How To Access Accounts Receivable Credit Receivables Funding Solutions Canada

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THE COMMERCIAL ACCOUNTS RECEIVABLE FINANCING SOLUTION

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factoring accounts receivable how accounts receivable financing works

Accounts Receivable Credit Financing. For the majority of Canadian business owners and financial managers that are considering receivables funding as a finance strategy the main question seems to be:

WHAT IS THE DIFFERENCE BETWEEN BANK FINANCING AND COMMERCIAL A/R FACTORING?

What is the difference between A/R receivables finance and bank financing for their company? It's a legitimate question, so let’s dig in!

A/R FUNDING IS SHORT TERM BUSINESS FINANCING

One of the main reasons in fact that many companies choose an A/R financing accounts receivable credit solution is that it simply doesn't involve new long-term financing for your company. The most simple explanation of that difference between a commercial finance solution vs. a bank scenario simply involves understanding that the receivables factoring / discounting solution is simply the sale of your receivables, as opposed to the financing of them. Both get you immediate cash flow - they just work a little differently.

HOW FUNDING WORKS

On a daily basis, the sale of a receivable generates cash flow for your firm. In Canada, you typically get 90% of all your invoice the same day you instigate the AR financing discounting process. The other 10%, less financing costs of approx 1.5- 2% is remitted to you as soon as your client pays. Simple so far, right? It is your new business line of credit!

That 2% fee in fact becomes larger, commensurate with the time your receivable financing accounts are is outstanding. So don’t be prepared to lull yourself into a fall sense of security on your new cash flow tool, because whether you are holding outstanding invoices and waiting, or financing them in an accounts receivable credit factoring situation is still going to cost you money. Carrying balance sheet accounts such as A/R and inventory is a hidden but very real cost of doing business - and the faster you turn over balance sheet accounts leads to great profits and operating efficiencies.

ADVANTAGES OF RECEIVABLE FACTORING

The key advantages of a factoring solution are:

Immediate ongoing cash flow

Funding as needed for your business if you have seasonality or bulge requirements

A more solid balance sheet that reflects cash, not A/R

It's important to us when we’re in front of clients to maintain a balanced position when it comes to explaining receivables funding. So we do point out that if you enter into the wrong facility (and Canadian companies do that every day) the actual optics of how people think you are financing your company can be perceived as negative. It should not be that way, but it is.

RECOURSE / NON RECOURSE FINANCING / CREDIT INSURANCE

Remember also that this method of financing doesn't take away the risk of carrying A/R unless you have a receivables funding insurance program, which most companies don't. So making proper credit decisions around your client's needs should still be top of mind. It is certainly not unusual for many invoices to be paid in as long as 90 days these days.

CONCLUSION

One of the key things to understand in a/r financing is simply that the cost of using this method of cash flow and working capital is a rising and falling process, depending on how much you are drawing down, what that final approximate 90% advance rate is, and the administrative costs you need to run an a/r finance program.

Small businesses can achieve the benefits of funding in the same manner that large corporations do. So, no need to be naïve when you weigh the costs of receivables funding vs. bank financing consider seeking and speaking to a trusted, credible and experienced Canadian business financing advisor who can help you set the record straight on those pros and cons of each method of finance.