Exploring the Landscape: Types of Accounts Receivable Financing
The proverbial 'turnaround'. Typically we think of it as a reversal in fortune, whether in sports, life or in our case today, 'Business'! More and more Canadian business owners who are looking for a turnaround in their cash flow and working capital are considering accounts receivable finance from financing companies in Canada to affect that turnaround.
But is that a sensible solution? It certainly is with the right circumstances and the right information. Otherwise, consider it somewhat of a deadly minefield of misinformation and dealing with the wrong parties. And at a time when the Canadian business financing environment is at (or close to!) its tightest, it makes sense to have the right information at hand.
Is Accounts Receivable Finance the Right Choice?
So it starts at the river, where the cash flows (or isn’t flowing!) That lack of flow is the right time to contemplate an A/R receivable finance strategy for trade credit.
Simply speaking it's a tool that can be used by businesses of all sizes, from start-ups to major corporations. Financing companies in Canada sometimes do not do a great job of even explaining things properly, or even advertising them in a manner that makes it clear what the solution involves. So don't get confused when you hear terms like invoice discounting, confidential A/R financing, factoring, etc. Essentially they are all the same, simple as that.
Cash flow tends to slow down when your business the economy, or both slow down. So it’s at that time when you're probably most creatively challenged to come up with working capital solutions.
The Timing of A/R Receivable Finance
Is bank financing to secure financing for the start-up or existing SME (small-medium enterprise) extinct? We won't weigh into that debate, but safe to say that if your firm is not a very solid citizen in good standing with the bank... well let's just leave it at that!
As we have intimated half the battle in accounts receivable finance is just understanding the solution and knowing how to choose the right financing companies to implement that solution. First of all, it comes down to understanding the benefits, and the mechanics of the A/R finance strategy as it relates to your business operations.
Unveiling Solutions: Understanding Accounts Receivable Finance
There are essentially two key offerings in the Canadian marketplace, the traditional one that's been around before the Dead Sea was sick and a newer, and in our belief preferred solution to that same problem.
The traditional solution has you receiving anywhere from 70-90% of your a/r via an immediate advance on the invoice, as soon as you generate it, or at any time thereafter, as long as the invoice is less than 90 days old.
When that invoice is collected by the finance companies that offer this traditional solution you get the remaining amount back immediately, less a financing charge which typically is in the 1-1.5% per month range assuming a collection period of 30 days.
Evaluating Alternatives: Traditional vs. Confidential Invoice Financing
The alternative is a confidential invoice financing solution, allowing you to bill and collect your own receivables, while at the same time receiving the cash advances as you generate sales/invoices. It's the confidentiality of this type of offering, i.e. no notification to any of your clients or other creditors that we feel is appealing to the Canadian business owner or financial manager.
Larger asset based lending solutions also offer non-notification A/R funding. Collecting payments without client intrusion is one of the key benefits of ABL financing, as invoice payments when the customer pays are handled by the company, not the factor.
Reaping Rewards: The Benefits of Accounts Receivable AR Financing Strategies
So the benefits of either of the above strategies in receivables financing now become immediately clear - you're in positive cash flow, suppliers can now be paid, payrolls and government remittances can be made, and, oh yes, you can grow your business again.
Key Takeaways
Unlocking cash tied up in invoices: Convert outstanding invoices to immediate cash, boosting liquidity to cover expenses and investments.
Financing options for businesses: Explore various solutions like factoring (selling invoices) or invoice discounting (receiving advance payments) based on business size and industry.
Matching financing to business needs: Choose the option that aligns with your cash flow requirements and risk tolerance. Consider factors like fees, speed of access, and impact on customer relationships.
Conclusion
So depending on which solution you choose the bottom line is that your turnaround is in motion!
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can work with you to implement the solid cash flow solutions you need... today.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How does accounts receivable financing work?
Accounts receivable financing involves selling outstanding invoices to a financing company for immediate cash. When the business sells receivables it allows the company to access funds tied up in accounts receivable, allowing it to optimize cash flow. That early payment puts cash flow on the balance sheet in what for many companies is a long supply chain finance timeline. Factoring fees and in some cases small processing fees are the profit earned by the factor company.
An advance rate of approx 80-90% is made against the invoice accounts receivable balance - the remainder is paid to the company when the client pays, less the factoring fee agreed to on these receivable loans.
What are the benefits of accounts receivable financing?
Accounts receivable financing via a factoring company provides businesses with quick access to cash based on the invoice value of unpaid invoices, improves working capital, helps manage cash flow fluctuations, and eliminates the need for traditional bank loans.
Is accounts receivable financing suitable for my business?
Accounts receivable financing is ideal for businesses with consistent invoicing and sales but may not be suitable for those with irregular revenue streams or high credit risk.
How do I choose the right accounts receivable financing company?
When selecting a financing company, consider factors such as reputation, terms and rates, customer service, and flexibility to ensure they align with your business needs.
What are the potential drawbacks of accounts receivable financing?
Drawbacks may include higher costs compared to traditional loans, potential loss of customer relationships due to third-party involvement, and limited availability for businesses with low creditworthiness.
How quickly can I access funds through accounts receivable financing?
Typically, funds can be accessed within 24 to 48 hours after approval, making it a swift solution for businesses in need of immediate cash flow.
Are there any restrictions on how I can use the funds obtained through accounts receivable financing?
No, you can use the funds for various business purposes, including covering operating expenses, investing in growth opportunities, or managing unexpected financial challenges.
What happens if my customers fail to pay their invoices after I've used accounts receivable financing?
Depending on the type of financing agreement, you may be responsible for repaying the advance or the financing company may assume the risk of non-payment through recourse or non-recourse financing options.
Can I still apply for accounts receivable financing if my business has a less-than-perfect credit history?
Yes, some financing companies offer accounts receivable financing based on the creditworthiness of your customers rather than your business's credit history, making it accessible to businesses with varying credit profiles.
What are the alternatives to accounts receivable financing for businesses seeking working capital solutions?
Other options than AR financing include traditional bank loans, lines of credit, merchant cash advances, or investments from venture capitalists or angel investors, which are not realistic for the SME sector in Canada. Each option has its own pros and cons depending on the business's specific needs and circumstances.
How does accounts receivable financing differ from traditional bank loans?
Accounts receivable financing leverages outstanding invoices as collateral, providing businesses with immediate cash flow, whereas traditional bank loans typically involve borrowing against assets or creditworthiness.
What factors determine the amount of funding I can receive through accounts receivable financing?
The amount of AR financing funding typically depends on the value of your outstanding invoices, the creditworthiness of your customers, and the financing company's policies and criteria.
What happens if my customers dispute or delay payment on the invoices I've used for accounts receivable financing?
Depending on the terms of the accounts receivable financing agreement with accounts receivable financing companies, you may be responsible for resolving disputes with customers, and the financing company may adjust your funding of accounts receivable AR accordingly, based on the outcome of the dispute.
