7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer ACCOUNTS RECEIVABLE FINANCING solutions that solve the issue of cash flow and working capital – Save time, and focus on profits and business opportunities
ACCOUNTS RECEIVABLE FACTORING & FINANCING IN CANADA - HOW IT WORKS AND WHAT IT COSTS
INTRODUCTION
Are you considering Receivable Financing in Canada? If so, your thoughts and answers to two questions should help you out quite a bit regarding invoice factoring in Canada.
Cash flow is a company’s lifeblood. But when outstanding invoices create a cash flow squeeze, what can the business owner do? Enter accounts receivable factoring companies!
Factoring companies convert unpaid invoices into immediate cash, and they can help businesses bridge the gap between selling their products or services and receiving payment from clients.
It is crucial to evaluate invoice factoring providers based on their reputation, fee structures, and terms of service.
Let the 7 Park Avenue Financial team show you how AR Financing is a game-changer for businesses looking to improve their cash flow, grow, or meet day-to-day business obligations.
DID YOU KNOW?
- The Canadian factoring market was estimated to be worth over $5 billion in 2020.
- Small and medium-sized enterprises (SMEs) account for approximately 70% of invoice factoring clients in Canada.
- The average factoring fee in Canada ranges from 1.5% to 5% of the invoice value.
WHAT IS INVOICE FACTORING?
Invoice factoring is a financial solution that allows businesses to convert their outstanding invoices into immediate cash.
This type of financing helps businesses manage their cash flow by providing a quick and efficient way to receive payment for their invoices. Invoice factoring companies in Canada purchase outstanding invoices from firms and provide them with a percentage of the invoice value upfront.
This allows businesses to receive the funds they need to operate and grow without waiting for their customers to pay their invoices. By leveraging invoice factoring, companies can bridge cash flow gaps, meet financial obligations, and seize new business opportunities.
HOW INVOICE FACTORING COMPANIES (CANADA) WORK
Invoice factoring companies in Canada work by purchasing outstanding invoices from businesses and providing them with a percentage of the invoice value upfront.
The factoring company then collects payment from the customer and returns the remaining balance to the business minus a fee.
This process allows businesses to receive the funds they need to operate and grow without waiting for their customers to pay their invoices. Invoice factoring companies in Canada typically offer various services, including accounts receivable financing, invoice financing, and cash flow management.
These services help businesses improve their cash flow, reduce administrative burdens, and gain financial flexibility.
THE FACTORING PROCESS
The factoring process typically involves the following steps:
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A business issues an invoice to a customer for goods or services provided.
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The business submits the invoice to an invoice factoring company in Canada.
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The factoring company reviews the invoice and determines its eligibility for financing.
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The factoring company provides the business with a percentage of the invoice value upfront.
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The factoring company collects payment from the customer.
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The factoring company returns the remaining balance to the business minus a fee.
This straightforward process allows businesses to quickly convert their invoices into cash, ensuring they have the necessary funds to maintain operations and pursue growth opportunities.
ACCOUNTS RECEIVABLE FACTORING & FINANCING IN CANADA - HOW IT WORKS AND WHAT IT COSTS
Accounts receivable factoring and financing in Canada work by allowing businesses to convert their outstanding invoices into immediate cash.
This is done by selling the invoices to a factoring company, which collects payment from the customer. The cost of accounts receivable factoring and financing in Canada typically includes a fee, which can range from 1-1.5% of the invoice value.
This fee is usually deducted before the business receives payment from the invoice value. The cost of accounts receivable factoring and financing in Canada can vary depending on the factoring company, the type of financing, and the business’s creditworthiness. By understanding these costs, companies can decide whether this financing solution is right.
BENEFITS OF INVOICE FACTORING SERVICES
Invoice factoring services offer a range of benefits to businesses, including:
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Improved Cash Flow: Invoice factoring services allow businesses to receive payment for their invoices quickly, improving their cash flow and helping them manage their finances more effectively.
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Reduced Administrative Burden: Invoice factoring services can reduce businesses' administrative burden by handling customer payment collection.
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Increased Flexibility: Invoice factoring services can give businesses the flexibility to manage their finances and make strategic decisions.
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Access to Financing: Invoice factoring services can provide businesses with access to financing they may not have otherwise obtained.
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Improved Credit Management: Invoice factoring services can help businesses manage their credit more effectively by giving them a clear picture of their outstanding invoices and payments.
By leveraging invoice factoring services, businesses can enhance their financial stability, focus on growth, and maintain healthy cash flow.
HOW CAN MY BUSINESS IMPROVE CASH FLOW?
One of our favourite business writers recently focused on cash flow management and asked the following two questions -
1. Does your firm need cash right now?
2. Do you know what your cash balance needs will be a half year from now? Your considering a factoring provider in Canada suggests your business might be facing cash flow challenges, or you’re smart enough to address a future problem now!
Factoring providers connect businesses with financial institutions that offer invoice factoring services. This enables companies to access immediate funds from outstanding invoices and improve short-term liquidity.
WHAT IS FACTORING - HOW DOES ACCOUNTS RECEIVABLE FINANCING WORK?
The basics of factoring finance are easy to understand - setting up a factoring facility allows you to, at your choice, sell invoices to an invoice factoring company, reducing your receivables and adding immediate cash flow to your balance sheet.
The ‘sale’ is made via a ‘fee,’ not an interest rate. It is typically 1 %-1.25% / mo - the fee varies via several factors, including the size of your facility, overall quality and collectibility of the receivables, industry credit risk, etc. -
For example, construction industry factoring might be viewed as having more industry risk. Although some business owners consider the whole process as ‘factoring loans,’ the reality is that you are simply accelerating a collected account receivable’s cash flow benefits.
That ‘invoice purchasing’ allows you to turn your company into a cash flow machine at your option.
Invoice factoring providers offer accounts receivable financing and cash flow management services. It is crucial to evaluate these providers based on reputation, fee structures, and terms of service.
They can significantly improve cash flow for businesses by providing quick access to funds generated from unpaid invoices. A curated list of reputable options available in Canada can help companies to choose the right provider to meet their needs.
WHAT IS THE DIFFERENCE BETWEEN INVOICE FACTORING VERSUS ACCOUNTS
RECEIVABLE FINANCING?
Invoice factoring agreements stipulate the sale of outstanding receivables to factoring companies, usually independent non-bank commercial finance companies.
On the other hand, receivable financing is used as working capital and a cash flow management solution, and it uses a business’s accounts receivables as collateral to obtain funding.
Banks offer unsecured loans via receivable financing solutions. They typically register a general security agreement on the business’s assets, assigning the receivables to the bank under this arrangement.
Both factoring and a/r financing provide valuable business funding, and each method of small business financing has advantages and disadvantages.
HOW DOES INVOICE FACTORING / ACCOUNTS RECEIVABLE FACTORING WORK IN CANADA?
In Canada, the invoice factoring company has a credit agreement with the customer to purchase invoices at a pre-agreed discount. In traditional ‘old school’ factoring, many factoring companies also assume the collection role in the funding process.
When a client pays the company for the invoice, the factoring company charges a fee on the invoice value and sends the company the funds less a fee for financing the invoice when the customer pays -
The benefit is that companies can receive cash flow immediately on generating sales of products and services to their customer. Many factoring companies use invoice tracking and automation systems to fund client transactions.
IS INVOICE FACTORING AND RECEIVABLE FINANCING A GOOD OPTION FOR YOUR BUSINESS?
Both invoice factoring and accounts receivable loan financing are solid credit risk management and cash flow solutions for small business financing in Canada.
Businesses can improve cash flow and focus on collections management by obtaining cash advances for invoices before the end user customer pays them.
Companies that cannot acquire a bank loan or line of credit are excellent candidates for factoring. However, business owners must weigh the benefits and drawbacks of these financing methods while considering issues around fees, interest rates, and credit risk.
Choosing the right factoring provider is crucial, as reputation and fee structures can significantly impact the overall benefits. Working with banks and reliable factoring companies is vital in assessing this method of Canadian business financing.
THE DIFFERENCE BETWEEN FACTORING AND OTHER RECEIVABLE FINANCING
It’s more of a technical issue that shouldn’t concern business owners. Still, the paperwork around ‘ factoring’ invoices an agreement to ‘ sell receivables ‘ - whereas using a bank credit line as an example, the bank holds security against the receivables because you ‘ assign ‘ your a/r to the bank under a traditional business loan arrangement - Somewhat much ado about nothing.
It is important to compare different invoice factoring providers based on their reputation, fee structures, and terms of service. Evaluating these factors can help businesses choose the best provider to improve cash flow by quickly accessing funds generated from unpaid invoices.
IMPORTANCE OF CASH CONVERSION CYCLE / OPERATING CYCLE
A/R finance allows you to rapidly address what's going on with your firm's working capital. And by the way, it puts you in control, which you might not be feeling now regarding your firm's overall cash/ business cycle.
When we meet and talk to clients quite often, it's clear they don't necessarily feel in control of their finances. Money's uses seem much more apparent when you can control your cash with receivable loans.
You can now make or take on new lease payments or reduce debt in other areas, such as accounts payable. Keeping those suppliers and preferred vendors on the side is essential, pretty well, all the time!
MAXIMIZE CASH FLOW VIA FAST FUNDING OF YOUR SALES REVENUES
Let's cover some basics regarding invoice factoring in Canada, also known as invoice discounting. First, it's a business-to-business financial strategy, so it doesn't work in a Business-to-consumer environment.
(If you are selling in a retail environment, a merchant cash advance / short-term working capital loan strategy that finances future retail sales might work for your firm, but we digress...!)
WHAT DOES INVOICE FACTORING COST - ACCOUNTS RECEIVABLE FINANCING RATES
The costs of receivable financing rates in Canada vary greatly, and it's probably our most significant discussion point when we explain to clients the benefits and costs of an A/R finance strategy.
What is important here is that you understand that the cost factor around receivable finance, in fact, is the costs you are bearing now, except that now you're winning, and using this financial solution allows you to win.
Business owners and financial managers must understand that overall financing costs take into account a variety of critical factors -
Some of those factors include: Overall creditworthiness of your client base The size and the monthly volume of invoices to clients In some cases, specific industries are significant users of factoring - i.e. trucking/staffing companies, distributors, etc.
Factoring costs are expressed as fees, not interest rates, and some factoring companies charge miscellaneous fees around applications, funds transfers, etc.
On-balance factoring is more expensive than traditional bank accounts receivable financing but provides access to unlimited cash flow that otherwise might not be available from Canadian banks.
Startups in the Canadian economy can also access this funding method, and firms can benefit from credit insurance and non-recourse financing programs.
The cost of receivable financing has to be benchmarked against two or three critical points you might not be considering.
One is that you are already in the banking business, whether you like it or not because you already carry your customers for 30, 60, or 90 days. Congratulations on doing a great job growing your client's cash flow—although that's probably not your goal, right?
USE THE POWER OF RECEIVABLE FINANCING SERVICES TO TAKE ADVANTAGE OF GROWTH FINANCING OPPORTUNITIES
Secondly, you are potentially missing the opportunity to grow your business because of the cash flow constraint that invoice factoring in Canada solves under the challenge of carrying a company’s accounts receivable investment.
Leveraging the services of a factoring provider can open up growth opportunities by enabling access to immediate funds from outstanding invoices.
At 7 Park Avenue Financial, we work with our factoring clients to ensure they understand the fees and costs of a/r financing and how they can benefit from this type of financing. Focusing on prompt invoice collection always reduces financing costs, and we are not big fans of miscellaneous fees, set-up costs, and locked-in contracts.
Our most recommended and successful a/r finance solution is CONFIDENTIAL RECEIVABLE FINANCING. It allows you to bill and collect your invoices and receive all the benefits of traditional, dare we call it ‘old school’ Canadian factoring companies.
If you want to learn more about invoice financing, how it works, what it costs, and the best facility for being ‘in control,’ then seek and speak to a business financing expert today.
You’ll then see clear answers to those two nagging questions: Do you have enough cash today, and can you address your money needs a half year from now?
Three uncommon takes on invoice factoring in Canada:
- Invoice factoring as a strategic tool for seasonal businesses to smooth out revenue fluctuations
- Utilizing invoice factoring to finance rapid expansion into new Canadian markets
- Leveraging invoice factoring to negotiate better terms with suppliers by offering early payments
KEY TAKEAWAYS
- Factoring basics: Understanding the process of selling invoices for immediate cash
- Eligibility criteria: Knowing which businesses and invoices qualify for factoring
- Cost structure: Grasping the fees involved, including discount rates and service charges
- Factoring vs. loans: Recognizing the key differences between these financing options
- Customer relationships: Managing interactions between the factor and your clients
Solving Cash Flow Issues - Businesses sell products or services and issue customer invoices but often wait 30-60 days or more to receive payment. This creates a cash flow gap that can hinder operations and growth.
The Factoring Process - Accounts receivable factoring companies purchase a business’s outstanding invoices at a discount. The business receives immediate cash, typically 70-90% of the invoice value. The factoring company then collects payment from the customer at a later date.
Benefits- Invoice factoring providers offer improved cash flow, making it easier to manage day-to-day operations. They enable businesses to take on new projects or expand by providing quick access to funds generated from unpaid invoices.
Fees- Discount rate: A percentage of the invoice value the factor charges. Additional costs: This may include account management or early termination fees.
CONCLUSION
Invoice factoring allows your company to fund outstanding invoices via a third-party financing company in exchange for immediate cash, less a feel.
Companies accessing receivable financing post their invoices as collateral for an invoice factoring loan/line of credit facility.
Managing working capital and accessing business capital are key benefits of these methods of financing sales.
Factoring invoices is a solid solution to the cash flow problems of small and medium-sized businesses - using financing companies in Canada for working capital increases cash, and as cash is added to the balance sheet, your company takes on no debt - you are simply monetizing your 2nd most liquid current asset - accounts receivable ( Cash is your most liquid asset !! )
In most cases, receivable financing complements other lenders your firm utilizes for banking, loans, leases, etc. Factoring receivables via a factored invoice program via accounts receivable financing companies in Canada should not confuse your cash flow needs.
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your cash flow needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How does a business qualify for accounts receivable factoring?
There are 6 critical qualifiers for a/r factoring: To qualify for accounts receivable factoring, a business must be able to meet specific lending criteria in the invoice discounting/factoring process -
1. Factoring is based on the general creditworthiness of the customer of the businesses, so clients must generally be stable and have reasonable payment track records
2. Factoring is on a B2B basis and factoring does not apply to individuals - Government Receivables qualify for financing
3. Unpaid Invoices eligible for financing must be less than 90 days old - invoices older than 90 days are generally deemed uncollectible by the accounts receivable financing company
4. Certain factoring companies may require a minimum of monthly or annual sales to ensure factoring makes sense for the factoring company from a cost and time perspective
5. Receivables must not be encumbered by liens or other financing arrangements with other bank financing or a business loan from other business lenders. The lender often requires business bank statements and the business debt schedule around other secured lenders.
6. Companies must acknowledge in the factoring agreement with the invoice financing company the advance rates and fees under invoice financing for small business
Is invoice factoring right for my business?
Accounts receivable factoring can be a good option for small businesses and SMEs that:
Have a history of slow-paying customers.
Are experiencing rapid growth, need immediate cash flow, and have a lower business credit score and difficulty in obtaining traditional loans
Offer credit terms to their customers.
How quickly can I receive cash after selling an invoice?
Typically, accounts receivable factoring companies will advance you 70-90% of the invoice value within 24-48 hours of approval.
What are the fees associated with invoice factoring?
The main fee is the discount rate, a percentage of the invoice value the factoring company charges. Additional fees may also apply for account management or early termination.
Will using a factoring company damage my customer relationships?
Some factoring companies offer recourse factoring, in which you are responsible for collecting payment if your customer defaults. However, many offer non-recourse factoring, in which the factoring company assumes the risk of non-payment. In this case, your customer may receive notification that a factoring company is involved, but this shouldn't negatively impact your relationship and the focus on good, consistent cash flow.
Are there any alternatives to accounts receivable factoring?
Yes, several alternatives exist. A business line of credit offers access to funds but requires repayment with interest. Merchant cash advances provide a lump sum of cash in exchange for a percentage of future sales. Invoice factoring can be a good option when these alternatives are unavailable or unsuitable.
What happens if my customer disputes an invoice?
The process will depend on your factoring agreement. Sometimes, you may be responsible for resolving the dispute with your customer.
How can I choose the right accounts receivable factoring company?
Get quotes from several factoring companies and compare their discount rates, fees, and services. Consider the company’s experience in your industry and its customer service reputation.
What is the difference between recourse and non-recourse factoring?
With recourse factoring, you are responsible for collecting payment if your customer defaults. With non-recourse factoring, the factoring company assumes the risk of non-payment, and it typically comes with a higher discount rate.
Can I negotiate the discount rate with a factoring company?
Yes, in some cases, you may be able to negotiate the discount rate with a factoring company. This will depend on your creditworthiness, the size of your invoices, and the overall volume of business you bring to the factor.
