EMAIL - sprokop@7parkavenuefinancial.com
Accounts Receivable Financing Factoring transforms your invoices into immediate capital, fueling business growth and financial stability.
Unlock cash flow now—turn your invoices into instant cash!
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ACCOUNTS RECEIVABLE FACTORING solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
LOOKING FOR THE BEST FACTORING COMPANY?
INTRODUCTION
Factoring finance in Canada continues to get strong positive traction as a form of financing and a tool for Canadian businesses.
In fact, and we see more of this every day, a once alternative financing vehicle with negative connotations is now a prevalent method and mainstream form of business financing with positive connotations!
As a general rule, there are many times when business cash flow is not positive! A liquidity crisis can be a major source of a company's success or failure and the immediate need for cash becomes a priority.
Receivable Financing Factoring is a solid solution for managing cash flow and supporting the growth of your business - Being able to immediately convert sales on credit terms into immediate cash, businesses can ensure a constant supply of cash flow/working capital, eliminating the waiting periods typically associated with customer payments of unpaid invoices.
So what changed that and what is the one mistake Canadian business owners and financial managers make when entering into a factoring program to receive cash from open invoices from their immediate sales from the ' indebted party,' i.e. your customers?
First of all, what changed is very clear to all Canadian business owners; financing has become a major challenge for funding future growth and profits. Therefore all forms of business financing, including those from factoring companies, should be considered by every business owner and financial manager.
WHAT IS THE SINGLE BIGGEST MISTAKE YOU CAN MAKE WHEN CONSIDERING AN INVOICE FACTORING FACILITY?
The answer is:
Entering into a factoring program without understanding how it works and the limitations of the program! That’s a broad comment, so let’s get right into what mistakes clients make when we sit down with them and work towards a solid factoring and working capital facility that makes sense for their firm based on their accounts' size and credit strength receivables.
IS FACTORING A ' LOAN '?
First of all, you should not consider factoring services as a ‘loan‘ per se. Also, it’s not the same as how a Canadian chartered bank would run such a facility if your firm were eligible for bank financing.
When you enter into a factoring program, you are selling your receivables – however, under a true bank arrangement, you are collateralizing your receivables and borrowing against them. That’s a big difference.
FACTORING VS BANK LOANS
Factoring Finance differs from bank financing because a bank's focus on its due diligence is on the operating and overall financial strength credit history, and financial performance of a company. That eliminates many small and growing companies from accessing bank credit when they cannot meet bank credit criteria around financial statements, debt-to-equity ratios, consistent profits, etc.
The financing of the balance sheet is really how traditional financing works, while a factoring solution focuses solely on the quality and size of your accounts receivable investment.
At 7 Park Avenue Financial, we've received many calls from bankers who recognize a shorter-term factoring solution will help their clients.
AN EXAMPLE OF HOW FACTORING WORKS
So, clients ask, if we are selling our receivables, how much do we get? The reality is that is one of the major mistakes uninformed clients make when they enter into such a facility. Some firms in the marketplace will hold back part of the receivables they fund, but your pricing will be based on the receivables' total sale or the group of receivables you are financing. Also, what's the cost of factoring?
The amount of financing you receive will vary depending on the overall full amount and size and quality of your receivables based on the general creditworthiness of your portfolio or other factors such as a large concentration in one customer.
WHAT IS THE BEST TYPE OF FACTORING PROGRAM - HINT - IT'S CONFIDENTIAL!
At 7 Park Avenue Financial, we recommend Confidential A/R Financing as the best solution via a customized factoring program. With this 'non-notification financing' method, your firm can bill and collect payment from clients without any third-party notification. When it comes to types of factoring finance it's the best method to mirror a bank line of credit.
BENEFITS OF FACTORING & FAST FUNDING
The approval process in business factoring is easy and fast, much quicker than traditional financing. The immediate cash advance made on your receivables is usually the same day, or at most 24 hours.
Advances are made at approximately 80-90% of the face value/total amount of the invoice, with the balance being paid to your firm when your client pays, less the factoring fee.
The ability to get access to funds based on the size of your receivables provides your firm with virtually unlimited funding!
Those remaining balances build up a reserve account or buffer, which is periodically released to your firm. Your firm's ability to manage good asset turnover in a/r is directly related to the cost of the investment you hold in your accounts receivable.
Invoice or Factoring finance lets a company build up its cash balance to cover current obligations such as accounts payable. The ability to free up working capital allows a company to manage the current asset/ current liability relationship positively, which is the essence of successful net working capital turnover and maximizing opportunity cost.
While many specific industries are large users of factoring receivables, any business selling on commercial credit terms can use this type of financing.
UNDERSTANDING THE RECOURSE VERSUS NON RECOURSE FACTORING TRANSACTION
At 7 Park Avenue Financial, we ensure that our clients understand they have the option of recourse factoring or non-recourse accounts receivable financing. Non-recourse financing costs more, but it removes all the bad debt and collection risk associated with carrying an investment in accounts receivables.
Those higher rates offset, of course, the fact that your factoring finance company takes the risk in assuming collection liability and non-payment bad debt risk. That is one of the factors in determining your overall financing cost to reduce risk.
HOW MUCH DOES ACCOUNTS RECEIVABLE FACTORING COST?
The fees of a factor may vary - Most clients make the mistake of focusing totally on price when it comes to factoring finance companies/factoring providers – yes, that’s important. Still, at the same time, the way your facility is structured and how it operates on a day-to-day basis over a given period can be many times more important than price.
WHAT IS THE INTEREST RATE ( SPOILER ALERT - THERE ISN'T ONE!)
Speaking of price, the reality is that most customers equate price in receivable financing as an annual interest rate. The industry does not view it this way, preferring to call the sale of the receivable a ‘discount ‘to its original value, with the cost being called a ' factoring fee. '
We can talk all day about that one, but if you are, in fact, focused on price, you need to understand the per diem rate you are paying every day that receivable is uncollected. How that rate is communicated to you and when the rate terminates on collection is one of the single most expensive errors you can omit to research when working on a receivables financing facility.
In summary, our Boy Scout motto of ‘Be prepared‘ is highly appropriate to a factoring financing program.
KEY TAKEAWAYS
Invoice Discounting—Immediate cash is provided when invoices are sold to a financier at a discount.
Factoring Types—Distinguish between recourse and non-recourse factoring to manage financial risk effectively.
Factoring Costs—Understand the fees, including the discount rate and additional charges, integral to evaluating factoring services.
Credit Assessment—Assess debtor credit to mitigate risk before engaging in factoring agreements.
Factoring Agreements—Comprehend the terms which define the relationship and obligations between the client and the factor.
CONCLUSION - SMALL BUSINESS INVOICE FACTORING IN CANADA
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can guide you through the technical maze of factoring to ensure you sidestep our warning about entering into a facility that is not properly priced or explained to your firm concerning overall cash flow impact and day to day dealings on your receivables.
Most factoring companies understand that this type of a/r finance solution is generally a temporary one for small businesses that can help businesses grow. Factor facilities are acquired to fix a short-term cash flow problem as you work towards accessing more money from traditional lines of credit and business lines from banks.
In some cases, factoring might be a part of a total asset-based lending solution, which combines the receivables, inventory, equipment, and even real estate into 1 single borrowing facility for more cash access.
After all, your receivables are more often than not your largest financial asset – doesn’t it make sense to understand what type of financing you place around this asset?
Can your business benefit from factoring? We think it can, so let's get started!
Let the 7 Park Avenue Financial team focus on a solid facility with transparent costs, without long-term contracts/ hidden fees/additional fees, or contractual obligations when it comes to factoring trade finance solutions.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is factoring?
Factoring is a business financial transaction that allows a company to sell its invoice/accounts receivable to a third-party factor company' at a discount for a fee to allow the business to meet day-to-day short-term funding needs.
How does accounts receivable financing factoring provide immediate cash flow?
It allows businesses to sell their invoices to a financier at a discount, who then provides immediate cash.
What are the main types of factoring?
The primary types are recourse and non-recourse factoring, each with distinct risk management profiles.
How does factoring differ from a traditional bank loan?
Unlike loans, factoring does not create debt but advances funds based on existing invoices.
What are the typical costs associated with factoring?
Costs include a percentage of the invoice as a fee, which varies based on the agreement and risk involved.
How can factoring improve my business’s credit management?
It provides immediate cash to settle debts promptly and invest in growth opportunities, enhancing creditworthiness.
What legal considerations should I be aware of in factoring agreements?
Understanding the terms, conditions, and any liabilities involved in such agreements is crucial.
Can factoring be used by startups?
Yes, factoring is particularly beneficial for startups needing to stabilize cash flow without existing credit history.
How do international factoring arrangements work?
These involve exporting or importing companies factoring their foreign invoices to manage longer payment cycles.
What is the role of a credit risk assessment in factoring?
It evaluates the financial stability of debtors to protect against default on the receivables.
Does factoring affect relationships with my customers?
Transparent communication is essential as factoring involves a third party in receivable collections, which can impact customer perceptions.
What are the immediate benefits of accounts receivable financing factoring?
It offers quick access to working capital, improving liquidity and enabling more robust financial planning.
How does non-recourse factoring provide additional security?
The factor assumes most of the credit risk, protecting your business from losses if a customer fails to pay.
What factors should I consider when choosing a factoring provider?
Evaluate their fee structure, services offered, and industry reputation to ensure they align with your business needs.
How does factoring finance a company?
A company sells accounts receivable outstanding invoices from the company's customers, their commercial clients, to a factoring company via a financial transaction receives payment for the transaction, less a discount rate or' discount fee' as agreed upon in a factoring agreement. The invoice discounting process is finalized when the customer pays the company or the factoring company directly.
Is factoring a good idea
Receivable factoring is a good idea if a company requires short-term cash for its operating needs and has a reasonable credit-worthy client base. Good gross margins are required to be able to absorb factoring fees which are in the 1.5-2% range of invoice value.
What is the definition of a factoring company?
The three parties directly involved in the factoring transaction are the factoring company, the company selling receivables for short term cash needs, and the clients that make up the accounts receivable portfolio.
