Factoring Trade Receivables - Unlock Immediate Business Liquidity

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Factoring trade receivables enables businesses to accelerate cash flow by selling their invoices at a discount to a third party.

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer TRADE RECEIVABLE FACTORING solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities

FINANCING TRADE ACCOUNTS RECEIVABLE

INTRODUCTION

Canadian business owners and financial managers can be forgiven for getting confused when they hear about ‘commercial factoring ‘of accounts receivable as a financing strategy that is recommended for both growth and business financing survival.

It's part of the asset-based lending revolution around your company's accounts receivables that's happening in Canadian business financing!

Factoring trade receivables emerges is a solid business solution for companies faced with cash flow challenges. It allows businesses to convert their accounts receivable into immediate capital, offering a cash flow lifeline due to those delayed client payments and prolonged invoice terms. By financing outstanding invoices to a third party, companies can harness immediate liquidity to fuel day-to-day operations, invest in growth opportunities, and stabilize their financial health competitive markets.

FINANCING THE BALANCE SHEET

Part of this confusion comes simply from the fact that this relatively new business financing strategy goes under several names – those names include invoice discounting, receivable financing, etc. In reality, they all of course are talking about the same financing strategy – which is the sale of your accounts receivables, ie your commercial credit sales, for immediate cash to another party, generally a ‘factoring company ‘.

THE ADVANTAGES? IMMEDIATE CASH FLOW!

The sale of these accounts receivable causes two occurrences, a profit for the factoring company, (generally between 1-1.5 %) and immediate cash for your firm, which is the seller and owner of the receivables your firm has generated.

In Canada, we feel the main challenge for the acceptance of this strategy is the entire concept of who collects the receivable, i.e. your firm which sold the product or service, or the factoring company.

FACTORING FINANCE IN CANADA

The Canadian business marketplace has been somewhat slower to accept commercial factoring as a true traditional business financing strategy because of the optics of who collects the receivable. In years gone by it was only ‘financially troubled’ firms that utilized this strategy. That has clearly changed and factoring of various types is utilized by small start-ups to some of Canada’s major corporations.

UNDERSTANDING ACCOUNTS RECEIVABLES FINANCE

When we meet with clients who are considering a receivable financing working capital facility it is very easy to explain the immediate benefits - these of course include working capital and cash flow generation.

However, the type of facility you enter into, what firm you work with, and how this facility works on a day-to-day basis is really the essence of the key points that we focus on when a client contemplates this type of financing.

WHAT IS THE COST OF FACTORING

The ‘cost ‘of factoring should be a key discussion point in the contemplation of such financing. Unless you are a large already very creditworthy corporation your factoring costs will range from 1-2% per month. Factors that should take into account are the length of time that your customers take to pay yourself, and your ability to sustain the additional financing costs.

There is a bottom line here, and that is simply that you should have a sufficient gross margin on your product or service that allows you to bear these additional costs.

Customers think of these costs as the ‘interest rate' on the transaction – this is really not valid because commercial factoring is not debt financing per se, it is simply the liquidating of your receivables at an agreed-upon discount. At the end of the day whether it’s perceived as a ‘rate' or a ‘discount' it still needs to be built into your profitability and cash flow budgets.

Is commercial factoring and receivable financing a recommended strategy? It is if you can immediately benefit from cash flow and working capital. It makes even more sense when you can utilize those funds (often received the same day as you invoice) to take advantage of supplier discounts and improved purchasing power.

We have known some customers that have gained 100% cash flow benefits by the immediate sale of their receivables, while at the same time utilizing those funds to reduce almost all of their discount factor fees. That’s true cash flow power.

KEY TAKEAWAYS

CONCLUSION - ACCOUNTS RECEIVABLE FINANCING VIA FACTORING COMPANIES

Is there a bottom line? Looking for a solid way for small businesses to fund outstanding invoices?

AR Factoring converts unpaid invoices into immediate working capital. Funding receivables allows a company to quickly access cash which can be used to meet essential expenses. It accelerates cash flow, ensuring that businesses can continue operations without financial interruptions.

Investigate commercial factoring, and determine which benefits might work for you – while at the same time assessing costs and how the facility will work on a day-to-day basis.

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

What is factoring

Factoring is a way for business owners to quickly access cash through a factoring agreement - Companies that sell their accounts receivable to a factoring company may receive advances between 80% and 90% and financial accounting is a simple process and takes into account the factoring fee on the transaction. There are no monthly minimums usually and a company's customers represent the creditworthiness / credit strength of the overall transaction

Most factoring companies offer recourse and non-recourse financing. The type a company chooses will vary depending on the firm's goals and needs - In traditional factoring, the factor collects payment - Confidential accounts receivable financing allows a company to bill and collect its own receivables and maintain a positive cash balance and the advance rate is still the same - When a company uses its accounts receivables for asset sales, they do not need to worry about having repayment schedules.

There are three parties directly involved in a receivable: the one who purchases, the seller, and the debtor

How can a business benefit from factoring

Receivable Factoring is a type of debtor finance financial transaction that transfers receivable assets to a third-party finance company in exchange for discounted payment. The sale of invoices to a third party accesses immediate access to cash via the invoice factoring process as the company sells the invoices they choose - The approval process is much quicker compared to traditional bank financing. Companies can now potentially offer extended credit terms to clients and will receive immediate payment, typically within 24 hours.

What is the ADVANCE RATE and how is the factoring fee calculated?

Generally, 80-90 percent of the accounts receivable balance invoice amount is funded when a business sells a/r, the balance being a holdback until invoice payment from the account debtor. Factoring fees are expressed as a fee, versus an interest expense - a point often misunderstood by clients. No debt is added to the company's balance sheet when a/r is financed. Many businesses that have short term cash needs benefit from a/r finance. A factoring company pays you as soon as you submit invoices for goods and services you have delivered.

Factoring provides immediate cash, allowing businesses to manage cash flow efficiently, focus on growth, and handle operational costs without the strain of delayed customer payments.

Unlike loans, factoring does not create debt on your balance sheet and typically provides faster access to funds based on your existing invoices, not credit scores. Financing via factoring offers major financial advantages for businesses who can't access a bank line of credit: no collateral is required, little or no emphasis on physical assets, and a focus only on general a/r creditworthiness. Factoring flexibility allows companies to finance what amount of receivables they choose.

The primary risk includes dependency on the factoring company’s terms and potential customer perceptions; however, these can be mitigated with transparent practices and choosing reputable factors.

Yes, by securing immediate cash and receivables factoring ensures that your company has the funds to pay suppliers and creditors on time, factoring can help improve your business's credit rating. Businesses can forecast the cash flow required by analyzing outstanding invoices.

Costs vary, typically including a fee based on a percentage of the invoice amount - ie the ' cash advance ' which is in the 80-90% of the total receivable price, Average costs are in the 1.5% range and costs are influenced by your industry, volume, and the creditworthiness of your customers.

Look for industry experience, transparency in terms of fees and agreements, and robust customer service. Reviews and references can also guide your decision.

Typically, this risk is assumed by the factor in non-recourse factoring, whereas in recourse factoring, you might have to buy back the unpaid invoices.

Most industries can benefit from factoring, particularly those with long invoice payment cycles such as manufacturing, textiles, trucking companies, distributors, and staffing services.

Personal credit may be less significant in factoring agreements, as the focus is more on your customers' creditworthiness than yours.

Yes, international factoring via an accounts receivable factoring company can help you manage cross-border transactions more smoothly by mitigating the risk of currency fluctuations and varying payment terms.

The process involves selling your invoices to a factor who then advances a majority of the invoice value upfront, charging a fee when your customer pays in full.

By converting sales on credit into immediate cash, accounts receivable factoring works because it allows businesses to reinvest in operations and growth without waiting for payments, thus smoothing out cash flow fluctuations. Many factoring companies use software to assist in the cash flow finance process.

If your business frequently faces cash flow issues due to delayed payments from commercial or government clients, needs quicker cash turnover to fuel growth, or wants to reduce credit management overhead, factoring accounts receivable is worth considering.

' 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

Factoring Trade Receivables: Essential Insights and Strategies | 7 Park Avenue Financial

UNDERSTANDING THE ACCOUNTS RECEIVABLE FACTORING SOLUTIONS