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SMALL BUSINESS ACCOUNTS RECEIVABLE FACTORING SOLUTIONS
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Accounts Receivable Financing and working capital solutions – Save time, and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
Accounts Receivable Finance Solutions
Through a business factor, account receivable financing in Canada is a financial solution where businesses sell their outstanding invoices to a finance company to obtain immediate capital.
This method, known as accounts receivable ar financing, allows businesses to improve cash flow management by providing quick access to funding.
It is particularly beneficial for small and medium-sized enterprises (SMEs) that need flexibility and immediate capital. How can the owner/manager both reduce costs and enhance benefits? There are numerous ways… so let’s dig in.
WHAT IS ACCOUNTS RECEIVABLE FINANCING?
Accounts receivable financing is a financial solution that lets you use your outstanding invoices to get cash from a bank or a receivable financing company.
It’s great because it doesn’t create debt and isn’t dilutive – you don’t have to give up equity in your business. Instead, you sell your accounts receivable to a third party at a discount and get a cash injection.
This is perfect for businesses in any industry that need to improve cash flow and keep their balance sheet healthy without taking on more debt.
CASH FLOW CRUNCH - TURN YOUR SALES INTO INSTANT CAPITAL!
If your business is growing, it's not unusual that slow-paying clients can stifle your cash flow - That's stressful for owners and financial managers and can eliminate chances to take advantage of opportunities.
Let the 7 Park Avenue Financial team show you how to access immediate cash flow as sales are generated.
3 Uncommon Takes on A/R Finance
- Using AR financing as a competitive advantage to offer better payment terms than competitors
- Leveraging AR financing for international expansion without currency risk
- Using AR financing data analytics to identify your most profitable customers
WHAT IS THE DIFFERENCE BETWEEN FACTORING AND ACCOUNTS RECEIVABLE FINANCING?
We get that one a lot at 7 Park Avenue Financial. The simple answer is that financing accounts receivable via banks involves your company ‘assigning’ all your accounts receivable to the bank.
With a non-bank factoring solution known as accounts receivable factoring from factoring companies, the paperwork specifies when your company sells its accounts. This provides businesses with immediate cash flow by selling their outstanding invoices to a third party.
This contrasts with accounts receivable financing, where the responsibility of payment collection remains with the business. In both cases, businesses draw down on funds based on levels of a/r. Both solutions provide what you are looking for—immediate cash!
TYPES OF RECEIVABLES FINANCE
There are several types of receivables finance, each catering to different business needs:
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Invoice Factoring is a specific type of receivables financing usually offered by alternative funding providers. It allows businesses to receive close to the full amount (97-99%) of their accounts receivable’s value minus the factor provider’s fee. This method provides immediate cash flow and is particularly useful for businesses needing quick funds access.
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Accounts Receivable Financing: This lending solution uses a company’s accounts receivable to secure capital. The invoices are collateral to a third party, usually a bank, which provides an interim loan. This type of financing helps businesses manage their cash flow without waiting for customers to pay their invoices.
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Accounts Receivable Loans: In this type of funding, a business borrows against its accounts receivable. The lender provides cash in advance based on the value of the outstanding invoices, and the business repays the advance plus fees when the invoices are paid. This option benefits businesses that need immediate cash but prefer to retain control over their receivables.
ASSET TURNOVER IN YOUR BUSINESS RECEIVABLES IS THE KEY TO SUCCESSFUL CASH FLOW
The ability to manage your company's accounts receivable effectively while maximizing the benefits of receivable finance is the ultimate ‘business whammy’!
Part of the reason is that your investment in A/R is often the largest liquidity component in your business. So, managing your sales investment will directly affect your relations with suppliers, lenders, and clients.
WHAT IS THE BEST FORM OF FACTORING RECEIVABLES FOR SMALL BUSINESSES
We advise clients also to consider CONFIDENTIAL RECEIVABLE FINANCING, which allows them to eliminate their clients from the notification process typically associated with traditional receivable financing.
That came to us from business practices in the U.K. and Canada. In Canada, we’re a little different, eh?!
Receivable factoring is a type of financing that works for thousands of firms daily and is the fastest-growing part of alternative finance asset-based lending solutions.
Accounts receivable financing companies offer significant benefits, such as competitive rates, quick funding, and flexible contracts, making them an excellent option for enhancing cash flow and managing outstanding invoices.
WHEN A/R FINANCING DOES NOT WORK
When does account receivable financing via a business factoring company go awry? It’s when the owner/manager considers it as a total cash flow machine (which it is) but then lets other aspects of the company receivables investment get off track.
Accounts receivable financing involves lenders advancing cash based on outstanding invoices, allowing companies to improve cash flow and cover expenses.
However, while they get immediate cash flow from A/R financing, they may become lax in collecting accounts and granting credit. Remember that in most ‘Recourse’ A/R financing in Canada, you’re still responsible for bad debts, so don’t act like a drunken cowboy when granting credit, special terms, taking on ultra-large orders, etc.
Be mindful of the potential costs associated with borrowing.
The opposite of all that is running your focus properly, combining the benefits of AR financing (instant cash flow, unlimited working capital, ability to take on larger orders, easier approval than bank financing) with proper Receivables management.
We note to our clients that non-recourse and recourse factoring are separately available based on your decision to carry credit risk or sell it off.
3 KEY ISSUES FOR MANAGEMENT OF A/R
So, what is that ‘proper’ management focus? It’s:
A good credit-granting policy
Proper collections and follow-up on accounts
Good financing reporting on at least a monthly basis (i.e. aged accounts, etc.)
Taking your month-end a/r and determining how well you turn over current assets such as account receivables and inventory should be ‘ JOB 1’ when monitoring ongoing financial performance.
Additionally, understanding the terms and conditions of any financing arrangement is crucial to effectively managing cash flow needs and avoiding unnecessary costs.
OVERCOMING ACCOUNTS RECEIVABLE CHALLENGES
Accounts receivable financing can help businesses overcome several common challenges:
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Cash Flow Problems: By providing immediate access to cash, accounts receivable financing helps businesses manage their cash flow more effectively, avoiding financial difficulties and ensuring smooth operations.
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Slow Payment from Customers: Selling outstanding invoices to a third party allows businesses to avoid the long wait for customer payments, providing immediate cash instead. This can be crucial for maintaining liquidity and meeting short-term financial obligations.
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Limited Access to Credit: Accounts receivable financing offers businesses access to credit that they might not have otherwise had. This enables them to invest in growth and expansion, taking advantage of new opportunities without being held back by cash flow constraints.
AN EXAMPLE OF MEASURING THE BENEFITS AND COST OF A/R FINANCING
EXAMPLE: Your annual sales are $2,500,000.00 and your year-end AR is $350,000 -
The A/R Turnover Ratio formula is: Annual Net Credit Sales ÷ Average Accounts Receivable.
Given:
- Annual Sales = $2,500,000
- Year-end A/R = $350,000
Assuming this is the average A/R balance: $2,500,000 ÷ $350,000 = 7.14
Therefore, the company's accounts receivable turned over 7.14 times during the year.
To find the average collection period (in days): 365 ÷ 7.14 = 51 days
This means:
- The company collects its receivables about seven times per year
- It takes an average of 51 days to collect payment
- A higher turnover ratio would indicate a more efficient collection
For Canadian businesses, this would be considered a moderate turnover rate. Many industries aim for 12 (30-day collection) or higher turnover rate.
THE ROLE OF TECHNOLOGY IN ACCOUNTS RECEIVABLE
Technology plays a pivotal role in modern accounts receivable management. Many businesses now use online platforms and software to streamline their accounts receivable processes and access financing. These technological solutions offer several benefits:
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Faster Access to Cash: Online platforms can provide businesses with immediate access to cash, helping them manage their cash flow more efficiently and invest in growth opportunities.
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Improved Efficiency: Automation and AI can significantly reduce the time and effort required to manage outstanding invoices. These technologies streamline processes, minimize errors, and enhance overall efficiency.
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Increased Transparency: Online platforms offer real-time visibility into accounts receivable, allowing businesses to make informed financial decisions. This transparency helps in better resource planning and management.
CUSTOMER RELATIONSHIPS AND ACCOUNTS RECEIVABLE MANAGEMENT
Maintaining strong customer relationships is crucial for any business, and effective accounts receivable management can play a key role. By utilizing accounts receivable financing, businesses can:
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Improve Communication: Outsourcing collections to a third party can enhance customer communication, avoiding awkward conversations about payments and ensuring a professional approach.
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Reduce Stress: Accounts receivable financing alleviates the stress and pressure associated with managing outstanding invoices. This allows businesses to focus on building and maintaining strong customer relationships.
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Increase Trust: Providing customers with a professional and efficient payment experience can increase trust and foster long-term relationships. A well-managed accounts receivable process reflects positively on the business, enhancing its reputation and customer loyalty.
By integrating these new sections, the article will provide a comprehensive overview of accounts receivable financing, covering its definition, types, benefits, and the role of technology while also emphasizing the importance of customer relationships.
THE CLASSIC BENEFIT OF ACCOUNT RECEIVABLES FUNDING
The classic benefit of account receivable financing in Canada is the ability to take on larger orders from creditworthy accounts, things that your competition might not be able to consider.
They can’t consider that because investing in new sales requires a cash investment in your current asset accounts that you could otherwise not make.
Accounts receivable financing can be a quick and flexible solution to improve cash flow without the lengthy approval processes associated with conventional financing options, making it particularly beneficial for businesses that may struggle to qualify for a line of credit due to their newness or financial situation.
So unless you’re Apple Computer selling billions on a cash sale basis, it’s a challenge that business owners in the SME COMMERCIAL area face every day.
DID YOU KNOW
- 88% of businesses wait over 30 days for payment
- AR financing market grew 24% in 2023
- Average invoice payment time is 45-60 days
- 64% of small businesses face cash flow challenges
- AR financing can reduce DSO by up to 70%
KEY TAKEAWAYS
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Immediate access to working capital transforms unpaid invoices into usable funds.
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The credit quality of your customers matters more than your business credit score.
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Advance rates typically range between 80-90% of the invoice value
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Financing fees generally fall between 1-3% per month
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Professional receivables management improves collection efficiency
CONCLUSION
Receivable financing provides valuable cash flow to firms and is a solid funding source.
The cost of factoring a/r is a fee, not an interest rate, and utilizing this form of working capital funding improves day-to-day business operations.
There are numerous types of factoring, and the terminology can often be confusing to new clients. Therefore, they should get expert assistance in determining the type of AR finance that works best for their firm and industry.
The quality and turnover of your AR base will help determine your best pricing and the type of facility most suited to your company and industry.
The cash crunch is typical for every firm, large and small. Your investment in growth and accounts receivable levels will impact your ability to cover short-term obligations such as payroll, equipment leases, investments in r&d, etc.
Don’t overlook the benefits of proper working capital financing - including immediate cash, short-term inflow of capital to fund operations, and the ability to take on larger orders and contracts with new or major clients.
Leveraging outstanding receivables allows businesses to use their unpaid invoices as collateral for securing loans or immediate cash flow, providing a crucial financial lifeline without creating additional debt.
It’s time to tackle the balance sheet challenge of growth. Consider account receivable financing through a business factoring firm in Canada to turn your firm into a cash flow machine.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in matching A/R financing with solid ways to reduce the costs of that type of business finance.
FAQ
What makes accounts receivable financing better than traditional loans?
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No debt added to balance sheet.
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Approval based on customer creditworthiness
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Faster funding process
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Scales with your business growth
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No fixed monthly payments
How quickly can my business access funds?
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Same-day approval possible
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Funding within 24-48 hours
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Online application process
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Simple documentation requirements
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Immediate access to capital
What types of businesses benefit most from AR financing?
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B2B companies
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Manufacturing firms
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Service providers
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Wholesale distributors
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Staffing agencies
What are the cost advantages of AR financing?
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No long-term commitments
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Pay only for what you use
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Predictable fee structure
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Tax-deductible financing costs
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Reduced collection expenses
How does AR financing improve business operations?
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Better cash flow management
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Professional collections service
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Reduced administrative burden
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Improved customer relationships
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Enhanced growth opportunities
Is accounts receivable financing right for my business?
AR financing works best for B2B companies with creditworthy customers and 30-90-day invoice terms.
Does AR financing affect my customer relationships?
Professional factors handle collections respectfully while maintaining positive customer relationships. Clients can also choose confidential non-notification factoring.
What documentation is required for approval?
Basic requirements include:
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Recent accounts receivable aging report
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Sample invoices
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Business registration documents
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Last three months' bank statements
How does the approval process work?
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Submit application and documents
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Factor reviews customer credit
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Receive approval decision
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Sign agreement
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Begin funding
What happens if my customer doesn't pay
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The factoring company doesn't assume the non-payment risk i
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Your business is protected
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Professional collections handled by factor
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Non recourse options available
What distinguishes accounts receivable financing from traditional loans?
How does the pricing structure work?
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Factor fee (1-3% monthly)
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One-time setup fees
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No hidden charges
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Volume discounts available
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Transparent fee structure
What are the qualification requirements?
