Accounts Receivable Finance Cash Flow Factoring Solutions

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WANT TO FIX YOUR CASH FLOW ISSUES? HERE'S HOW!

Cash flow needs for Canadian business owners usually have them in one of two camps - either they have unlimited cash resources (doubtful!) or they are constantly hampered by day-to-day challenges in growing and managing their business - (probable!).

WHAT IS RECEIVABLES FINANCE

Accounts receivable finance solutions via factoring companies could well be the solution to all your problems - receiving cash immediately upon invoicing! This method of trade finance allows your cash flow to become 'predictable', thereby avoiding the proverbial 'cash flow crunch'. Let's dig in.

WHY ARE THE ADVANTAGES OF FINANCING RECEIVABLES FOR YOUR BUSINESS?

Business owners and their financial managers can't afford to let the accounts receivable financing gap between invoicing and collection grow larger - A/R financing allows a business to convert sales on business credit/trade credit into cash.

Don't find your business being cash dependent all the fine - Slow paying clients seem almost the norm these days!

WHAT IS DEBT FACTORING?

Debt factoring is a term for the sale of accounts receivable to a third-party lender - The receivable is sold at a discount, which enables a business to unlock the cash flow tied up in the company's accounts receivables investment. The ability to not have to wait to receive payment increases cash flows to the business almost automatically.

Canadian business owners and financial managers face, on a daily basis, real world cash flow challenges. Let’s look at an example of why accounts receivable finance can be your holy grail of working capital financing. Cash flow financing goes by a number of different names in Canada - that is part of the confusion we are always trying to wade through on our client's behalf.

Owners and finance managers choose this method of financing to shorten their cash flow cycle - this type of financing accelerates cash and allows the company to meet short term day-to-day obligations as it relates to the credit terms they offer their customers. As company sales grow so does the level of A/R and inventory that you are carrying, therefore tying up working capital.

Note also that these types of financing facilities grow as your sales revenues increase. There is virtually no upper limit to your company's ability to cash flow sales. A/R financing via asset-based facilities tends to be a bridge to a firm's access to more traditional bank type finance. Smaller and growing companies want to avoid equity dilution, and asset monetization strategies such as factoring allow your firm to grow with the need for additional owner equity.

Various terms apply to this type of business receivables financing. They include receivable factoring, invoice discounting, A/R financing, invoice factoring, and our favourite and most recommended solution - Confidential receivable financing. Depending on how your transaction is structured and who you are dealing with is really the key issue - It's not about what the financing is called!

Clients always want to know if they are a candidate for receivables finance. There are some perfect candidates, so let’s look at a profile or two in order that you can determine if you fit.

Generally, you will have accounts receivable outstanding invoices that pay fairly regularly but are on occasion slow. Note also that investigating this cash flow finance solution is not at all about a business loan - it's simply a monetization of your current assets! Another key benefit for firms considering funding receivables and cash flow/working capital loans, also known as 'merchant advances' is the ability to avoid fixed repayments under a term loan type of financing versus account receivable loans.

Your overall bad debt experience has probably been in the satisfactory/respectable column. Your invoice and stated terms for your customers is 30 days, but guess what? Some or many clients pay in 60 and 90 days. Bottom line - you're in the category of needing an A/R finance solution from a commercial financing company

Does size count? It depends on what you're talking about of course! In cash flow financing, it really doesn’t. Speaking in general terms, if you have at least $50,000 of invoices a month you are a candidate for accounts receivable finance. The reality is that corporations with millions of dollars in receivables actually utilize this form of financing also. It is important to understand that A/R financing from a factoring company the factoring cost is determined as a fee, as opposed to an interest rate.

WHAT ARE THE FACTORS THAT AFFECT OVERALL FINANCING COSTS IN RECEIVABLES FINANCE?

Note however that the business owner and financial manager must determine whether they want recourse or non-recourse financing, i.e. the transference of the risk of collection. Also, you have the choice at the start of your facility of determining if your or the commercial lender carries the credit risk associated with bad debt.

At 7 Park Avenue Financial, our recommended solution for A/R factoring is Confidential Receivable Finance - allowing your firm to bill and collect its A/R while retaining all the benefits of invoice financing.

Where size might count a bit is that it has a potential effect on your overall financing cost. In our experience, you can potentially reduce the cost of your accounts receivable finance facility by close to 1% per month if you have a large facility. However, we spend many hours and many meetings educating Canadian businesses on factoring pricing, which is grossly misunderstood by most clients who look into this type of business financing.

THE BOTTOM LINE?

So the bottom line is that you should not let your company size or any other challenges you might be facing (temporary financial losses, restructuring, etc.) affect your ability to successfully achieve accounts receivable finance strategy.

Many times the decision to consider factoring of your receivables comes from directly related issues to collections. In some cases the slow pay nature of your client may be affecting your ability to purchase inventory or meet payroll - It is that type of classic situation that drives clients to seek outside financing assistance.

HOW DO ACCOUNTS RECEIVABLE AFFECT CASH FLOW?

When you finance (in effect you are selling) your receivables under this type of facility you immediately receive a 90% advance on your invoicing - which allows you to meet obligations and expand your business.

Traditional sources of business financing in Canada, i.e. chartered banks have made it challenging for firms to finance receivables in a manner that makes sense for the business owner. In some cases, as we noted, your business has had challenges that prohibit you from temporarily sourcing cash flow financing from banks.

That's why a commercial finance company might often be your best bet in alternative financing choices. No bank loan applications are required!

No debt is added to your company balance sheet when you finance receivables. Even the largest corporations in Canada use a similar method of financing; it just comes with a fancier name - Securitization!

CONCLUSION - ACCOUNTS RECEIVABLE FINANCING

Small business owners, as well as mid-sized companies, can't afford to neglect and address their cash flow needs - Speak to a trusted, credible and experienced business advisor, and focus on getting into a facility that meets your needs regarding day-to-day working capital needs while address business growth and raising cash utilizing Canada's most popular form of asset based lending. Let our team address receivable financing problems and the solutions available for business funding options.

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

What is receivables financing?

What are the different types of Accounts Receivable Financing?

Invoice factoring is a common type of AR financing for money owed to a company. A business receives early payment based on invoices on the company's balance sheet for products and services provided to the company's customers, The supply chain finance timeline in a business can be lengthy - so the account receivable cash advance under a loan agreement/ factoring agreement from factoring companies benefits the cash flow of a business. Companies should generally try and avoid long-term contracts with factoring companies. Factoring fees are based on a variety of factors that reflect lender risk, etc.

Larger businesses and large corporations use receivable finance asset-backed securities such as securitization techniques which operate in a similar manner - ie the company sells its a/r for cash. Understanding receivable financing vs factoring is important in the decision to fund receivables. Receivable financing is generally done via unsecured credit lines from banks or secured loans from asset based lenders.

Is factoring receivables a loan?

How does AR factoring work?

' 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

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