Unlocking the Potential of Accounts Receivable Factoring in Canada | 7 Park Avenue Financial

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Unlock the Cash Trapped in Your Receivables: A Guide to Accounts Receivable Factoring in Canada

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Liquidity on Demand: How Canadian Firms Can Cash in on Accounts Receivable Factoring

Introduction

Guess what? Whether you are a start-up, an established business, growing like crazy, or just trying to survive and stay competitive - you need business working capital financing. That is why one solution might be accounts receivable financing/factoring in Canada.

Unlocking the Potential of Receivable Factoring in Canada? Why Canadian Businesses Are Turning to A/R Factoring 

Contrary to common perception,  business  receivable factoring isn't a financing option exclusive to businesses that can't secure traditional loans.

Some of Canada's most successful corporations capitalize on this form of working capital financing to scale their operations. While larger corporations may use fancier terms like "securitization" or include it within their asset-based lending strategies, it's still fundamentally accounts receivable factoring at its core - immediate financing for unpaid invoices!

Businesses who choose Non recourse factoring allow companies to transfer credit risk to the finance company. Recourse factoring stipulates the company still carries bad debt and collection risk associated with accounts receivable management and credit policies.

The Power of Predictable Cash Flow

One of the standout advantages of accounts receivable financing/factoring for Canadian businesses is generating predictable and limitless cash flow.

Why limitless? As your sales increase, you generate more receivables. If these can't be financed through conventional bank lines or working capital loans, factoring offers the flexibility to convert these receivables into cash. It's a customized solution: factor one, some, or all your receivables.

Bridging the Gap Between Sales and Cash Flow

Accounts receivable factoring is a real-time cash flow solution that links your sales to immediate liquidity.

Though the perceived costs might deter some, it's essential to realize that many don't fully grasp the true financial implications. Understanding the opportunity costs—what you're losing by not discounting your receivables—can offer a more accurate perspective.

A Non-Debt Financing Solution / Enhancing Liquidity & No Debt

Another important aspect of accounts receivable factoring is that it's not categorized as debt. Rather than adding a liability to your balance sheet, you're monetizing one of your most liquid assets—your receivables. Some facilities such as asset-based credit lines might also consider including an inventory component for additional liquidity.

Who Can Benefit? A/R Finance Solutions Are Suitable for Businesses of All Sizes and Industries

The universality of accounts receivable factoring as a financing option is truly remarkable. Even if your business navigates challenges such as tax issues or other financial encumbrances, you could still be a prime candidate for this financing avenue. Talk to the 7 Park Avenue Financial team about financing options.

Decoding the Basics and Assessing Costs & Fee Structure

Understanding the fundamentals of a factoring transaction is crucial. In contrast to a bank line of credit, where receivables are assigned but still owned by your firm, factoring involves selling your receivables. This paperwork results in immediate cash inflow, often on the same day, enabling you to extend credit to customers and grow sales.

It's crucial to grasp how the costs and daily operations work regarding invoice factoring.

In Canada, invoices are typically funded at around 90%, with the remaining 10% held back on the value of the invoice in a factoring transaction. The factoring fee ranges from less than 1% to 1.5% per month, often termed a "discount fee" rather than an interest rate.

Strategic use of these funds can often help recoup these costs,  and monitoring customer payments reduces costs and helps eliminate your working capital concerns, given that the factoring company pays the business as soon as a proper invoice is generated.

Both commercial, as well as government clients invoices, are eligible for financing from many factoring companies.

Navigating the Canadian Factoring Landscape

The Canadian market is replete with factoring companies, varying in size and origin. Some may even offer to bill and collect your receivables, although we strongly recommend maintaining control over your accounts and customers. Selecting a  receivables factoring firm that aligns with your capital requirements and business needs is essential.

Key Comparisons: A/R Factoring vs. Traditional Bank Lines of Credit 

1. Interest Rate:

• Traditional lines of credit typically have annual interest rates ranging from ~4% to ~9%.

• A/R factoring often costs more on an annualized basis but has unique benefits

2. Loan Duration:

• A bank line of credit is usually ongoing and subject to annual reviews.

• A/R factoring generally has a short duration, typically 30-90 days, based on the vendor’s payment terms.

3. Loan-to-Value (LTV):

• Traditional bank lines usually offer up to 75% of good accounts receivable.

• A/R factoring companies often advance 75-90% of an invoice’s face value.

4. Purpose of Loan:

• Bank lines are generally for "general working capital" and may have usage restrictions.

• A/R factoring offers greater flexibility in how the funds can be used.

•  

In summary, while traditional lines of credit are less expensive, A/R factoring offers higher advance rates and more flexibility, which could make it more suitable for certain businesses.

 Key Takeaways

 Conclusion: Take Control of Your Working Capital 

Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian financing advisor to determine how you can best manage your working capital and cash flow and minimize accounts receivable factoring cost.

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

What is Accounts Receivable Factoring?

 Accounts Receivable Factoring is a financial strategy where businesses sell their accounts receivable (invoices) to a third party (the factor) for immediate cash instead of waiting for the customer to pay.

Accounts receivable (A/R) factoring, or invoice discounting, is a short-term financial arrangement where businesses sell their unpaid invoices to a factoring company for immediate cash. This option is only applicable to businesses that operate on credit terms, allowing them to collect payment at a future date. By selling these future payments, or accounts receivable, at a discounted rate, businesses can get immediate cash flow instead of waiting for the payment term to expire.

Is Accounts Receivable Factoring a form of debt?

No, factoring receivables is not a form of debt and brings no debt to the balance sheet.  You are not borrowing money; you're essentially monetizing one of your most liquid assets—your receivables. This means no additional liabilities on your balance sheet.

Why would a Canadian business consider Accounts Receivable Factoring?

 This type of financing offers quick and predictable cash flow. It's especially beneficial for Canadian businesses that may not be eligible for traditional bank loans or those looking for more financial flexibility and control via an accounts-receivable factoring company.

Are there any hidden costs involved?

The main cost is the "discount fee," ranging from less than 1% to 2-3% monthly. It's essential to weigh this cost against the opportunity cost of not having immediate cash flow to grow your business or take advantage of supplier discounts. Business owners should know how factoring accounts receivables works and what costs are when weighing benefits.

Do I lose control over customer relationships when using a factoring service?

Not necessarily. Many factoring services offer "non-notification" factoring in a factoring agreement, where you maintain control of your accounts and customer relationships. Factoring fees remain similar via non-notification Confidential receivable financing solutions.

Selecting a factoring service that aligns with your business needs and growth strategy is essential.

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