ACCOUNTS RECEIVABLE LOAN FINANCING - CANADA
Introduction to Accounts Receivable Financing
Profit? From a money-losing strategy?
Before you question our sanity, consider this! Every day thousands of firms in Canada are selling their receivables at a loss - they know it, and they still have chosen to tap into one of business financing Canada's best working capital and cash flow strategies, despite the cost and apparent loss!
Loans for accounts receivable ( they aren't a loan per se ! ) provides immediate cash flow for businesses - Understanding the strategic advantae of this ( money making ?) strategy is a major benefit for Canadian SME's.
Understanding the Basics of A/R Financing
We're talking about accounts receivable financing and why those thousands of Canadian business owners and financial managers utilize an A/R finance loan (it’s not a loan per se) to fund their companies.
The Need for Alternative Financing
How many Canadian businesses have had their business credit lines pulled or reduced in the last several years? We wouldn’t want to count. Getting that letter in the mail from their financial institution either seemed like a mistake, but more probably a shock.
Naturally, there are a hundred reasons why their business credit lines were pulled/reduced. It could be external lawsuits against your firm, failing profits, your inability to produce timely financial statements, etc., etc.
And believe us, we're not taking the side of Canadian chartered banks, which are among the best run in the world, the bottom line, and any well run financial institution certainly has its rules and policies... but.. bottom line, you need a new financing solution!
The Strategy: Turning Losses into Gains
Our recommended potential solution? Lose money.
But let's clarify - consider an accounts receiving financing strategy. Your receivables are sold as you generate them, at a loss. A loss? But this loss is then turned around into a working capital and cash flow bonanza, as you now have the ability to be liquid, sell more, generate new profits previously unattainable, and yes, survive.
Receivable Finance as a Savior
Receivable finance has been the saviour of thousands of firms in Canada, from start-ups to even some of our larger corporations. While banks, credit unions and other firms have slowed down in commercial financing the receivable finance industry has stepped in to take its place.
Details of A/R Financing
So, some key points. A/R financing is not a loan, as we mentioned; your firm incurs no debt.
The Canadian commercial receivable finance industry is generally unregulated - the A/R firms buy your receivables at a discount (hence ... your ' loss'), providing you with unlimited working capital as your sales grow. Your firm should generally have stable or growing sales when this strategy is implemented.
Explaining the Costs
So what about those ' losses ' and the cost? That’s where we spend most of our time with clients, explaining the concept of invoice discounting or accounts receivable financing loan finance. Your A/R portfolio is financed by your A/R being sold at a discount - In Canada, that discount is in the 2-3% range. That 2-3% is the loss we've referred to.
A simple example is if you have an invoice for 10,000 - you receive 9800 dollars when you finance or sell that invoice. You've just incurred a loss, in reality, a financing expense.
The Benefits of Quick Cash Flow
But consider this! Here's the essence of our message today: your firm no longer has to wait 30-60 or 90 days for cash flow out of that invoice.
You can also use the cash to take a 2% discount with your key supplier, and you might also give him a call and say you'd like a 5% price reduction as you are prepared to give them a cheque as soon as they deliver the product to your door.
You can also now take on that large order you previously could not compete against competitors who have been taking all your business. Those are new incremental profits for your firm via that new business.
Key Takeaways
Invoice Financing, Cash Flow Management, Financial Liquidity Solutions, Credit Risk Assessment, and Comparison with Other Financing Options.
These core areas explain how businesses can convert receivables into immediate funds, manage financial health, assess lending risks, and choose the best financing method compared to alternatives like bank loans or credit lines.
Conclusion: Receivable Finance -Canada
Hasn’t our money-losing recommendation just become a mini-profit machine for your firm? We think it has. So yes, your financing costs may double, but the benefits are obvious.
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian Business Financing Advisor.
FAQ - FREQUENTLY ASKED QUESTIONS AND MORE INFORMATION
How does accounts receivable financing benefit my business?
Utilizing accounts receivable financing enables businesses to convert sales on credit terms into immediate cash flow, reducing the wait for payment settlements and enhancing liquidity.
What is the typical cost associated with accounts receivable loans?
The cost usually ranges from 1.5% to 2% of the monthly invoice value, depending on the lender's risk assessment and the debtor's creditworthiness.
Can any business use accounts receivable financing?
Most businesses that issue invoices with payment terms can qualify, especially those in manufacturing, wholesale, and services where trade credit is a standard practice.
How quickly can I access funds through accounts receivable financing?
Funds are typically available within 24 to 48 hours after the financing company verifies the invoices you wish to finance.
What impact does accounts receivable financing have on my business relationships?
Handled properly, it should not negatively impact your relationships with clients; disclosure to your clients varies based on whether the arrangement is notification or non-notification.
What differentiates accounts receivable loans from traditional bank loans?
Your accounts receivables secure accounts receivable loans, do not require extensive credit checks, and provide quicker access to funds compared to traditional bank loans that often involve more comprehensive credit assessments and collateral. Accounts receivable financing companies help businesses improve their cash flow by providing competitive rates, quick funding, and efficient invoice processing.
How does accounts receivable financing work?
In a notification arrangement, the financier may handle collections directly, whereas in a non-notification arrangement, your business maintains control over the collections process. When comparing accounts receivable financing and factoring, the key differences lie in the ownership of invoices, responsibility for collecting payments, structure, borrowing limit, and interest.
How are unpaid invoices and outstanding invoices managed in accounts receivable financing?
In a notification arrangement, the financier may handle collections directly, whereas in a non-notification arrangement, your business maintains control over the collections process. A factoring company purchases invoices from a company and collects payments from customers, providing immediate working capital and relieving the company of the responsibility of collecting payments.
What are the differences between invoice factoring and invoice financing?
Invoice factoring involves selling outstanding invoices to a third party at a discount, while invoice financing uses outstanding customer invoices as collateral to receive immediate cash. The invoice value is a critical factor, as companies can receive a percentage of the invoice value upfront through these methods.
How does accounts receivable financing impact the balance sheet?
Accounts receivable financing transactions do not appear on the balance sheet and do not impact a company's debt ratio. Asset based lending is available for more seasoned companies with at least several million in monthly sales and average balances. Accounts receivable financing can significantly improve cash flow by providing immediate access to funds tied up in unpaid customer invoices.
