YOUR COMPANY IS LOOKING FOR FACTORING!
Accounts Receivable Financing
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Financing & Cash flow are the biggest issues facing business today
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We get a lot of questions on factoring as a business finance solution in Canada. The concept, background, and mechanics of financing just your AR are somewhat misunderstood we think. Let's share some basics around accounts receivable finance for the sake and benefit of those firms considering this method of business financing.
FACTORING IN CANADA
First of all, there seems to be a general consensus that this type of finance vehicle for your business is one of the faster growing and certainly feels like it is getting more popular every day. The reality is that accounts receivable finance has been around for many, many years, and in the case of being around period it’s been around for hundreds of years in North America, Europe, etc... Kind of reminds us of that saying in the fashion industry, ' what's old is new again ...'!
As a potential user of A/R finance it kind of makes sense to know who you are working with. In Canada, the market is somewhat smaller and fragmented, with firms offering AR finance being either small or mom in pop in nature, or to the other extreme subsidiaries of some very large U.S. and global corporations. Talk about a choice!
ITS CRITICAL TO WORK WITH EXPERIENCED RECEIVABLE FINANCE COMPANIES
It's also important for you to distinguish between firms who offer accounts receivable financing as a part of their overall solution, or if you're dealing with a specialty firm, for all the right reasons! We've always preferred to work with an expert ourselves!
THE RISE OF AR FINANCE POPULARITY AND USAGE
From our perspective, it kind of feels that receivable financing via factoring got a lot more popular after the 2008 recession. That's not hard to disagree with because of the way the business credit totally dried up at that time, with thousands of small and medium-size firms finding they have a lot less access to business credit. Canada’s chartered banks clearly no longer dominated all of the Canadian business financing, that’s for sure.
What Size And Type Of Companies Utilize Factoring
Here’s where it gets interesting, and not doubt speaks to the fact of this newfound popularity. Why? Small firms use factoring, start-up firms use it, SME firms utilize it and guess what.... some of the largest corporations in the world utilize AR receivable financing, although it takes a new name higher up the food chain, often referred to as a ' Securitization '. At the end of the day, it’s all about taking A/R off the balance sheet immediately, replacing it with cash, and taking on a finance charge for that privilege of enhancing your balance sheet with cash.
When Does Factoring Work Best?
Several business situations arise that drive the popularity and success of this finance solution. Primary is the inability of the borrower, small or large, to get traditional bank type financing.
CONCLUSION
At 7 Park Avenue Financial, we remind clients also that even startups qualify for accounts receivable financing, and many firms that are actually doing quite well ( too well in fact because they are growing too fast ) also embrace this finance, cash flow and working capital solution. It's also a great way to assist in the restructuring of a company that is having any one of a number of business challenges that preclude it from accessing working capital elsewhere.
Factoring Receivables using a/r financing provides significant benefits to a firm. For a small business, it allows a company to fund daily operations without the stress of running out of cash. Many smaller firms are considered ' not bankable ' and can't access traditional bank financing - so factoring delivers the working capital the firm needs. For firms with good sales, the ability to receive funds immediately on completion of a sale is critical to growing a company. Under the factoring process, you receive approx 90% of funds immediately, with the balance coming as soon as your client pays, less a discount fee of approx 1.5-2% based on a 30-day term.
Invoice Factoring companies don't discriminate! Any firm that that has sales and receivables and needs help in cash flowing their a/r is a suitable factor company candidate.
Is that everything you need to know about AR Receivable financing and the factoring company solution in Canada? Probably not, but it’s not a bad start and business owners and financial managers should speak to a trusted, credible and experienced Canadian business financing advisor for more info and assistance on this widely misunderstood finance solution.
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Stan Prokop
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