Boost Cash Flow with Business Factoring & Receivable Financing

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The Ultimate Guide to Receivable Financing for Canadian Businesses

Explore this guide because it's a deep dive into the flexible financial solution many Canadian businesses swear by Receivable Financing.

Introduction

Receivable financing solutions in Canada, often called 'business factoring', offer a genuine 'second chance' regarding the business owner/financial manager’s ability to turn adversity into opportunity. This business finance solution for small business and SMEs in Canada goes by a few names: invoice factoring, invoice discounting, receivable factoring, etc.

Different Forms of Factoring

There are different forms of factoring, so we forgive new clients at 7 Park Avenue Financial for sometimes getting overwhelmed with the terms! The ability of your company to turn cash flow for business challenges into a significant win in working capital and cash flow might just come from one of Canada's newer forms of business financing, called 'business factoring'.It's a popular business loan solution for thousands of Canadian businesses.

The Cash Flow Challenge

Getting the order or sale, and then getting paid. The old 'cliché' of 'the order is not complete until it's paid for'... as trite as that sounds, seems to hold even today, especially for new, small and medium-sized firms.

Many clients we meet with are in the enviable position of getting larger orders and contracts than they might have imagined based on their innovative products and services. But with that success, as we noted, comes the challenges of cash flow financing.

Impact of Economic Turmoil

During the past few years, with all the economic turmoil, Canadian business financing options seem limited or have disappeared - that's how many clients feel. The impact of accounts receivable growth is a huge challenge, not to mention inventory and Purchase Order / Contract funding needs. Many companies find traditional bank financing restrictive because Canadian banks can't meet their business credit needs.

The concept of 'selling A/R' to a third-party factoring company and generating immediate cash as you grow sales has become popular with thousands of companies in Canada. This differs from assigning accounts receivable to a bank. Note that almost all of the commercial factoring in Canada is done by non-bank commercial lenders. Canadian banks will often refer customers seeing A/R financing to a specialty lender or an experienced advisor familiar with factoring.

Advantages of Factoring Vs. Other Types Of Financing

There are, of course, some significant differences between A/R finance and the concept of a 'commercial loan versus solutions from factoring companies. This type of business credit is not a 'loan' per se - your company does not take on debt on your balance sheet. The amount of factoring financing is directly related to the amount of your A/R.

Industries That Utilize Accounts Receivable Financing

Almost every industry in Canada uses Factor financing. Industries in the oil and gas sector, staff placement, manufacturing, distribution, wholesaling, trucking, technology and business services are all major clients of the receivable financing industry. Although some businesses are financially challenged in some manner, the proverbial 'bad credit' industry statistics show that the factoring industry is experiencing strong growth and popularity. Business cash flow, a la 'cash is king' has never been more relevant for the economy.

Key Points in Determining the Financing Value Of Your Accounts Receivable

Numerous factors are considered when commercial lenders set up their accounts receivable financing facility. It's all about the true value and quality of your a/r. Regarding your accounts receivable aging, it's no secret that newer invoices have more significant value - numerous industry statistics validate that point. Who your client is also is essential.

Setting Up Your A/R Financing Facility

Generally, borrowers will be pleased to know that the entire application process in setting up your facility is straightforward. Key information required includes:

How Receivable Financing Works

Receivable financing, also known as factoring, addresses the issues of your customers paying you in 30, 60, or, dare we say it, 90 days. You can carry those receivables and continue to invest highly in current assets, or you can turn your sales into immediate cash. Let's cover some other basics around how this innovative method of business financing works.

Companies typically opt for " recourse factoring ", which carries the traditional risk around bad debt and collection on unpaid invoices. Unpaid accounts receivable can also be addressed by opting for a non-recourse factoring agreement, which transfers credit risk to factoring companies.

The Cost of Factoring

In Canada, the cost of factoring from accounts receivable factors ranges from 1-1.5% monthly to when the customer pays.

Key Takeaways

Receivable Financing/ Invoice financing is a business selling/ financing its accounts receivable (invoices) to a third party (a factor) at a discount for the cash advance. It's a financial transaction where a business sells its receivables to get immediate cash.

Difference from Traditional Financing:

Account Receivable Factoring is not debt, unlike a traditional bank loan. The company doesn't incur any new debt on its balance sheet. Instead, it's an advance against your invoices - thereby addressing cash flow issues in the company

Industries That Use Factoring:

Almost every sector, from oil and gas, staffing, and manufacturing to business services, utilizes this financing form. It's trendy among businesses with extended payment terms with their customers but needs cash sooner.

Advantages:

The primary benefit is immediate cash flow. Instead of waiting for customers to pay their invoices in 30, 60, or even 90 days, businesses get most of the money right away. It's also useful for companies that might not qualify for traditional bank financing due to restrictive conditions.

Costs and Setup:

The cost of factoring typically ranges from 1-1.5% a month in Canada. Companies must provide a credit application, A/R and A/P aging, incorporation details, and a sample invoice to set up an invoice purchasing facility.

Conclusion

In summary, at its core, "CASH FLOW BUSINESS FACTORING AND RECEIVABLE FINANCING" revolves around businesses selling their invoices to third parties to generate immediate cash flow. This method offers a solution to the cash flow challenges that many businesses face, especially those with long invoice payment terms or those who might struggle to secure traditional financing.

It is essential to realize how factoring works and why it can be valuable to your business in good times and less than good times!

Your firm accelerates cash flow and unties the capital you have invested in sales to clients. I

FAQ

What is receivable financing?

It's a financial strategy where businesses sell their accounts receivable or invoices to a third party, known as a factor, in exchange for immediate cash.

How does this differ from a traditional bank loan?

Unlike bank loans, factoring isn't debt. You're essentially getting an advance against your invoices, so there's no new liability on your balance sheet.

Which industries commonly use this form of financing?

Factoring is popular across many sectors, including oil and gas, staffing, manufacturing, and business services, especially those with extended invoice payment terms.

What are the primary benefits of using factoring?

The main advantage is instant cash flow from the financing company, versus instead of waiting for clients to pay their invoices, businesses receive a majority of the money upfront, aiding in consistent business operations.

Are there any associated costs with factoring?

Yes, Canada's factoring fee typically ranges around 1-1.5% a month. This cost is a percentage of the invoice amount and is deducted from the final payment.

How does receivable financing differ from other financing options, such as traditional bank loans?

Receivable financing focuses on advancing cash against invoices, unlike traditional loans, which add debt to a company's balance sheet. For financing companies, the company's credit history is not as important as the quality of the accounts receivable.

Is there a limit to how much a business can factor?

No, there's virtually no upper limit in factoring receivables. The amount is tied directly to the volume and quality of your accounts receivable.

What's the typical time frame for setting up a factoring facility?

The setup process for a factoring facility is straightforward and can be arranged relatively quickly, especially with the right documentation.

Are all invoices eligible for factoring?

Most invoices for completed work or delivered products are eligible, but their value may depend on the invoice's age and the client's creditworthiness.

Can businesses choose which invoices to factor?

Absolutely! Businesses can decide whether to factor specific invoices, a portion of their A/R, or their entire accounts receivable portfolio.

' 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

Cash Flow Business Factoring and Receivable Financing Solutions