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Maximize Cash Flow: Accounts Receivable Financing in Canada
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"In today's ever-changing business landscape, securing the right financing can make all the difference in propelling your company towards success."
"Imagine unlocking the financial keys to your business's growth without the headache of traditional lenders or complex paperwork."
Introduction: Understanding Accounts Receivable Financing
We wish. If only pricing and 'rates' around accounts receivable financing loan rates were easier to understand, and not so confusingly (is that a word?) presented to clients looking for a/r financing (commonly known as factoring).
We're quite sure that thousands more Canadian business owners and financial managers would look at this unique form of financing arrangement/business financing/receivables finance quite differently when it comes to funding your company's balance sheet for immediate cash!
Demystifying Accounts Receivable Financing
So if it’s not for the industry itself to explain how things work... you guessed it, it’s up to us!
You're looking at accounts receivable financing because of the value you perceive in both growing and yes surviving from an operational and growth perspective. Using growth as an example the financial reality is that as your firm does grow you require a greater investment in inventory and accounts receivable.
That investment hampers cash flow and working capital unless you have discovered a way to get your clients to pay your firm before you have to pay your suppliers and employees. Most of our clients haven’t yet found that magic formula, so accounts receivable financing allows you to achieve effective balance sheet financing.
Cost vs. Benefits of A/R Finance
In the majority of cases, A/R finance is going to be more expensive than traditional financing you could obtain through a Canadian chartered bank. But no matter what pricing you achieve in Canadian A/R finance you can still offset this cost via supplier discounts you can now take, as well as the reality that you can now compete on equal footing with all your competitors. The bottom line, you're financed to grow!
Understanding Factoring Pricing
But let’s get back to pricing and rates, which is why you came today! To be able to afford and use effectively accounts receivable financing factoring you must be in a position to have solid, at minimum reasonable gross margins. This can be achieved financially of course via pricing well to your clients and having respectable overheads.
Key Factors in Factoring Pricing
So what are the key factors that you need to wrestle down when trying to understand factoring pricing in receivable loans?
1. Advance Rate
First of all, you need to understand the advance rate. That’s the amount of funds you receive on your invoice that's able to be provided to you immediately after you generate a sale. Typically you want to enjoy the maximum advance rate, which is 90% more often than not. Advances rates less than that are not advisable in our opinion and affect your overall pricing negatively. So don’t ask the question 'what's my rate?’, make that instead 'What's my advance rate?'
2. Discount Fee
In accounts receivable loan financing, it's all about the discount fee. To most clients that’s what they think the 'interest rate' is on the deal. The reality - and this is difficult to understand - is that in factoring financing, there is no interest rate because the transaction is a 'sale' of your a/r between you and your finance partner. Your receivables are 'bought' at a 'discount' - that discount effectively being your carrying cost on the transaction.
3. Holdback Considerations
How does accounts receivable financing work when it comes to holdbacks? We talked about the advance rate on your financing being an optimal 90%. But what about that 10% holdback by the factoring company? You get that holdback back when your client pays, immediately. That’s the facility you want to strive for, as the reserve plus the advance rate can significantly impact your overall financing cost in A/R finance.
Simplifying Factoring Pricing
We're the first to agree with clients that receivable factoring pricing can be complex. One of the reasons is quite simple; the firms that offer it to you make it complex when it fact its simple cash flow management!
If you take the time to understand how this financing works and is priced we're quite certain the benefits will appeal much more clearly to your firm.
Key Takeaways
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Advance Rate: The percentage of funds you receive immediately after making a sale, typically 90%, which is crucial for your cash flow.
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Discount Fee: This represents the cost of financing in accounts receivable financing, equivalent to the interest rate in traditional loans.
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Holdback: The portion of funds, usually 10%, held until your client pays, impacting your overall financing cost.
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Factoring: The process where your accounts receivable are sold at a discount to a finance partner, improving your cash flow.
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Overheads: Necessary business expenses that should be managed effectively to maintain reasonable gross margins.
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Supplier Discounts: Savings you can attain by paying suppliers early due to improved cash flow from accounts receivable financing.
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Financial Growth: The primary objective of A/R financing via accounts receivable financing companies is to allow you to invest in inventory and expand your operations.
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Expert Guidance: Seeking advice from experienced business financing advisors for clarity and simplification of financing rates and options.
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Operational Survival: How Accounts receivable factoring helps your business survive by managing cash flow effectively.
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Competitive Edge: A/R financing enables you to compete on equal footing with competitors by providing the necessary funds for growth.
Seek Expert Guidance
Want clarity and simplicity on your accounts receivable financing loan rates?
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in making the right decisions in A/R finance and introduce you to solutions such as Confidential A/R Finance.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How does Accounts Receivable Financing benefit my business's cash flow?
A/R Financing accelerates cash flow by providing immediate funds against outstanding invoices.
Can A/R Financing help my business compete more effectively?
Yes, receivables financing ensures you have the necessary working capital from unpaid invoices to stay competitive in your industry.
What are the primary advantages of Accounts Receivable Financing in Canada?
Factoring receivables delivers enhanced cash flow, improved liquidity, and the ability to take advantage of supplier discounts via funding your unpaid invoices.
How does A/R Financing differ from traditional bank loans?
Invoice factoring is not a business loan or a true line of credit; it's the sale of your accounts receivables, providing fast access to financing capital via lender advances on A/R, without incurring debt. The factoring company pays your firm immediately after invoices are generated and your products and services have been delivered.
Is AR Financing suitable for small businesses in Canada?
It's a flexible financing solution for small business owners that benefits businesses of all sizes and is a solid balance sheet financing technique.
How do I calculate the cost of Accounts Receivable Financing?
The cost is determined by factors like the discount fee and the duration of outstanding invoices until the customer pays. Good asset turnover / days says outstanding is a key to successful a/r financing.
What documents are typically required to apply for A/R Financing?
You'll need invoices, client information, and your business financials.
Can I choose which invoices to finance, or do I have to finance them all?
In most cases, you can select which invoices to finance, providing flexibility.
What industries commonly use Accounts Receivable Financing?
Accounts Receivable Financing is widely utilized in industries such as manufacturing, distribution, wholesale, and services where businesses have outstanding invoices and need to maintain cash flow.
Can businesses with a limited credit history qualify for A/R Financing?
Yes, businesses with limited credit history can still qualify for Accounts Receivable Financing since it primarily relies on the creditworthiness of your clients and invoice value, not your business's credit history.
Are there any tax implications associated with A/R Financing?
Accounts Receivable Financing typically doesn't have significant tax implications, as it's considered a sale of assets rather than a loan. However, it's advisable to consult with a tax professional for specific advice related to your situation around a 'receivables loan".
How quickly can I access funds through Accounts Receivable Financing?
Accessing funds through Accounts Receivable Financing is relatively fast, often within a few business days once your application is approved and your invoices are verified.
What happens if my clients don't pay their invoices after I've used A/R Financing?
If your clients don't pay their invoices after you've used A/R Invoice Financing, the financing provider may work with you to recover the outstanding amount. In some cases, you might need to buy back the unpaid invoice or offer an alternative solution, depending on the terms of your agreement with the financing provider.
