Your Guide To Accounts Receivable Financing Factoring & Cash Flow Solutions

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ACCOUNTS RECEIVABLE FACTORING SOLUTIONS WORK! HERE'S WHY AND HOW!

ACCOUNT RECEIVABLE FINANCING VS FACTORING

Accounts receivable financing alternatives were virtually close to unheard of some years back. How did 'cash flow factoring' become so popular and fast-growing for business owners and financial managers who need to access working capital funding for trade receivables in their businesses when a traditional bank loan arrangement is not available. Let's dig in.

ARE YOU ABLE TO ACCESS ALL THE TRADITIONAL FINANCING YOU NEED

Suppose your firm does not have traditional financing in place with a Canadian chartered bank or can't negotiate that financing, more importantly. You are forced to explore alternative working capital solutions through a firm such as an accounts receivable factoring company for invoice amount funding.

RECOURSE OR NON-RECOURSE? FINANCING CREDIT RISK

When factoring receivables, you can choose between non recourse factoring or recourse factoring, depending on how you wish to manage traditional client credit risk.

With factoring of receivables with recourse you assume your normal credit risk on the transaction- In recourse factoring, your firm sells its receivables and still has a liability to the factoring company if receivables prove uncollectible. When factoring accounts receivable without recourse the company transfers credit risk to the factoring company.

Factoring costs for financing accounts receivable will vary based on the type of solution you choose. Financial accounting and factoring company charges are easy to understand, and your accountant can clarify the difference between a business loan/bank loan versus a/r finance.

ACCOUNTS RECEIVABLE FINANCING COMPANIES

How long does it take to put an A/R financing solution in Canada with finance company/factoring companies? Suppose you are well researched or use the services of a trusted and credible experienced advisor. In that case, our experience is that you access that type of facility within a couple of weeks. This is significantly less time than it might take you to negotiate traditional bank type financing or a working capital term loan with a banking/credit union or other conventional sources of capital.

So why then are owners/managers looking at this type of solution via receivable factoring for their growth and operating needs?

While historically, some industries have used the financing more than others, we can safely say that almost every industry in Canada is currently utilizing this financing solution - simply about when a company sells its a/r. When a business sells, its a/r is similar to assigning your receivables to a bank - the paperwork is merely different in the financial transaction. The interest expense is reflected in your financial statements.

A KEY REASON TO CONSIDER FUNDING RECEIVABLES

The most typical firm will often be one with expansion capital needs or is simply growing too quickly. It is somewhat ironic that banks and more traditional lenders frown on hyper-growth because of the imbalance in changes in working capital accounts- therefore, invoice factoring becomes a potential solution.

The bottom line is a company is forced to carry more accounts receivables and inventories. That issue, though, is the simple reason that working capital funders like your business growth - more assets to finance

In some cases, factoring can be a temporary ' stop-gap ' solid in financial distress or restructuring - generally, firms in this category use factoring for some time and then gravitate back to a more traditional type of financing.

UNDERSTANDING FACTORING COSTS

Many clients we meet and speak to want to discuss their perceptions that factoring is a ' costly ' method of financing for a factoring fee/costs. Congratulations! You are 100% correct and 100% incorrect!

While the face value cost of financing your receivables in a factoring solution might seem much higher than bank rates, let’s make sure to cover a few key points. First of all, it costs you to carry your accounts receivable. We meet with customers who sell on thirty-day terms and constantly tell us they are waiting 60 and 90 days to collect their receivables.

Remember that savvy business owners comprehend the cost to carry those receivables. All of a sudden, factoring seems a bit less expensive. Also, consider this scenario, do you want to sell your product or service once and wait 60 days to 90 days to collect your funds?

Or ... would you rather sell your product or service, get paid the same day for those goods (that’s what factoring does), and then reinvest those funds into more goods, allowing you to bill your customer and generate more revenue and profit?

Firms with respectable gross and net profit margins can fairly easily absorb the additional costs of A/R finance via a non-bank commercial lender. If you have those decent margins, you can quickly see that a strong case could be made that factoring is the cheapest financing method for factoring fees! The factoring fee is considered interest expense but is not expressed as an interest rate per se.

And remember, it’s cheaper and more accessible than accessing more equity or taking on term debt on your balance sheet. The bottom line of factoring: It cash flows your sales instantly when using most factoring companies that offer the type of solution you are looking for.

We strongly suggest you analyze your own ' costs to carry ' in the context of selling your products and services and replicating that process 2-3 times in a 60-90 day period. Your accounts receivable balance is often one of the most significant assets on your balance sheet.

Effective management of your company's accounts receivables and constant turnover of unpaid invoices is key to business and cash flow success! The invoice value of outstanding invoices should be monitored on an ongoing basis - A/R solutions can also be done via a total asset-based lending solution that funds your receivables/inventories and hard assets. For more info on 'ABL' solutions, talk to the 7 Park Avenue Financial team.

CONCLUSION - ACCOUNTS RECEIVABLE FACTORING COMPANIES

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

Invoice Factoring via a factoring agreement helps companies free up their most liquid asset on the balance sheet and is a great way to turn your invoices into cash without the hassle of dealing with applications and waiting periods. You can even deal directly on the internet if you require quick funds! Accounts Receivable Financing referred to as "Factoring," allows companies with good credit but lack liquidity because their customers haven’t paid them yet, access to short-term loans through an invoice sale at discounted rates from specialized finance companies known as Factors that buy these receivables outright.

Accounts receivables factoring provides immediate cash flow for businesses that are waiting on payments from customers, No debt is taken on the balance sheet and a firm can fuel growth without relying on external financing when the factoring company pays invoices.

A company can factor its receivables after it has provided goods or services and generated an invoice - A company can receive immediately approximately 90% of the invoice - the remainder 10% is paid to the company by the factor, less a finance fee when the client pays the invoice. Factor fees in Canada from a commercial financing company are in the 1-2% range.

What is the difference between factoring and financing of accounts receivable?

Factoring industry solutions and bank financing are different methods of financing receivables with the issue being ownership of the receivables - Factoring companies charge a fee and buy your invoices at a discounted rate while banks take an assignment of a company's receivables and allow a company to borrow them at a rate which is typically in the 70% range. It is all about who owns these accounts receivable regarding the company's customers.

' 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 Financing Factoring Cash Flow | 7 Park Avenue Financial

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