Commercial Factoring Receivable Finance AR Solutions In Canada

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ACCOUNTS RECEIVABLE FACTORING IN CANADA

Commercial factoring in Canada addresses some of the major issues your firm faces every day in cash flow and working capital challenges.

Let's go inside the business credit line battle - an ongoing wrangle between traditional banks and commercial finance companies. Let's dig in.

Most business owners know the drill - customers have always been slow to pay, and that's not getting any better. On top of that cash flow requirements change daily as your business addresses the working capital needed to finance inventory and receivables, and at the same time manage investments in ongoing operations, debt payments, commitment to suppliers, etc.

WHAT IS COMMERCIAL FACTORING?

Factoring finance is a widely used form of accounts receivable finance. Unlike assigning or pledging your receivables to a bank the documentation in a factoring facility via factoring companies specifies the sale of the receivable in exchange for an advance payment - In this method of accounts receivable financing the typical advance rate is in the 85-90% range which is significantly larger than bank margins on AR. The remaining balance of the receivable is advanced to the company, less a fee when the end user customer pays the invoice - Simple as that.

Issues that companies must consider when using this form of financing cash flow is the involvement of the factoring company in the transaction - Although factoring fees are currently the most competitive they have ever been the fees are generally higher than traditional financial institutions such as bank interest rates. On smaller transactions some non-bank commercial finance companies might require all receivables to be financed, which should be avoided if possible, allowing a client to use selective receivable funding only when need

Factoring receivables with recourse is simply when the company assumes the normal credit and bad debt risk - Firms who wish to transfer the risk of bad debts to the finance company can enter into a non recourse finance agreement.

Is there a solution to those challenges? We know there is. Is it as expensive as you may have heard, we are pretty sure it is not? The reality is that commercial AR factoring solutions have dramatically dropped in pricing over the last few years.

FACTORING ACCOUNTS RECEIVABLE IS AN INNOVATIVE FINANCIAL SOLUTION

So what is A/R financing, and what solution, traditional or alternative, works for your firm?

Commercial factoring is the ongoing sale of receivables for instant cash. For many customers, it always comes down to the rates and pricing they have heard about this type of financing. In Canada, those costs range from anywhere from 8% per annum to 1- 1.5% per month. Customers with good profit margins should be easily able to afford that cost. Financial technology allows firms to have real time focus on collections.

THE COST OF FINANCING RECEIVABLES

Let's talk about costs. When many customers calculate the 'all in' cost of borrowing from banks it is often a lot higher than they might think -despite those low bank rates. So it is important not to get 'seduced' by your low rate expectations around traditional Canadian bank financing- not to mention the rigorous criteria banks impose for those low rates and flexibility.

We're big supporters of banks - when our clients qualify - which isn't always the case. Many clients we meet with simply can't meet the requirements, (the banks call them covenants) for borrowing on a revolving ongoing basis for working capital, particularly receivables and inventory. So the conversation around pricing becomes somewhat moot.

CONSIDER OPPORTUNITY COST

Instead of worrying about the cost of factoring consider the following - If you have money tied up in accounts receivable for, as an example, 60 days, then you are losing the opportunity to receive payment and re-invest in your business and increase your overall return on equity. The more quickly you can get paid allows you to reinvest in further sales for your firm, and those sales create more profits.

Looking for unlimited working capital/cash flow for your business - Consider factoring, since as long as your sales and orders grow so does your access to cash flow - In essence unlimited!

THE BOTTOM LINE?

A bottom line - Most business owners view cash flow as unpredictable, and commercial factoring removes that unpredictability - you in effect control the cash flow valve - financing all or a part of your receivables...when you chose.

A/R financing is growing all over the world, North America no exception, and certainly in Canada, it has been on the rise also.

Some of Canada's largest corporations use this type of financing - when it comes to larger corporations fancier finance terms like 'securitization' are used. Bottom line, If General Motors factors, why shouldn't you? So even if your firm may have had some financial losses, or is in a turnaround situation, etc. - you are still a solid candidate for this type of business financing!

Factoring is the ultimate in off-balance sheet financing - you are simply monetizing your receivables and generating cash instantly. The secret of factoring costs, or their perceived costs, is your utilization of those funds. You can use the cash flow generated from receivables sales to pay invoices from suppliers and take a discount or negotiate better terms and pricing for your products.

When you have the additional working capital you can grow sales and revenue and increase profits - that financial flexibility is what this type of financing is all about. Sometimes it is a 'bridge' solution, in certain cases, it can easily become your long-term ongoing working capital solution.

KEY TAKEAWAYS & BENEFITS OF COMMERCIAL FACTORING RECEIVABLE FINANCE AR SOLUTIONS / FACTORING SERVICES

Businesses that utilize commercial factoring effectively have a strong level of flexibility in financing their sales as well as the obvious liquidity that incoming cash flows from sales add to business success. Many businesses that can't access some or all of the funding they need from banks can benefit from A/R financing solutions.

Current economic conditions bring a lot of volatility to the business financing marketplace - cash flows have never been more important, and customers of businesses large and small stretch payables out far later than the trade credit terms extended and offered - The potential cash flow crunch and the focus on more liquidity makes accounts receivable finance a logical solution for fast payment as companies generate sales.

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

Is factoring the same as receivables financing?

Financing receivables differs from factoring in that in an a/r finance arrangement accounts receivables are pledged or assigned to a bank or other financial institution/firm - In the factoring process, the paperwork specifies an actual sales/ transfer of ownership of the receivable.

Is factoring receivables a loan?

Short-term debt financing via a factoring finance/invoice discount facility is not a term loan per se - it is simply the monetization of the balance sheet's current asset - i.e. receivables.

How Does Factoring Work And what are the costs?

Receivable factoring for business accounts allows a business to finance unpaid invoices by ' selling ' the invoice amount to a finance factoring company for a fee, which is not an interest rate per se.

What is Selective Receivable Finance

The financing of selective receivables is a subset solution of factoring that offers a level of flexibility to businesses who do not wish to factor finance all of their a/r. Sales to specific creditworthy clients allow a business to receive cash for accounts they wish to finance to improve the working capital position. It is a more strategic method of funding business needs and is not a term loan that brings debt to the balance sheet.

' 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

Commercial Factoring Receivable Finance AR | 7 Park Avenue Financial