms of the invoice. A/R finance is a subset of asset-based lending services offered in Canada.

How Do Companies Account For Receivables That Are Factored

When a company sells goods or provides services they generate a credit to accounts receivable - Cash received from the factoring company is recorded as a debit entry into cash when the factoring company pays the business - Receivable factoring companies charge a factoring fee which is recorded as a financing cost and the holdback to the invoice is recorded as debt to a/r. A/R Financing is a type of line of credit for growing companies that carry a higher level of days outstanding as investments in current assets such as receivables.

What is non recourse factoring?

Non-recourse factoring allows a company to transfer credit risk to the accounts receivable factoring company for specific clients or customer invoices. This reduces potential bad debt costs but comes with a higher financing charge as a part of the factoring fees and ultimate factoring costs. Not all, but many factoring companies offer this service based on the creditworthiness of a portfolio. Recourse factoring has the borrower maintaining the credit risk in a sale to a client - which is the opposite of nonrecourse factoring.

How much does accounts receivable factoring cost?

Factoring businesses calculate their pricing based on the volume of their client's accounts receivables. Factor companies often charge a fixed rate which is known as a factor fee.

The faster your clients pay the invoice the larger their payment will be. Advances vary in varying industry sectors, but these can reach up to 90%. The factoring fee is a monthly charge in the 1-2% range.

Will a company qualify for accounts receivable factoring?

For accounts payable factoring services, businesses must use established billing practices providing information regarding invoice pricing and terms of payment to the client. The invoice must show completed work or services or goods shipped. Companies with Government agencies as clients can also factor invoices.

' 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

Accounts Receivable Factoring Services | 7 Park Avenue Financial