Factoring: Unlocking Cash Flow for Canadian Businesses
Introduction
One alternative to borrowing funds or raising additional ownership equity in your firm for cash flow financing is the solution provided by factor companies in Canada via accounts receivable financing/factoring.
A steady cash flow is key for sustainable growth. Factoring companies offer invaluable solutions to bridge the gap between invoicing and receiving payments. They provide a lifeline for businesses navigating the challenges of cash flow management and receivable management.
Understanding Factoring in Canada
This solution is becoming more and more popular and much of the misinformation around this type of Canadian business financing is being cleared up and clarified properly as thousands (yes thousands) of companies just like yours look for new business financing methods when the old ones either don’t work or aren’t available.
Key Considerations in Cash Flow Financing
Let's focus on a couple of the main points that clients want to better understand when they consider cash flow financing via factor companies. Those two key points, if we had to sum them up, are: What is the real cost of factoring, and how does it work on a day-to-day basis?
Factors Influencing Pricing
In Canada, it is somewhat safe to say that pricing on receivable financing is somewhat 'all over the place'. Rates range from 1-1.5% per month.
So what drives that pricing then? The key areas that factor into factoring pricing are the size of your facility, your payment terms, the general overall quality of your Canadian and U.S. receivables, and the relative financial health of your firm as a 'borrower'.
We hasten to add that when you finance your firm in this manner you aren’t actually borrowing or taking on more debt... you are just 'monetizing'... or we could say 'cash flowing' your largest current asset, which is typically receivables.
Becoming an Educated Buyer
You can win with factor companies when you become in effect an 'educated buyer’... what we mean by that is it’s important to understand the Canadian landscape when it comes to who you are dealing with. There is an incredibly fragmented industry here, and it’s yours to take advantage of if you know-how.
Players in the Industry
So who are the players in the industry, because it certainly would be a challenge if you had to investigate them all as there are hundreds of firms. These firms are Canadian, U.S. and U.K. owned, some are major corporations, some could simply be called 'mom and pop' finance firms, and finally, some are medium-sized in nature and capitalization and are solid candidates to handle all your business financing.
Confidential Receivable Financing: A Preferred Method
Concerning how this type of financing works... our recommended preference is confidential invoice discounting... a term we give to factoring which allows you to bill and collect your own receivables, with no notice being required to apprise your clients of how you are financing your firm.
Finding the Right Partner
Typically, if not always the U.S. and U.K. firms doing business in Canada do not offer this type of financing.
Your best bet is to seek someone knowledgeable in the factoring market and ensure you partner up with the right firm. That’s where working with an expert always pays off. Naturally, if you have all the time in the world to speak to and investigate hundreds of firms that might be a poor choice for this type of financing need then by all means... go ahead! And for the record, we're jealous of the time you have on your hands in running a business!
Maximizing Benefits
Getting back to pricing on this cash flow financing method. Remember that you aren’t borrowing funds, you're selling receivables. So by utilizing this financing you're generating immediate cash flow every time you make a sale. You are not constantly 'reapplying' for a new line of credit, similar to a bank scenario.
Leveraging Sales Growth
Canadian firms make the best use of this financing when they have growing sales and fairly decent gross margins that allow them to absorb the financing cost. Your strong sales growth brings immediate cash; the fixed costs in your business generally remain the same... so the higher business volumes bring incremental profits to your firm.
Key Takeaways
- Factor companies provide immediate cash by purchasing invoices at a discount.
- This benefits businesses with cash flow issues.
- They prioritize customer creditworthiness over the business's credit history.
- Industries with long payment cycles, such as manufacturing and construction, benefit greatly.
- Using factor services typically doesn't harm client relationships due to professional handling.
- Reputable companies maintain transparency regarding fee structures.
- Thoroughly reviewing agreements helps understand potential fees.
Conclusion:
Our bottom line? As usual, we encourage you to work with an 'expert’... Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your cash flow financing needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How does factoring differ from traditional bank loans?
Factoring involves selling invoices to a third party (the factoring company) at a discount in exchange for an immediate cash advance under a factoring agreement, while traditional bank loans involve borrowing money from a financial institution and repaying it over time with interest. Companies can also choose the financial benefits of non recourse factoring which allows a company to transfer credit risk to the factoring company - It is available from most factoring companies.
Normal recourse factoring is the most commonly used type of invoice finance - where the company still maintains credit and bad debt risk.
Can businesses with bad credit history still benefit from factoring and invoice financing services?
Yes, businesses with bad credit history can still benefit from factoring services to generate working capital around managing cash flow. Factoring companies primarily focus on the creditworthiness of the business's customers rather than the business itself. Businesses that can't qualify for a small business loan often look to factoring financing as a solution.
What industries can benefit the most from partnering with factoring companies?
Industries with long payment cycles, such as manufacturing, transportation, staffing, and construction, often benefit the most from partnering with factoring companies via an accounts receivable management solution. However, various other industries can also benefit depending on their cash flow needs and the situation around slow paying customers.
Will using factoring services affect my relationship with clients?
Generally, using factoring services should not negatively affect your relationship with clients. Factoring companies typically handle the collections process professionally, and your clients are informed transparently about the arrangement. Using confidential receivable financing solutions avoids all client contact versus the traditional notification factoring solution.
Are there any hidden fees associated with factoring agreements?
While factoring agreements may involve various fees, reputable factoring companies are transparent about their fee structures and the actual factorng fee .It's essential for businesses to thoroughly review the terms of the agreement to understand any potential fees for transparency.
