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Unlock Your Business's Hidden Cash: Turn Invoices into Instant Capital!
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Accounts Receivable Funding and working capital solutions – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
Accounts Receivable Funding: A Solution for Business Borrowers
What is Accounts Receivable Financing?
Accounts receivable financing is a financial strategy that allows businesses to leverage their outstanding invoices to secure immediate cash.
Also known as invoice financing or receivable financing, this method provides a quick infusion of working capital, which can be crucial for covering short-term expenses, investing in growth opportunities, or seizing new business prospects.
By converting unpaid invoices into cash, businesses can effectively manage their cash flow and maintain smooth operations. This financing option is particularly popular among companies with a high volume of invoices, as it helps bridge the gap between issuing invoices and receiving payments, ensuring a steady cash flow.
How Accounts Receivable Financing Works
Accounts receivable financing works by enabling businesses to borrow money against the value of their outstanding invoices.
Here’s how the process typically unfolds:
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Invoice Submission: The business submits its outstanding invoices to a financing company.
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Advance Payment: The financing company advances a percentage of the invoice value, often ranging from 70% to 90%, providing the business with immediate cash.
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Customer Payment: The business’s customers continue to pay their invoices as usual, either directly to the financing company or through a dedicated account.
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Final Settlement: Once the customer pays the invoice, the financing company releases the remaining balance to the business, minus a fee for the service.
This process allows businesses to access funds quickly, without waiting for customers to pay their invoices, thereby improving cash flow and providing financial flexibility.
The Working Capital Dilemma
Alternative Financing Options
How do firms that can’t qualify for bank financing (or all the bank financing they need) solve the working capital dilemma?
A solid ‘Plan B’ solution is (A/R) ar financing of your accounts receivables. Factor or discounting finance has become a significant contributor to the funding of Canadian businesses - of all sizes.
Accounts receivable financing work helps businesses manage cash flow by allowing them to access capital quickly and efficiently without relying on traditional loans.
Your ability to turn current assets such as receivables (and of course inventory) makes you quite simply a better credit risk for your lenders and suppliers.
Most Canadian business owners and financial managers realize very quickly that profits do not automatically generate cash flow for your business. In the long run of course they do equal cash flow… however you will not your suppliers and other lenders rarely want to wait for the ‘long run’!
The Importance of Cash Flow
Profits vs. Cash Flow
Naturally, if you don't need to borrow and can generate cash by waiting and collecting your receivables your cash flow stays 'internal'.
To stay in business for the long haul, you, of course, need three key underpinnings—profit, cash, and solvency. As we have said, profits don't equal solvency in the short term, and that's where AR financing comes into play.
Benefits of Factor Finance
So why do thousands of Canadian firms (yes thousands) turn to factor finance?
Simply speaking it’s an alternative way to funding growth, turnaround and restructuring. A factoring company takes on the risk of customer non-payment and handles the collection process, allowing businesses to focus on other aspects of their operations.
If utilized properly you are now in a position to take and negotiate vendor discounts with your key suppliers, enhancing your relationship over the long term.
Bank Financing vs. AR Financing
So, the logical question we get from clients is of course 'why not the bank?'
Although bank financing of receivables is by far a cheaper method of financing your working capital that solid pricing comes with stringent credit requirements. The bottom line is that ar financing and funding have quite often much more flexibility when it comes to your firm's particular current financial situation.
Understanding AR Financing Solutions
Factor financing is often viewed as ‘the gap’… it’s the bridge between your current situation and traditional funding.
There are several different AR financing solutions in Canada. Many Canadian business owners and financial managers are confused by the terminology… recourse…notification… discount rate, reserve holdback, etc.
Receivable financing companies utilize technology for faster assessment and capital provision, streamlining the process for businesses needing quick cash flow solutions.
Confidential Factoring Facility
Our recommended solution to clients is what we term a 'confidential factoring' facility. This facility allows you to bill and collect all your own invoices...
Unlike the majority of this type of financing in Canada, your clients are not contacted or notified. You simply must be able to maintain proper monthly financials and reporting around your A/R.
Key Considerations
When exploring accounts receivable financing, businesses should consider several key factors to ensure they make an informed decision:
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Customer Creditworthiness: Financing companies assess the creditworthiness of your customers to gauge the risk of non-payment. Strong customer credit profiles can lead to better financing terms.
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Invoice Age: The age of your invoices can impact the terms of the financing. Newer invoices are generally more favorable, while older invoices may come with stricter conditions.
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Industry and Sector: Some financing companies specialize in certain industries or sectors. It’s important to choose a financier familiar with your business’s specific needs and challenges.
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Invoice Volume: The number of invoices you plan to finance can affect the terms and conditions. High-volume invoice financing might offer more competitive rates and terms.
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By carefully evaluating these factors, businesses can select the most suitable accounts receivable financing option to meet their needs.
Calculating Financing Costs
The amount a business can receive through accounts receivable financing is typically calculated as a percentage of the invoice value.
Here’s how it works:
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Credit Assessment: The financing company evaluates the creditworthiness of the business’s customers and the age of the invoices.
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Advance Rate: Based on this assessment, the financing company determines the advance rate, the percentage of the invoice value they are willing to provide upfront. This rate usually ranges from 70% to 90%.
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Fee Structure: The financing company charges a fee for the service, which is deducted from the remaining balance once the invoice is paid.
This calculation ensures that businesses receive a fair and immediate cash advance while the financing company mitigates its risk.
Choosing a Finance Partner
Selecting the right financier for accounts receivable financing is crucial for maximizing benefits and minimizing costs. Consider the following factors:
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Experience and Reputation: Choose a financier with a proven track record in accounts receivable financing and a solid reputation in the industry.
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Terms and Conditions: Compare the terms and conditions different financiers offer to find the most favourable agreement for your business.
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Fees: Evaluate the fee structures of various financiers to ensure you’re getting a competitive rate.
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Customer Service: Opt for a financier with excellent customer service and a responsive support team to assist you throughout the financing process.
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By carefully considering these factors, businesses can select a financier that aligns with their needs and provides the best possible terms for accounts receivable financing.
Key Benefits of Factor Funding
Automatic Growth and Asset Monetization
A key benefit of factor funding in Canada is that facilities grow automatically as your firm grows—there is no constant re-applying. Many clients miss the key fact that this type of financing is not debt—it's a monetization of your assets. Over the long term, you will increase profits and sales turnover.
Three uncommon takes on Accounts Receivable Funding:
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Accounts receivable funding as a strategic tool for seasonal businesses to smooth out cash flow fluctuations.
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Using accounts receivable funding to finance rapid international expansion without diluting equity.
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Leveraging accounts receivable funding to negotiate better terms with suppliers, creating a competitive advantage.
KEY TAKEAWAYS
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Immediate cash conversion: Transform unpaid invoices into working capital
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Flexibility: Access funds without long-term debt commitments
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Risk mitigation: Transfer collection responsibilities to funding providers
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Scalability: Funding grows with your sales, supporting business expansion
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Credit enhancement: Improve your financial position by leveraging receivables
Conclusion
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor, to learn how funding and financing your receivables can help you grow sales and profit.
FAQ
How does the accounts receivable factoring improve my business's cash flow?
Accounts receivable funding converts unpaid invoices into immediate cash, allowing you to access working capital without waiting for customer payments. This accelerates your cash flow cycle, enabling you to cover operational expenses, invest in growth opportunities, or take advantage of supplier discounts.
Can accounts receivable finance companies help my business grow faster?
Yes, by providing quick access to working capital, a company's accounts receivable funding solution allows you to take on larger orders, expand your customer base, and invest in new equipment or inventory without being constrained by slow-paying customers. This financial flexibility can significantly accelerate your business growth.
Is accounts receivable funding more flexible than traditional bank loans?
Accounts receivable factoring offers greater flexibility as it's based on your sales rather than your credit history or assets. The funding grows with your business, and you only pay for what you use, making it a more adaptable solution for companies with fluctuating cash flow needs.
How can accounts receivable funding improve my relationships with suppliers?
By accessing funds quickly through accounts receivable funding, you can pay suppliers promptly or even early. This can lead to better terms, discounts for early payment, and stronger supplier relationships, ultimately improving your supply chain and reducing costs.
Will using accounts receivable funding affect my customers?
Many accounts receivable funding solutions, particularly confidential factoring, allow you to maintain direct customer relationships. They continue to pay you as usual, unaware that you're using a funding service, preserving your business relationships and brand image.
What types of businesses can benefit from accounts receivable funding?
Accounts receivable funding can benefit many businesses, particularly those in B2B sectors with invoice payment terms. This includes manufacturers, wholesalers, service providers, and some B2G (Business-to-Government) companies. It's especially useful for businesses experiencing rapid growth, seasonal fluctuations, or those unable to qualify for traditional bank loans.
How quickly can I access funds through accounts receivable funding?
One key advantage of accounts receivable funding is the speed of funding. Once you're set up with a funding provider, you can typically access funds within 24-48 hours of submitting an invoice. This rapid turnaround can be crucial for managing cash flow gaps or seizing time-sensitive opportunities.
What are the costs associated with accounts receivable funding?
Costs for accounts receivable funding usually include a factoring fee, which is a percentage of the invoice value, and potentially other administrative fees. While these costs may be higher than traditional bank loans, the benefits of improved cash flow, flexibility, and reduced risk often outweigh the expense for many businesses.
Is accounts receivable funding a form of debt?
Unlike traditional loans, accounts receivable funding is not considered debt on your balance sheet. Instead, it's a sale of an asset (your invoices). This can be advantageous for your company's financial ratios and may make it easier to obtain other forms of financing in the future.
How does accounts receivable funding differ from a line of credit?
While both provide access to working capital, accounts receivable funding is more flexible and typically easier to obtain. It grows with your sales, doesn't require collateral beyond your invoices, and doesn't have the same strict credit requirements as a line of credit. However, it's specifically tied to your accounts receivable, unlike a general line of credit.
What criteria do funding providers look at when approving an accounts receivable funding application?
Funding providers primarily assess the creditworthiness of your customers, the quality and diversity of your accounts receivable, and your business's invoice processing and collection practices. They may also consider your company's financial health and industry, but these factors are often less critical than in traditional lending.
How does accounts receivable funding impact my business's credit score?
Accounts receivable funding generally does not impact your business credit score as it's not a loan. It doesn't appear on your credit report since you're selling your invoices rather than taking on debt. This can benefit businesses looking to maintain their creditworthiness for other financing options.
Can accounts receivable funding be combined with other financing methods?
Many businesses use accounts receivable funding in conjunction with other financing methods. It can complement traditional bank loans, equipment financing, or equity investment. This diversified approach to funding can provide a more comprehensive solution for complex business needs and growth strategies.
